Policy & regulation

Significant code review to address concerns that residual charges unfairly burden some network users

Ofgem has commenced a wide-ranging review of electricity network charging to address concerns that the current arrangements may unfairly burden some users and lead to inefficient outcomes.

The significant code review (SCR) will examine the residual charges which recover the sunk costs of the existing distribution and transmission networks.  

Outlining the scope of the review in an open letter to stakeholders, energy systems partner Frances Warburton wrote that the current charging framework may result in “inefficient use of the networks” and drive behaviours which have “adverse impacts on other network users, and hence consumers in general”.

“As a result of changes in technology and other factors, some network users are increasingly able to adjust the timing and volume of their production and/or consumption of electricity, reducing their exposure to charges,” she added.

“Therefore, current residual charges will increasingly fall on those network users who are not able to do this. They are likely to include “residential and small business consumers in general, and more vulnerable consumers in particular.”

The SCR was launched off the back of a targeted charging review (TCR) consultation which Ofgem first announced back in March when it published its “minded-to” decision on cuts to triad avoidance payments.

The payments are one form of the so-called “embedded benefits” available to distributed generation. Revealing its final decision in June, Ofgem said it would proceed with plans to drastically reduce the payments despite intense opposition from embedded generators.

The regulator will keep an eye on embedded benefits throughout the SCR: “If evidence emerges that these may be leading to significant distortions and consumer disbenefits, we will consider whether action, ahead of the conclusion of the SCR, would be in consumers’ interests.”

Warburton said the SCR will provide Ofgem with an opportunity to initiate “wide-ranging and strategic change” to network charging.

“We have considered relying on the ongoing industry-led reviews to deliver change through the code modification process,” she wrote. “However, based on our own analysis and responses from stakeholders, we believe that the complexity and need for coordination on residual charges and other embedded benefits make these questions less suited to an industry-led modification process.”

According to Warburton, most respondents to the TCR agreed that action is needed to prevent residual charges being loaded on certain groups of customers and that an SCR is “the best way to do it”.

She said, despite the pleas of some stakeholders, the review will not delve into forward-looking charges – which reflect the network reinforcement costs for accommodating individual users – or connection charges.

Neither will it look into charging arrangement for storage as “to deliver changes as quickly as possible, changes to network charges for storage should proceed through the usual code modification process”.

Rather than putting forward code modifications itself or leading an “end-to-end” modifications process, Ofgem has decided to invite licensees to propose changes. Although the regulator may give directions over what the changes should seek to achieve, they will otherwise be enacted through the standard code modification process.  

Ofgem plans to publish a working paper on residual charges before the end of this year and then a draft impact assessment for any proposed charging arrangements in the second quarter of 2018. The decision on the proposed changes would take place during the following quarter.  

Alongside the launch of the SCR, Ofgem has also unveiled its new regulatory strategy

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