Ofgem has paused its plans to expose smaller distributed generators to forward-looking transmission network charges after receiving opposition from a “large majority” of the respondents to its consultation on the proposals.
However, the regulator said it continues to hold the view that “smaller generators should pay charges equivalent to larger generators where they have an equivalent impact on the network.”
Transmission Network Use of System (TNUoS) charges are divided between forward-looking charges, which are designed to provide price signals to network users, reflecting their impact on costs in different locations due to required reinforcements; and residual charges, which are the same across the country and intended to recover the remaining sunk costs of the transmission network. The charges are currently levied on both generation and demand, with the bulk falling on the latter.
The charges on generators are applied as a wider tariff – which incorporates forward-looking charges that depend on their location within 27 geographic zones as well as the generation residual – and local circuit and substation tariffs. Generators are charged according to their transmission entry capacity.
Distributed generators with a capacity of less than 100MW are currently exempt from both forward-looking and residual charges, aside from the Embedded Export Tariff – a credit that replaced the triad avoidance payments they were previously able to collect from suppliers for helping them to reduce their charges.
Ofgem previously announced plans to remove all generators’ liability to pay residual transmission charges and shift the burden entirely onto demand in the form of fixed banded fees as part of its significant code review looking at residual charges, also known as the Targeted Charging Review.
The regulator is also conducting another significant code review looking at forward-looking charges and network access arrangements.
In its minded-to decision in June, Ofgem proposed to expose small distributed generators to forward-looking TNUoS charges, stating: “We do not think the impact export has on the transmission networks differs between the size of the generator or whether they are connected at transmission and distribution and, therefore, the differences in the charging arrangements between large generation and small distributed generation creates a distortion that can lead to inefficient network usage.”
It also outlined plans to introduce new non-firm and time-profiled access options for customers connecting to distribution networks and create a shallower connection boundary, lowering their contribution to the costs incurred for new connections.
Ofgem has now updated its minded-to position and issued another consultation.
Although it is continuing with its proposed changes to connection boundaries and access arrangements for distribution networks, albeit with some changes, the regulator said it is hitting pause on its plans to expose smaller distributed generators to forward-looking TNUoS charges after only “a few” respondents to its previous consultation supported the proposals, whilst a “large majority” were opposed.
The regulator said there was “significant opposition” from respondents concerned that renewable generators in remote areas would be disproportionately affected. Some argued that the current charging regime incentivises fossil fuel generation close to demand centres in the south, where forward-looking charges are negative, when it should be encouraging renewable deployment in areas of the country with relevant resources, but charges are often too high to the point of being punitive or discriminatory.
It also heard “a range of strongly felt arguments” that the broader TNUoS requires a more fundamental review before this change is considered.
Despite the pushback, Ofgem stated: “We stand behind the principle that smaller generators should pay charges equivalent to larger generators where they have an equivalent impact on the network.”
“We have not yet seen convincing evidence that small distributed generation is sufficiently different to transmission-connected, or larger distributed generation to warrant a perpetual differential in charging treatment,” it remarked.
Nevertheless, Ofgem acknowledged that further work is needed before it makes a decision and said it does not intend to enact any changes to TNUoS charges for April 2023 – the planned implementation date for the other proposals emerging from the significant code review. Noting its launch of a call for evidence on TNUoS charges at the beginning of October, the regulator said it is not consulting on any additional policy proposals either.
The deadline for responses to the latest consultation is 21 February.
The significant code review was originally expected to examine forward-looking distribution charges as well. However, Ofgem announced its intention in November to hold yet another significant code review dedicated specifically to forward-looking distribution charges, having paused this work as part of its minded-to decision in June.