Ofgem ponders extensive network charging review

Ofgem has floated the possibility of holding a wide-ranging review of network charging to examine the best way to recoup costs without causing market distortions.

The regulator said its concerns that embedded benefits “could be preventing a level playing field” are part of a “wider issue” of the recovery of sunk and fixed costs.

The prospect of a review was raised in a draft document outlining Ofgem’s plan of action for its 2017/18 financial year, beginning in April.

“In early 2017 we intend to consult on launching a targeted charging review which may require a significant code review to consider these issues,” the document said. This could involve examining “some aspects of the Balancing Services Use of System charges and allocation of sunk/fixed costs, including for storage and ‘behind the meter’ generation”.

Ofgem is also considering other aspects of network charging such as “how best to provide the right locational incentives for market participants”. It urged stakeholders to put forward their views on the plans outlined in the draft document.

The regulator launched a review of embedded benefits in January after a significant number of distribution-connected diesel engines won capacity market contracts in the first two auction rounds. Embedded benefits – in particular triad avoidance payments – played a large part in their success.

Under the current arrangements embedded generators are exempt from Transmission Network Use of System (TNUoS) charges. This enables them to effectively reduce suppliers’ demand on the transmission network during the triad periods used to set the charges and receive payments from the suppliers for doing so.

In an open letter in July, Ofgem revealed it was focused on two potential changes to the charging arrangement to address its concerns over triad avoidance payments. Earlier this month the regulator revealed it intended to make a decision on the proposals in the first half of 2017. The latest document narrows the timeframe to between April and June.

There have been repeated calls for Ofgem to carry out a holistic review of network charging arrangements. In August National Grid chief executive John Pettigrew, told Utility Week a “fundamental” review would be preferabe to focusing on “individual elements” like embedded benefits.