Ofgem is pressing ahead with plans to recover residual electricity network costs through fixed charges on consumers, despite strong opposition from some quarters.
The decision is the outcome of a more than two-year review of residual network charges and embedded benefits, known as the Targeted Charging Review, which was prompted by concerns that the current arrangements allow some consumers to avoid paying their fair share.
“More and more businesses and households are generating their own electricity on-site, including from renewables such as solar power,” wrote Ofgem chief executive Dermot Nolan in the foreword to the decision document.
“However, these consumers still use the grid, for example on dark winter evenings when solar power cannot generate electricity.”
“By taking less electricity from the grid by either generating their own electricity or taking other action, some businesses and households currently avoid paying (some or all of) these charges, despite being able to draw on the networks as and when they need,” he added. “The cost that they avoid falls on those that are not able to take similar action.”
Ofgem said the changes will save consumers as a whole £300 million per year from 2021 when the first reforms are due to take effect. It said the total saving out to 2040 will be between £4 billion and £5 billion.
“Many homes and businesses will save money as a result of these reforms,” said Nolan. “Some that generate electricity at home or on-site may pay more to better reflect the service they get from the network, but they will continue to enjoy benefits from generating their own electricity.”
There are two main types of network charges: forward-looking charges, which are used to pay for new investments in the power grid and are designed to reflect users’ impact on costs; and residual charges, which are used to cover the remaining costs of the existing network and are not intended to be cost reflective.
Residual charges are worth around £4 billion per year and are currently levied on both generation and demand, with the majority falling on the latter. The charges on demand are partly based on users’ consumption during certain periods.
For example, residual transmission charges for half-hourly metered non-domestic customers are determined by their consumption during the three half-hours of peak demand each year known as the triads. By reducing their usage at these times, they can lower the amount they pay.
Ofgem said it does not consider this appropriate as “there is no associated reduction in system costs through responding to the signals sent through residual charges.”
To prevent this from happening, the regulator has decided to shift liability for the charges solely onto demand and recover them through fixed charges on consumers.
In its minded-to decision in November, Ofgem said it planned to divide both domestic and non-domestic customers into broad segments and apply different charges to each. However, it has since to decided to apply a single residual charge to all domestic customers, regardless of how much electricity they consume or which of the 14 distribution license areas they live within.
By contrast, the regulator has decided to retain banding for non-domestic customers. The amount they pay will be determined by a combination of factors, including the voltage level at which they connect and the license area they fall within. Where further segmentation is required, larger users will be charged according to their agreed capacity, whilst smaller users will be charged on the basis of their net consumption.
To maintain compliance with an EU regulation capping annual transmission charges for larger generators at €2.50/MWh, their residual charges are currently negative. The reforms will mean the removal of this credit.
Ofgem has also confirmed its intention to apply balancing charges to suppliers on the basis of gross rather than net demand at the relevant grid supply point. This will prevent local embedded generators from receiving avoidance payments from suppliers in exchange for reducing their charges.
These avoidance payments are one of a number of favourable charging arrangements, collectively known as embedded benefits, which are enjoyed by smaller generators (less than 100MW) connected to distributed networks.
In November, Ofgem said it was also considering removing another one of these benefits, namely an exemption for embedded generators from paying balancing charges themselves.
However, it has since decided to shelve the change after a taskforce created to examine the issue concluded that it was not feasible to apply the charges in “a more cost-reflective and forward-looking manner”.
Ofgem has instead decided to launch a second taskforce to explore the issue further. The taskforce will report back to the regulator by June 2020.
It said the agreed changes to embedded benefits and residual transmission charges will take effect in 2021, whilst the changes to residual distribution will be introduced a year later in 2022.
The reforms have faced strong opposition from distributed generators, who claim they will undermine efforts to create a smarter, more flexible power grid. Aurora Energy Research warned in May that the changes could set back the progress of renewables, which are often connected at the distribution level, by up to five years.
Responding to the latest announcement, Nina Skorupska, chief executive of the Association for Renewable Energy and Clean Technologies, said: “Although there are a few consolations for larger generators, today’s announcement undermines the move towards a more flexible power system.
“These reforms mean that businesses and homes which have taken responsible steps to install low-carbon technologies will effectively pay more to use the wires needed to support the system.”
Ofgem is also considering changes to forward-looking charges and network access arrangements as part of a separate review which is still ongoing. In May, the regulator delayed their introduction to allow time for further analysis.
Skorupska said both sets of reforms should have been dealt with simultaneously: “Tackling and rolling out these two sets of proposals in tandem would have allowed the whole picture of grid charges to be progressed at the same time in a cohesive manner.
“This has not happened, however, and we now face a period of investor uncertainty and a significantly weakened business case for battery storage and the other crucial systems we need to ensure Britain has a modern power grid.
“Ultimately, this decision will negatively impact subsidy-free renewables and until the forward-looking charges review is enacted we risk further shrinking the pipeline of new projects.”
Chris Hewett, chief executive of the Solar Trade Association, commented: “Despite their own revised analysis highlighting that these changes risk delaying deployment of subsidy-free low cost renewables, Ofgem are pressing ahead with changes that make net zero harder to reach, not easier.
“With the urgency of climate change, it is abundantly clear that the regulator’s current objectives are now outdated and absolutely vital that the next government addresses this.”