Ofgem has outlined plans for a major review of network charging to examine concerns that some consumers are paying too much towards to the cost of the grid and others too little.
The regulator is also worried that the current arrangements are leading to “inefficient investment decisions” which are pushing up costs for consumers across the board.
The primary focus of the significant code review (SCR) will be the residual element of network charges, which currently make up around four fifths of transmission charges and half of distribution charges. A consultation has been launched to determine whether to proceed with the review and what its exact scope should be, if it goes ahead.
“We think that the current way the residual charges are applied could lead to potentially detrimental differences in costs for different groups of consumers, and inefficient investment decisions resulting in increasing costs for consumers overall,” the regulator said in the consultation document.
Residual charges are designed to recover the sunk costs of the existing power grid. They are a “top-up” to the forward-looking charges that reflect users’ impact on spending due to investments in new capacity.
The review will look at whether residual charges should be set differently in future to “reduce distortions” and ensure that “everyone pays a fair contribution”.
Ofgem partner for energy systems, Frances Warburton, said: “If one set of users pay lower residual charges, these costs have to be recovered from somewhere. If some network users pay less, it means that others have to pay more towards these charges, and these charges then flow through to customer bills.”
Among the key concerns is the growing volume of behind-the-meter generation, which does not count towards consumers’ demand during the triad periods used to set transmission charges and can therefore be used to lower their costs.
“If the size of the saving is large enough this may lead to an increase in the amount of behind the meter generation, and further increases in residual charges for consumers without it,” the consultation document states.
Although behind-the-meter generation enables some consumers to effectively go off-grid for long periods, the regulator argued that they still need access to the network from time to time and must therefore pay a fair share towards costs.
The SCR was first announced by Ofgem earlier this month when it published its minded-to decision on changes to the triad avoidance payments available to small-scale distributed generators.
Despite repeated calls to examine the payments holistically, Ofgem told Utility Week that, for the moment at least, they will not be covered by the SCR. They could, however, be brought within its purview once a consultation on the proposed changes has concluded and a final decision has been made.
Either way, the review will also look at whether further changes are needed to the other charging arrangements for distributed generators.