Energy projects are being cancelled due to a “postcode lottery” that can leave individual customers facing the entire costs – sometimes tens of millions of pounds – of upgrading supergrid transformers.
In an open letter to Ofgem, the specialist consultancy Roadnight Taylor says the regulator has previously promised to resolve this issue but there has since been “no action, even though the situation has become worse”.
Supergrid transformers are used to change voltage levels at connection points to the transmission network, including the grid supply points for distribution networks.
Transmission reinforcement costs are generally socialised through Transmission Network Use of System (TNUoS) charges. This applies to grid supply points which are used by multiple distribution network operators (DNOs), or by a DNO and a customer, and are therefore classed as infrastructure asset sites.
However, grid supply points that are only used by one DNO are instead classed as connection asset sites, meaning the electricity system operator (ESO) passes on the costs of upgrading supergrid transformers to the DNO, which in turn charges the customers triggering the reinforcement.
If a group of customers triggers the upgrade, then the cost is split between these customers in proportion to their capacity. “This means that if customers in the group terminate their offers, the remaining customers pick up a higher proportion of the cost, until theoretically one customer could be left to fund the full cost,” the letter warns. “Investors are often not able to accept this risk and so projects stall or are cancelled.”
With the cost of upgrading supergrid transformers currently ranging from £12 million to £60 million per grid supply point, the letter says this is “usually far too much” for an individual distribution connection customer to afford.
Roadnight Taylor says some DNOs have in the past sought funding for such reinforcements through their price controls but this has mostly been to “cater for gradual growth in background load, rather than by step changes in load caused by large individual connections”.
The company says most DNOs claim there is no mechanism for them to recover supergrid transformer reinforcement costs through Distribution Use of System (DUoS) charges, or say they are unwilling to do so.
The letter also notes that over the last three years or so, National Grid Electricity Transmission has offered a large number of customers low-capacity transmission connections to unused tertiary windings on supergrid transformers. These tertiary windings were included in many of National Grid’s transformers to enable it to connect equipment for voltage control. According to Roadnight Taylor, as of April last year, there were 51 tertiary connection schemes with accepted offers on the Transmission Entry Capacity register with a combined capacity of just over 2.7GW.
The consultancy says in some instances customers applying to connect to these tertiary windings have instead been grouped together and offered connections to a “grid park” at the grid supply point in question. As the supergrid transformers at these substations are therefore classed at infrastructure assets, the costs of upgrading them are not charged to those customers.
“But if those customers had applied as a distribution connection, they would likely have been charged for supergrid transformer reinforcement,” the letter adds. “These grid parks may be the most cost-effective solution, but they lead to a distortion in the charging for supergrid transformer reinforcement.”
The letter points out that Ofgem has already identified supergrid transformer upgrades as an issue as part of its significant code review (SCR) of network access arrangements. The regulator decided not to take any action at the time but did promise to undertake further work on the matter.
“As Ofgem has already looked at this issue, it has done the analysis it would need to quickly implement changes, and yet we have not seen action,” the letter remarks.
Roadnight Taylor suggests three potential options to resolve the issue, the first being to socialise all supergrid transformer reinforcement costs through TNUoS charges: “This would effectively turn all present connection asset sites into infrastructure sites and would mean that supergrid transformer reinforcement charges are not passed on the DNOs or to distribution customers.”
The consultancy states that reinforcement costs could alternatively be socialised through DUoS charges: “The DNOs would have to be given appropriate mechanisms within ED2 to request reinforcement of supergrid transformers and to increase the annual ‘pass through’ costs to customers.”
A third option would be to apply a Cost Apportionment Factor approach, whereby the costs for each customer would be proportionate to their share of the capacity of the upgraded supergrid transformer, rather than their share of the capacity of the group of customers triggering the reinforcement. Their charges would be smaller and would not increase if other customers terminated their offers.
Roadnight Taylor’s letter adds that DNOs currently refuse to take this approach on the grounds that it exposes them to costs they cannot currently recover. It says DNOs would therefore need a mechanism to recover these costs.
The consultancy adds that this option is its least favourite as the others would encourage network companies to take a more holistic, strategic approach to supergrid transformer reinforcements, including considering non-build solutions.
The letter to Ofgem chief executive Jonathan Brearley has also been sent to officials at the Department for Energy Security and Net Zero as well as the Energy Networks Association.
Concerns that grid upgrade costs were being unduly loaded onto the customers triggering reinforcements previously led Ofgem to move to a “fully shallow” charging boundary for customers connecting to distribution networks.
The decision, made as part of the network access SCR, came into effect at the start of the RIIO ED2 price controls in April and means customers triggering the reinforcement of shared assets are no longer required to directly contribute towards the costs, unless they exceed a cap.