More change for network charging - Access and Forward-looking Charging Significant Code Review and proposal to review market competition

On 18 December 2018, Ofgem launched a Significant Code Review (“SCR”) in relation to network access and forward-looking charges (see our previous Law-Now covering the SCR here). Following its review, Ofgem published its minded-to decisions (the “SCR Consultation”) on 30 June 2021. The SCR Consultation sets out Ofgem’s proposals on access rights, connection charging and transmission charges.

Ofgem’s proposals

Ofgem has offered three main proposals as a result of the SCR:

1. Distribution Connection Charging Arrangements;
2. Definition and Choice of Network Access Rights; and
3. Transmission Charges for Small Distributed Generators.

We look at each proposal in more detail below:

1. Distribution Connection Charging Arrangements

In the SCR Consultation, Ofgem proposes to:

• completely remove the contribution to reinforcement within the connection charge for demand connections; and
• reduce the contribution to reinforcement within the connection charge for generation connections.

Instead, it is proposed that these costs would be recouped via distribution network use of system (“DUoS”) charges. Ofgem states that a different approach for generation and demand connections is justified, as removing the charge for generator users would mean that they would not face any signal about the costs they put on the distribution system.

This proposal stems from Ofgem’s analysis that identified:

• current arrangements may create barriers to investment or push users to accept non-firm connections. This is particularly relevant for those customers with less flexibility over connection location;
• stakeholders, including electric vehicle (“EV”) charging customers, can face prohibitively high reinforcement costs. Ofgem recognises that EV charging locations have little flexibility and that it does not collect data from DNOs on the loss of opportunity from those connections which do not proceed following initial discussions; and
• DNOs responding to each application individually may result in “piecemeal network investment”, rather than looking at more “holistic network-wide requirements”. Currently, DNOs can only recover their costs through connection requests, which may stop them from looking to invest ahead of requirements.

Ofgem is not minded-to take forward the SCR proposals in relation to deferral payments and the introduction of security obligations.

2. Definition and Choice of Network Access Rights

Ofgem notes that users currently face loosely defined access rights that require users to take on significant risk of curtailment. Ofgem hopes that the proposals will “help ensure users are able to get quicker or cheaper access to the network in line with their needs, by making better use of existing network capacity.” The proposals only apply to distribution access.

In the SCR Consultation, Ofgem proposes to introduce new non-firm distribution access options that allow users to:

• choose the percentage of time that they are willing to have their connection be non-firm and at risk of curtailment. A higher percentage will likely result in a quicker or cheaper access to the network; and
• choose time-profiled access such that a user would either have no access or non-firm access during peak periods. A user would be able to select the percentage of their access rights that are time-profiled. A higher percentage of the connection being time-profiled will likely result in a quicker or cheaper access to the network. However, this option would not be available to small users.

Ofgem sets out a number of considerations on how to reflect the value of the proposed alternative access rights either via connection or DUoS charges. It notes that any changes in the connection charge are unlikely to reflect the financial value for opting for a non-firm or time-profiled access right. Instead, the speed of connection may provide the primary driver. Ofgem considers that time-profiled connections could be reflected in DUoS charges with costs of access during different periods to be calculated in a relatively simple and accurate way. However, as above, this is subject to a separate DUoS reform.

Ofgem is not minded-to take forward the SCR proposals in relation shared access.

3. Transmission Charges for Small Distributed Generators

In the SCR Consultation, Ofgem proposes to charge TNUoS generation charges for all users over 1MW irrespective of whether they are directly connected to the transmission system. Ofgem notes that the current approach of different transmission generation charges “create[s] a boundary distortion that can lead to inefficient decisions about where generation should locate.” In particular, the different treatment between those generators above 100MW who are treated as large distribution-connected generators and those below 100MW who are treated as small distribution-connected generation, where Ofgem wishes to create a “level playing field”.

The proposal stems from Ofgem’s position that all generation makes a similar contribution to the system flow, and growth in small distributed generation is starting to have a sufficient effect on the transmission system which the TSO needs visibility of. By dropping the TNUoS threshold to 1MW, this will harmonise the threshold with transmission network planning studies (that used to ensure that flows of distribution connected generation are accounted for), the threshold for users to take part in the Balancing Mechanism, and DNO capacity registers.

Ofgem predicts that this proposal will increase transmission charges for offshore wind generators, particularly in Scotland. However, in southern English regions, TNUoS charges may decrease for large renewables (particularly solar).

Ofgem is considering and requests stakeholder engagement on several implementation options:

• no transitional arrangements – after a final decision is made, Ofgem would implement the required changes immediately. This may not provide time for affected generators to effectively adapt to the changes;
• implement change with delay - after a final decision is made, Ofgem would implement the required changes with a clear implementation date which would provide certainty to the market. This may result in the changes not aligning with future developments of transmission charging;
• confirm intention to address distortion but delay implementation until greater clarity about strategic direction delay implementation – due to uncertainty about the longer-term direction for the role of transmission charging Ofgem would wait to align with further developments. This would retain boundary distortion and inefficient decision making for an undetermined period of time; and
• limited period of grandfathering – exempting a group of generators for a period of time from the implementation of the measures (e.g. 15 years from commissioning to reflect CfD duration). Ofgem is still to determine which group of generators would benefit from any grandfathering provision.

Ofgem’s consultation on the proposal to review competition in the electricity distribution connections market

The launch of the SCR Consultation follows Ofgem’s consultation on 18 June 2021 on its proposed approach to reviewing the level of competition in the electricity distribution connections market (the “Connection Competition Consultation”). The findings will inform the next round of price controls (“RIIO-ED2”) for DNOs which will begin in April 2023, under which Ofgem will set connection outputs and incentives on the service provided by DNOs. The SCR Consultation acknowledges the interactions between the two and that the proposals could mean that DNOs incur new costs and could result in changes to network users’ behaviour, which would need to be factored into the DNOs’ RIIO-ED2 business plans.

Under the Connection Competition Consultation, Ofgem wishes to carry out a review on levels of competition in certain segments of the distribution connection market where evidence of effective competition has not previously been seen. The market segments that are in scope are set out below:

(Table 1, ‘Relevant Market Segments’, Connection Competition Consultation)

The results of the competition review would impact the Ofgem-mandated regulated margin that DNOs must charge and the use of other price control incentives.

Ofgem proposes to base its review on what it considers to be the key indicators of effective competition and has set out a data template to collect this information. The Connection Competition Consultation is narrow in scope in requesting feedback on Ofgem’s proposed methodology, scope and approach to the competition review and data collection.

Commentary and next steps

The SCR was scheduled to consult on a minded-to decision in spring 2020, so the publication of the SCR Consultation in June 2021 is over a year late. The SCR Consultation, while delayed, has some significant proposals. However, there are many decisions still to be taken by Ofgem and a lack of detail on implementation. This provides scope for stakeholders to present their thinking to Ofgem where it may be open to direction from industry. The SCR Consultation is open to receive stakeholder views until 25 August 2021. Any implemented proposals would take effect from 1 April 2023 in line with RIIO-ED2.

The Connection Competition Consultation will be an important starting-gun for DNOs of the run-up to the RIIO-ED2 proposals. The scope and methodology of the competition review could influence Ofgem’s findings and proposals in the future so will be of keen interest to these industry players. The Connection Competition Consultation is open until 13 August 2021.