Location, location: The increasing complexity of embedded benefits

There is growing recognition of the need to reform our current network arrangements to support a more dynamic and flexible electricity system as we undergo the transition to net zero. Among the network elements currently going through a period of review are Distribution Use of System (DUoS) charges, which recover the costs of operating and maintaining the distribution system. DUoS charges are currently levied on demand, reflecting use of the distribution network as electricity is transported from generators to demand customers. Generation connected up to 22kV within local distribution networks is deemed to offset reinforcement within the distribution network, as it reduces the flow of power coming from the transmission system and is therefore paid generation DUoS (GDUoS) credits. However, the growth in embedded generation over the past decade has led to calls for reform to the current charging arrangements because, in instances, distribution-connected generators are driving rather than offsetting reinforcement in the network, alongside wider concerns about possible market distortion relative to transmission connected projects.

Currently, all generators connected at the low voltage (LV, <1kV) or high voltage (HV, 1kV to 22kV) voltage level within a Distribution Network Operator (DNO) region receive credits relative to their connection tier and depending on the time of day that they export. However, in areas where there is a concentration of generation or lack of demand, these assets are driving network reinforcement to export the energy elsewhere on the grid. The charging arrangements are therefore driving inefficient outcomes.

Furthermore, embedded generators also avoid the generation Transmission Network Use of System (TNUoS) charges, which are especially significant in north England and Scotland. This “cliff edge” in the charging arrangements drives considerable competitive distortion between distribution and transmission connected generators. Consequently, DUoS and TNUoS reform has formed a key part of the wider debate on future network arrangements, specifically how locational and time-of-use signals can be improved to be more reflective of the costs generators impose on the system. Conversely, it has been argued that Extra-High Voltage (EHV, over 22kV) charges are sensitive to local changes on the network and therefore drive no useful signal.

As part of the wider assessment of network arrangements, Ofgem launched the Network Access and Forward Looking Charges Significant Code Review (Access SCR) in December 2018 to assess the current access arrangements and forward-looking elements of use of system charges. The review aimed to assess how arrangements could be adapted to be more reflective of the costs that users impose on the system, encourage the optimal generation mix to come forward, and ensure that some network users are not cross-subsidised by others. An assessment of DUoS charges was included in the original scope of this SCR. On the 1 November 2021, following an initial announcement at the Charging Futures Forum meeting on 22 September, Ofgem issued a consultation on its proposals to take forward its wide-ranging review of DUoS charges through a new and entirely separate SCR.

Ofgem is proposing that the scope of new SCR would mirror the scope of DUoS reforms originally proposed under the Access SCR. This would include, but not be limited to:

  • A review of the charging methodologies for Extra-High Voltage (EHV), as well as High Voltage/Low Voltage (HV/LV).
  • Assessing the balance between usage-based and capacity-based charges, as well as charges that could vary by time-of-use.
  • Improvements to signals about how network costs and benefits vary by location.
  • Improved predictability of charges for EHV users.
  • The potential need for mitigating measures such as a basic charging threshold to protect small users (and vulnerable customers) from sharper charging signals.

Changes to the current DUoS charging arrangements could have some notable impacts on embedded generators. The value of embedded benefits already varies greatly for generation sites according to their location, voltage, connection type and technology. The move to improve signals on how network costs and benefits vary by location and time is likely to further increase this variation between generators, and in some cases introduce additional network costs for the first time. The review of DUoS will now be undertaken throughout 2022 and Ofgem expects that reforms will be implemented in 2025 at the earliest. Ofgem’s consultation will take views on progressing the separate DUoS SCR until the 6 December and aims to publish an update by early 2022.

Additionally, under a separate review, embedded generators above 1MW in size may need to pay TNUoS costs for the first time. This subject was initially assessed within Ofgem’s Access SCR and is likely to be taken forward as part of a wider review of TNUoS in coming months. Ofgem ran a Call for Evidence between 1 October and 12 November seeking views on the extent to which reform of TNUoS charges is needed, priority areas of reform, delivery of reform and timescales of change. Responses to this call for evidence will be used to inform any next steps for TNUoS.

Embedded generators will need to factor these changes into their business models and the changes could impact siting and connection level considerations for developers. Ofgem expects that increased price reflectivity could drive beneficial behaviours to help reduce network costs, although the short-term impact on generators as any changes come into effect remains uncertain.

Embedded Benefits Calculator

Cornwall Insight’s Embedded Benefits Calculator provides an in-depth view of the range of benefits available to embedded generation, helping to provide clarity on the opportunities available to different technology types across GB. The model calculates these benefits from a range of projects including intermittent, controllable, and flexible technologies, providing a simple tool to enable you to tailor the calculator to suit your project’s needs. For more information on our Embedded Benefits Calculator or network forecasting services, please contact Tom Ross t.ross@cornwall-insight.com or Bertie Bagge b.bagge@cornwall-insight.com.

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