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Electricity transmission charging reform – overtaken by changing priorities?

Josephine Lord Josephine Lord Consultant
27th April 2021

Charging for the transmission network is never out of the development process for long. From major reviews, such as that initiated under Project Transmit in 2010, to significant reforms such as removing the triad benefit from distributed generation in 2018, and a host of smaller developments, change seems the only constant. As around £3.3bn is expected to be recovered through transmission network use of system (TNUoS) charges in 2021-22, with the level set to rise further, how these charges are levied is important to existing and future users.

Ofgem decided following its Targeted Charging Review Significant Code Review (TCR SCR) that all TNUoS residual elements should be paid by final demand sites through fixed pence per day charges, and that the residual element related to generation should be zero. The Forward Looking Charges and Access Significant Code Review (NAFLC SCR) is currently considering, among other things, how the way distributed generation pays for the transmission network should change, and the methodology for locational based TNUoS demand charges (which will remain under the Triad and peak demand based charging approach once the residual elements have been removed through the TCR).

Both strands of reform – we summarise their current position below – are already delayed compared to the original timetable, but there are strong indications that parts of the current round of reforms are also being overtaken by changing priorities. In particular, the question is whether the way that TNUoS is calculated is fit for purpose in terms of aligning with the net zero agenda and the type and location of plant that will be required in the future.

Residual charges

In terms of residual charges, Ofgem is now minded to delay by a (further) year until April 2023 the reforms to residual charges proposed under CMP343/340 that is currently with it for determination. This will place the residual charge element fully on final demand sites (with alternatives proposed for the number of charging bands for transmission connected sites and to floor the locational element temporarily at zero). This was set out in an open letter on 1 April. Reasons included that some of the options presented would result in significantly different charges to those Ofgem had earlier consulted on, and evidence from users that they would need more time to adapt their physical arrangements, including to take advantage of other revenue streams, such as the Capacity Market. It will issue a consultation and impact assessment after the 6 May parliamentary and local elections.

Meanwhile, a Competition and Markets Authority decision on 30 March has clarified the route forward for Ofgem’s aim to set the transmission generator residual to zero. (It also seeks to ensure compliance with the retained EU requirement relating to annual generator charges being in the range €0-2.5MWh). By rejecting an appeal by SSE Generation on Ofgem’s approval of CMP317/327, the transmission charges that came into effect at the start of April are unchanged. Further changes are in train, however, as Ofgem requested National Grid ESO to raise a further modification (since raised as CMP368/369 ) to make further adjustments (that relate to the “connection exclusion” in the EU Regulation, and the treatment of large distributed generation). This could see further transmission charge changes in April 2022, although the impacts are expected to be small.

Forward looking charges

At a recent forum (Challenge Group) meeting on the NAFLC SCR, Ofgem said “increasing questions have been raised about whether the price signals provided by the wider TNUoS methodology will be fit for purpose in the future for the late 2020s”. Since the SCR was launched in 2018, the government has introduced the net zero emissions target, and there is a growing onus on Ofgem to regulate in a way that takes into account the consumer impacts of greenhouse gas emissions. Ofgem may therefore see an opportunity to reframe the SCR as a way to incentivise the use of the network that helps to meet net zero ambitions, rather than as a way of improving the efficient use of the network while keeping costs to consumers down. 

The regulator said it was still considering the links with the development of flexibility markets. Notably, Ofgem said that it also considers there is a need to assess wider issues that have arisen with transmission charges - including the expansion constant – before issuing its transmission charging proposals.

It noted questions around:

  • Tariff volatility stemming from the current transport model (that feeds into tariff calculations) and the approach to charging zones, including the “expansion constant” parameter of the charge.
  • Other potential reforms to the transport model, including whether there would be benefit in signalling spare capacity on the network and if the peak and year-round backgrounds used in the tariff calculations are still fit for purpose.
  • Whether the methodology produces the right signals for demand and particular technologies, such as storage.

One key problem is that charging all distributed generators on the same basis as transmission-connected, which is one of the options it is considering and has modelled for the impact assessment, would better reflect network cost drivers but would see some existing generator users, notably in Scotland, face large increases in costs to which they cannot respond.

Ofgem laid out a range of possible implementation options for change, which ranged from immediate raising of modifications with the plan to implement them as soon as possible, to a delay to undertaking a wider TNUoS review. It is planning to issue a minded-to consultation in May/June that will include its views TNUoS charges for distributed generation.

Given past experience and the issues at stake, debates around the final form of any changes seem set to continue.

We will examine the implications of these developments through Energy Spectrum and through our regulatory service. For further information, please contact v.simonds@cornwall-insight.com.