The case for network reform

Making charging costs add up for networks is crucial, particularly if they are to meet the low-carbon technology challenges ahead. Tom Grimwood looks at how the regulator is responding.

Towards the end of last month, Ofgem proposed the second of two major reviews into network charging.

The first, which kicked off in August last year, is currently considering the residual charges used to recover the sunk costs of the existing network.

The second will examine the ­forward-looking charges used to pay for ­network upgrades, as well as grid access arrangements.

The overarching aim is to provide the right price signals to network users, to drive efficient investment decisions and enable the optimisation of the energy system, while also ensuring that vulnerable customers are treated fairly.

Ofgem said without reforms the cost of accommodating low-carbon technologies such as renewable generation, electric vehicles and heat pumps on the power grid will be unnecessarily high.

If it goes ahead, the regulator expects to launch the significant code review (SCR) by the end of 2018 and conclude the process by early 2020. It aims for any resulting code modifications to be implemented by April 2022 and to take effect by April 2023.

Two taskforces

Ofgem first outlined plans to reform forward-looking charges and grid access arrangements in a working paper published in November 2017.

Since then, the regulator has chaired two taskforces – one looking at each of the issues – which developed detailed options and undertook an initial assessment of them. The taskforces published a final report containing their conclusions and recommendations in May.

It is now consulting on whether to hold an SCR to determine which changes, if any, to take forward. It is also asking stakeholders whether some of the potential reforms should be led by industry.

Options ahead

Ofgem is considering three different options for the scope of the review – a narrow approach, a moderate approach and a comprehensive approach. The core topics to be considered by all will be:

• the definition and choice of access rights for smaller users;

• the distribution connection charging boundary (the extent to which network costs are paid through charges for new connections);

• forward-looking distribution use of system (DUoS) charges;

• transmission network use of system charges (TNUoS), including whether to end the use of triad periods to set the ­levels for network users.

Under the moderate approach, the regulator will additionally examine the definition and choice of access rights for larger users, while under the comprehensive approach it will add the allocation of network access rights to the list.

Ofgem has set out seven “desirable ­features” that reforms should aim to achieve:

• network capacity should be allocated in accordance with users’ needs;

• network users should face cost-reflective charges for access and usage;

• network arrangements should provide a level playing-field between different types of users and technologies;

• forward-looking charges should be sufficiently simple, transparent and predictable to enable users to make decisions based on them;

• risks should be appropriately apportioned when developing and allocating network capacity;

• network arrangements should provide high-quality information about where and when new network capacity is needed;

• network arrangements should take into account the needs of vulnerable customers.

The regulator’s proposals were partly informed by a report commissioned from the consultancy Baringa. This report identified 22 potential issues with the current network arrangements, covering five areas: ­capacity allocation; locational price signals; inefficient dispatch; price signal predictability; and cost and risk allocation.