Change to network charges threaten water firms’ renewable plans

Proposed changes to network charges threaten to undermine plans by water companies to generate renewable power on their sites in efforts to become net zero by 2030.

Water UK’s routemap to net zero is encouraging water companies to generate 80 per cent of their own power through renewables in a bid to cut emissions, become more resilient and reduce costs. But water companies have expressed concern that Ofgem’s Targeted Charging Review (TCR): Significant Code Review (SCR) and other charging changes in the pipeline will make their renewable plans financially unviable, whilst still meeting affordability targets.

Ofgem is exploring a move towards fixed charges to assets based on capacity of connection, rather than charges relating to usage (for both electricity and gas).

Many water companies are looking to partner with investors/developers by leasing them sites on water company land. Typically, the investor’s solar panels generate power which is delivered directly to the water company and not via the electricity distribution network. The water company then agrees to purchase the power for a fixed number of years using a private connection.

These so-called private wire power purchase agreements allow water companies to lever their considerable land assets but without them having to invest in renewables capital expenditure themselves, which is difficult under current price reviews.

This behind-the-meter arrangement has allowed both the generator and its client the opportunity to share savings in avoiding grid charges and policy costs applied to electricity imported from the grid. There is also no need for a licensed supplier, which also allows significant savings to be made.

“If you put renewables on your own site and self-consume, the energy you purchase is currently exempt from all the renewable levies [ROCs, FiTs, CfDs] which energy consumers pay for. This could cut your electricity bill by a quarter on every unit you self-generate,” said Craig Lucas Director of Energy Transformation at Mott MacDonald.

Even with private wires to the renewable generation, water companies will still need to retain their connections to the grid to guarantee their resilience. Those with private wire PPAs are particularly concerned by Ofgem’s proposals. In its TCR and SCR, Ofgem is exploring a move towards fixed charges to assets based on capacity of connection, rather than charges relating to usage (for both electricity and gas). Ofgem’s view is that fixed charges are fairer than those based on usage, because larger, more sophisticated consumers can avoid them, resulting in a disproportionate cost falling to smaller, less sophisticated ones.

Daniel Blunt, renewables programme strategy manager at Anglian Water Services, said that the impact could be significant. “Ofgem’s proposed changes have the potential to erode opex benefit from the PPA contracts we have entered into and cast doubt on future schemes and making carbon reduction harder to achieve. And we’re trying to get a sense of the likelihood of this change coming in and what range of impacts will be.”

Pat Horne, head of strategy and commercial services at United Utilities, agreed: “Our renewables portfolio is behind the meter and offsets grid import. It provides a good carbon performance and financial benefit to the business. There are challenges ahead with the introduction of the targeted charging review.”

Lisa Waters, director of Waters Wye Associates, also points to a review of supply licence exemptions by the Department for Business, Energy & Industrial Strategy (BEIS) which could add to renewable levy costs of onsite generation.

“If liabilities for green levies change, it will be significant. Coupled with changes to network charges, it will add up to being more expensive, though I understand exemption regime changes [from needing a licence] may be considered for new generation rather than existing,”

Water companies have raised their concerns in a new Utility Week report the generation game: can water companies win the 2030 race to net zero? The report can be downloaded for free