Move to spread network upgrade costs are ‘not equitable’

Forcing rural residents to bear the cost of the upgrading local electricity networks to accommodate the connection of renewables in their area is “not equitable,” the Welsh Affairs Committee has told the government.

In a wide-ranging report on grid capacity in Wales, the committee raised concerns over Ofgem’s decision in May to reduce connection charges for electricity distribution networks.

The decision, made as part of a significant code review looking at network access arrangements, concerned customers whose connection would trigger reinforcement of the wider network.

Under the current arrangements, customers connecting to distribution networks have to pay for all new assets required to extend the network to them, as well as any necessary reinforcements to existing shared assets up to one voltage level above their point of connection.

However, from the beginning of the RIIO ED2 price controls in April 2023, connecting customers will only have to pay for extension assets and will no longer be required to contribute to the reinforcement of the existing network. Reinforcement costs will instead be recovered from the wider customer base through Distribution Use of System (DUoS) charges.

The change was prompted by concerns that the current arrangements are discouraging investment in low-carbon technologies and encouraging distribution network operators to take an incremental and reactive approach to reinforcement.

Recounting the decision in their Electricity Networks Strategic Framework published in August, the government and Ofgem said it would mean that reinforcement costs would be borne by “all electricity consumers in the area”.

Whilst welcoming the effort to reduce barriers to connection, the Welsh Affairs Committee said shifting reinforcement costs onto local consumers is “not equitable,” adding that: “This would create a higher burden for rural households and businesses and those in areas which historically lack existing grid infrastructure.”

The committee asked the government and Ofgem to clarify what is meant by the phrase “in the area” and explain how they will ensure that rural communities will not be “unduly burdened”.

The report also warned that the power grid is facing constraints on the supply and demand sides, both now and in the future, with the committee raising concerns over an apparent “difference in understanding between the UK and Welsh government over current grid capacity in Wales.”

It asked the UK government to explain its statement via energy minister Greg Hands that the power grid in Wales is “fit for purpose today” in light of the evidence it had received, and said the UK and Welsh government’s must work together produce an agreed assessment of current capacity.

On the demand side, the committee said electricity networks are already under pressure, which will be “exacerbated” by the growth in demand from the decarbonisation of heat and transport. It said the UK government should task its proposed Electricity Networks Commissioner to determine what grid infrastructure is required to decarbonise heat and transport in line with net zero targets.

The report said it would be “inequitable” for the UK to benefit from the abundant natural energy resources in Wales, whilst local communities are not adequately connected to the grid.

The committee said these resources mean Wales is “uniquely well-placed” to play a “leading role” in the transformation of the UK’s energy system, but said there are also “distinct challenges and opportunities relating to grid infrastructure in Wales that require specific focus and intervention from the UK government.”

It said the UK and Welsh government should deliver a “coordinated and strategic approach” to electricity network design in Wales that recognises these challenges and opportunities.

The committee said the UK government should also work with energy companies to determine areas where anticipatory investment in network infrastructure would be justified.

It said the recently announced government proposals to halve the time for planning grid infrastructure is “the least that needs to happen” but said it is “not clear” if the government realises that a “step change” is required in the scale and pace of delivery.

The MPs also called for a mechanism to be developed that allows small energy generation projects to defer and spread grid connection payments over time.

Welsh Affairs Committee chair Stephen Crabb said: “The twin challenges of UK energy security and net zero demand a new approach to grid infrastructure in Wales.

“Wales has enormous potential as a key location for clean energy generation. But inadequate grid capacity, and the lengthy timescales involved in delivering improvements, will hold back investment in vital new projects.”

He continued: “With developers wanting to accelerate investment in opportunities like floating offshore wind in the Celtic Sea, the UK government must demonstrate a similar level or urgency and ambition in reducing the costs and barriers to new grid connections.

“Although the UK government has taken steps to improve the delivery of grid improvements, so far it is not clear that these will achieve the necessary step change required. Without clear leadership on this issue that pulls together the different parties involved, inadequate grid capacity will continue to be the biggest block on the pathway to Wales reaching net zero.”