Network charging reforms needed

Phil Lawton says cost-reflective charging would boost, not hinder, low-carbon generation.

Writing on utilityweek.co.uk recently (“One step forward, three steps back?”), Jonathan Marshall, head of analysis at the Energy and Climate Intelligence Unit, wrote that Ofgem’s proposed changes to network charging would not be “a good thing” for the country’s efforts to decarbonise electricity.

He argues that the changes would have the effect of reducing the embedded benefits of distributed generation, and thus damage the finances of low-carbon generation.

However, Energy Systems Catapult recent report Cost Reflective Pricing found that energy tariff pricing reform – and by extension, network charging reform – would encourage the switch from gas boilers to low-carbon heat pumps. While current charging actually creates a barrier to customers moving from fossil fuels and on to low carbon electricity.

Heat as we all know, is the elephant in the room as far as decarbonisation in the energy sector is concerned. It makes up almost one-third of carbon emissions, yet for domestic users, only about 4 per cent of heating is low carbon.

The Cost Reflective Pricing study investigated whether or not the fixed charge components of energy bills – covering network, environmental and social costs – are efficiently distributed between the standing charge and unit (per kilowatt-hour) price of electricity and gas tariffs.

Working with the Oxford Martin School of Oxford University, Energy Systems Catapult found the arrangement of fixed and volumetric charges within electricity and gas tariffs may inadvertently distort market behaviour towards favouring investment in decentralised generation technologies, like solar PV but also diesel generators, over demand technologies like heat pumps and electric vehicles.

This means that any generation connected on the consumer’s side of the meter is paid more than the value that it delivers to the system and any incremental demand is charged more than the costs it imposes.

The present arrangements, by overstating the cost of a kilowatt-hour, are creating a barrier to the deployment of heat pumps and hence the decarbonisation of heat.

For the energy system to transform to low carbon in an efficient manner, it’s vital the financial incentives on individual participants reflect their impact on the total cost of operating the system.

Some examples include: currently, if you install solar panels, almost half the benefit you derive comes from increased charges to other users rather than savings to the system; and while some of the generation benefiting from these arrangements is low carbon, fossil fuel generation like diesel receives the same benefit.

While it is entirely legitimate to promote low carbon generation, it should be done in a way that is transparent – not via a “hidden” subsidy.