Ofgem fixes transmission charging zones for generators

Ofgem has approved a modification to the Connection and Use of System Code (CUSC) that would remove the requirement to review the transmission charging zones for generators for each network price control, effectively maintaining the current 27 zones “in perpetuity”.

The regulator rejected another modification put forward by National Grid Electricity System Operator (ESO) that would have aligned them with the 14 charging zones for demand corresponding to the license areas for distribution network operators.

The charging zones for generators are used to determine their locational charges, which are intended to reflect their impact on costs by connecting to different parts of the network.

The zones are created by grouping together “nodes” based on geographical and electrical proximity and similarity between the marginal costs for connecting generation at each point. In order for nodes to grouped within the same zone, the associated marginal costs must be within £1/kW of each other.

In September 2019, the ESO proposed the CUSC modification CMP324 that would align the charging zones for generators with those for demand after concluding that the currently methodology for establishing them is overly sensitive and complex, leading to volatile and unpredictable charges. If applied for the RIIO T2 price control beginning in April 2021, the ESO said there would be an increase in the number of zones to 48.

In stating that the modification was being raised to align the charging zones for generation and demand, Ofgem said this effectively prevented the workgroup from considering any alternative rezoning methodologies. The ESO therefore proposed a further modification named CMP325 to expand the scope of the work and allow other options to be assessed.

Three alternatives to the original modification were put forward under CMP325.

The first would increase the current £1/kW parameter for grouping nodes in line with the RPI measure of inflation to £2.25/kW and index link this figure for future price controls.

The second would maintain the current 27 charging zones and remove the requirement to review the zones for each price control.

The third would keep the current 27 zones until March 2023 and implement the ESO’s original proposal for the beginning of the RIIO2 price controls for electricity distribution on 1 April 2023.

The only proposal not considered better than the status quo by the majority of the CUSC panel was the second alternative, with the first and third each being picked as the best option by four of the panel’s nine voting members. Ofgem has nevertheless decided to approve the second.

Explaining the decision, Ofgem noted that the ESO’s predicted increase in the number of zones to 48 did not take account of the expected update to the “expansion constant” – the annuitized cost of transporting 1MW of electricity over 1km of 400kV overhead line and a factor in the calculation of marginal costs for network nodes.

At the end of October, the ESO raised an urgent CUSC modification named CMP353 that would maintain the expansion constant at its present value rather than updating it for the RIIO T2 price control. Ofgem is considering it separately and “on its own merits” but said the modification creates uncertainty over the expansion factor for the next regulatory period. The regulator said this would feed through to the zoning methodologies under both the current arrangements and the first alternative proposed as part of CMP325 (WACM1).

“The exact change will not be known until a decision is made on CMP353,” it stated. “If CMP353 is approved, there would be 48 charging zones under the baseline and 21 zones under WACM1, in 2021/22. In that case, NGESO has proposed to review the expansion constant methodology in 2021.

“The exact nature of the proposed review and its implications are unknown, but this scenario may lead to a further change to zones during the price control. If CMP353 is rejected, we do not know what the charging zones would be in 2021/22 under the baseline or WACM1, because NGESO has not performed this analysis.”

Ofgem said the second alternative – and to a lesser extent the third – would therefore provide “a more stable investment signal”. It said fixing the current 27 zones will “simplify the administration and implementation of this aspect of the charging methodology”.

Whilst also true for its original proposal, the regulator said the ESO has not offered “clear evidence or a robust rationale” for aligning the charging zones for generation with demand and that reducing the number could make them less cost reflective.