Ofgem rejects £120m grid rebate for generators

Regulator says EU cap on transmission charges was not breached as generators argue

Ofgem has turned down a request from generators for a £120 million rebate to address an alleged overpayment of network charges.

Generators claim that recent levies have exceeded a cap on transmission charges imposed by the EU.

The regulation limits average annual transmission charges for larger generators to €2.50/MWh, but SSE argues that the charges for 2015/16 exceeded this cap.

In March 2016, the company submitted a modification to the Connection and Use of System Code (CUSC) called CMP 261 which would have returned the alleged overpayment through an £120 million rebate.

Two alternative versions of the modification were approved by the CUSC panel at a meeting in June. However, Ofgem has gone against the recommendations of the panel in rejecting the modifications.

Transmission charges are applied to both generators and suppliers, and are split between forward- looking charges, which reflect the individual impact of users on network costs, and residual charges, which reflect the sunk costs of the existing network.

The forward-looking charges for generators are further split between local charges, which reflect the bespoke costs of connecting individual assets to the grid, and wider locational charges.

The cap on transmission charges does not cover those “paid by producers for physical assets required for connection to the system or the upgrade of the connection”.

Ofgem believes these should not only include connection charges themselves but also most, if not all, local transmission charges. Based on this interpretation of the directive, the regulator has ruled that cap has not actually been breached.

The grid infrastructure paid for through local charges includes, for example, spurs connecting offshore wind farms to the main transmission system.

Explaining the decision, Ofgem senior partner for energy systems Andrew Wright wrote: “Put simply, such local assets provide the physical link from the generator (and its connection assets) to the transmission system and, but for these local assets, the generator would not be able to connect to the transmission system.

“We are therefore satisfied that local charges in respect of (at very least) offshore generation-only spurs fall within the connection exclusion. On the basis that local charges in respect of these assets fall within the connection exclusion, we are satisfied that there was no breach of the upper limit of the charge range in the charging year 2015/16.”

Ofgem said the decision was consistent the objectives of the EU directive to harmonise regulation across Europe and would be in the long-term interests of consumers who would otherwise have to pay for the rebate through higher network charges in future.

Earlier this month Ofgem announced plans to levy residual network charges solely on suppliers rather than both suppliers and generators as is currently the case.