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National Grid Electricity System Operator (ESO) will be instructed to launch and lead one or more task forces to examine and address the root causes of the unpredictability of electricity transmission charges, Ofgem has announced.
The ESO will also be asked to review the input data for the current model for calculating locational Transmission Network Use of System (TNUoS) charges to ensure they remain cost reflective.
Ofgem said this will enable short-term changes to be enacted whilst it undertakes a “significant programme of work” looking at the longer-term purpose and structure of TNUoS charges, including “trade-offs between market signals, network planning and market charging signals”.
The regulator made the announcement following the conclusion of a call for evidence on TNUoS charges, including whether there should be a broader review of the charges and priority areas for reform.
Ofgem said the majority of respondents agreed that such a review would be beneficial and cited a range of reasons such as: the volatility and unpredictability of charges; the divergence between generators in different parts of the country and between generators in Great Britain and the rest of Europe; and issues with the assumptions and data underpinning charging methodology.
The regulator said it does not necessarily agree with all of the feedback it received but it recognises the need for reform. It accepted that “the unpredictability of TNUoS undermines its ability to deliver a stable long-term investment signal” and that the data used in the methodology “may no longer be fit-for-purpose or reflective of the most reasonable assumptions as to parties’ effects on the network”.
It likewise acknowledged concerns over the divergence in charges between the north and south of Great Britain, stating: “There is a trade-off to be considered between the stability of the charge and its cost-reflectivity in absolute and relative terms.”
Ofgem said there may be short-term solutions to some of these issues: “Starting with the assumption that for the short-to-medium term we will retain today’s ‘transport model’, we think it is possible for some of the concerns around predictability and cost-reflectivity to be addressed incrementally over the period 2023-6.
“We do consider, however, that there are much broader questions as to the longer-term construction of TNUoS charges, and that the answers to those questions cannot likely be implemented in the same timescales.
“More fundamental issues around the role of markets versus that of charges in delivering operational and investment signals to network users require us to consider the balance between the longer-term system needs and the nearer-term issues stakeholders have raised regarding the current charging regime.
“We believe that looking at these issues separately, whilst recognising the links between them, is likely to lead to improvements in arrangements today, which then potentially pave the way for any broader reforms once those more fundamental questions as to the interactions between markets, planning and charging are answered.”
Ofgem issued its call for evidence following two significant code reviews (SCRs).
The first, known as the Targeted Charging Review, examined residual network charges and embedded benefits. The review concluded in November 2019, with the regulator deciding to apply residual network charges solely on demand in the form of fixed fees and replace the triad avoidance payments available to embedded generators with a much smaller charging credit.
The second, examining forward-looking charges and network access arrangements, was launched in December 2018 and is still ongoing.
Forward-looking charges are intended to reflect users’ impact on future investment to reinforce the power grid based on their location, whilst residual charges are intended to recover the remaining sunk costs of the existing network.
Alongside its response to the call for evidence, Ofgem confirmed plans announced in November to spin off its work on forward-looking Distribution Use of System (DUoS) charges into a third dedicated SCR.
Ofgem said it may be that yet another SCR looking at TNUoS charges is required in the future but this is currently “premature” and would not be the best way deliver quick fixes given that code modifications could not be put forward until the end of the review.
The regulator has instead proposed the creation of task forces focused on “improving predictability and cost-reflectivity, the inherent trade-offs between the two, and the best way to provide a stable foundation for the energy system over the next five years.” It said the two balancing charges task forces led by the ESO offered “a structured but flexible way for stakeholders to engage in a complex charging issue.”
“We believe that a similar approach in tackling some specific TNUoS questions will aid in identifying trade-offs, interdependencies, and potential solutions without being bound by the narrower scopes or prescriptive processes underpinning the current code governance frameworks,” it added.
Ofgem said it will work with the ESO to set the terms of reference for the task forces and expects to issue further updates before the end of March. It said the task forces are unlikely conclude much before March 2023, with April 2024 being the earliest implantation date for any changes to TNUoS charges.
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