Ofgem to hold dedicated review of distribution charges

Ofgem has announced its intention to hold a significant code review (SCR) dedicated to forward-looking Distribution Use of System (DUoS) charges.

They were already being examined by the regulator as part of an ongoing SCR looking at forward-looking network charges and access arrangements across both transmission and distribution that was launched in December 2018.

In June, Ofgem issued a consultation on its minded-to position on changes to connections charges, network access rights and transmission charges for smaller distributed generators.

However, the regulator paused its reforms to forward-looking DUoS charges to enable their alignment with its forward work programme for 2021/22, in particular other reforms being considered as part of its Full Chain Flexibility programme launched in late 2020.

Ofgem has now decided to spin off the reforms to DUoS charges into a separate SCR. It said this would allow its proposed changes to connection charges and network access arrangements to be implemented at the beginning of the RIIO2 price controls for electricity distribution in April 2023, reducing uncertainty for industry and minimising the use of uncertainty mechanisms and reopeners.

The regulator said implementing reforms to DUoS charges after 2023 would allow them to be aligned with other policy choices and developments. These include decisions on the extent to which locational prices signals for flexibility are provided by markets, charging or other mechanisms, and the acceptable strength of price signals for different user groups.

Ofgem said the new SCR would retain the original “wide-ranging” scope that it set out previously, among other things, covering the charging methodologies for low, high and extra-high-voltage networks; the balance between the usage and capacity-based charges; improvements to locational prices signals and the potential use of time-of-use charges; and the need for protections for small users and vulnerable customers.

It acknowledged that its planned changes to connection charges and network access arrangements will have linkages with DUoS reforms. For example, in the absence of changes to DUoS charges, its proposals to reduce user contributions to network reinforcement for generation and remove them completely for demand, could lead to less efficient price signals for customers who have some flexibility over where they connect.

Accordingly, Ofgem said it may make further changes to connection charges and access arrangements based on its chosen reforms to DUoS charges.

The regulator said its work on DUoS charges is now expected to take place throughout the course of 2022.

“As charge setting is an annual process and our reforms may require complex modelling and systems changes, we think that the earliest possible date for implementation is 2025,” it added.

Ofgem has invited feedback on its plans for a separate SCR and given a deadline for responses of 6 December.

The consultation on its minded-to position on connections charges, network access rights and transmission charges for smaller distributed generators closed in August. Ofgem said it is still working towards a final decision and expects to issue a direction in the first quarter of 2022.

The existing SCR on forward-looking charges and access arrangements followed on from another SCR, known as the Targeted Charging Review (TCR), examining residual network charges and embedded benefits. The TCR reached its conclusion in November 2019, with Ofgem deciding to shift residual charges entirely onto demand in the form of fixed fees.

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.