Renewables face five-year set back with charging reforms

Ofgem proposals to recover residual network charges through fixed charges on consumers could delay the advent of subsidy-free renewables by up to five years, Aurora Energy Research has warned.

In contrast to the regulator’s own assessment, the consultancy said the reforms would also benefit older and less efficient combined-cycle gas turbines (CCGTs).

Residual charges are designed to recover the sunk costs of the existing power grid. Unlike the forward-looking used to pay for new investments, residual charges are not intended to reflect users’ impacts on network costs. Consumers currently pay around three-quarters of residual charges with the remaining quarter levied on generators.

Ofgem is in the process of revamping both set of charges through two separate significant code reviews.

As part of the review of residual charges, also known as the targeted charging review, the regulator has announced plans to shift the liability entirely onto demand.

Consumers would be split into broad segments based on their energy usage and charged a fixed amount on this basis. Ofgem compared this approach to the “line rental model” for landlines used in the telecoms sector. It would bring a complete end to the residual triad avoidance payments which Ofgem is already cutting drastically.

Small-scale generators (less than 100MW) connected to distribution networks receive the payments from suppliers in exchange for reducing their transmission network use of system (TNUoS) charges. They are able to do this because the power they sell is counted as negative demand during the triad periods used to determine the charges for half-hourly metered non-domestic customers.

Ofgem is also planning to remove several other of the so-called embedded benefits enjoyed by distribution-connected generators. These include both an exemption from Balancing Services Use of System (BSUoS) charges and the avoidance payments they can receive from suppliers for reducing their BSUoS charges.

The underlying aim of the reforms is to create a level playing field between different types of generators and prevent some from avoiding paying what Ofgem considers their fair share of costs.

But according to analysis by Aurora Energy Research, these reforms will significantly harm the economics of renewable generators, many of which are connected at the distribution level.

The consultancy says the changes could push back the deployment of subsidy-free renewables by between two and five years and reduce solar and onshore installations by 5GW and 1GW respectively by 2035.

Aurora disputes Ofgem’s assertion that renewables would be able to make up the difference through higher subsidy payments, making the obvious point that both onshore wind and solar remain excluded from contracts for difference auctions.

It says the proposals would also have a negative impact on smart technologies such as batteries and demand-side response, both directly and through the reduced rollout of renewables.

By contrast, the firm says the reforms would benefit older and less efficient CCGTs, which were otherwise nearing closure. Although they would also see their network charges increase, the rise would be offset by higher capacity market prices, of which renewables are unable to take advantage.

Aurora project leader Weijie Mak said: “These changes would have a significant impact on the returns for power utilities across a wide spectrum of asset classes.

“We understand the need for Ofgem to ensure network efficiency and consumer protection, however there is a risk that pursuing too narrow a focus on these objectives could undermine the transition towards cleaner and smarter forms of power generation, as well as undermining investor confidence.”

A recent report from Smartest Energy suggested the proposals would cost a typical distribution-connected renewable generator £15/MWh by 2023. Another report produced by Oxera on behalf of Innogy, RES, Scottish Power and Vattenfall, claimed they would cost consumers up to £1.3 billion by 2040.