Residual charges fail to reflect sunk network costs, says ADE

Trade body argues for wider scope to Ofgem's significant code review

The amount paid by grid users to cover the sunk costs of the transmission network should be considered by Ofgem as part of its significant code review on network charging, the Association for Decentralised Energy has argued.

The trade body says the regulator should not only examine the most equitable and efficient way to split the charges between different types of users but also whether the overall bill is truly cost reflective.

Transmission Network Use of System charges are levied on generation and demand – generation to a much lesser extent – and include both locational and residual elements.

The locational charges should reflect users’ impact on network costs due to the grid reinforcements they necessitate, whilst the residual charges should cover the sunk costs of the existing infrastructure.

However, Association for Decentralised Energy head of policy Jonathan Graham said the residual charges are not cost reflective and are instead being used to fund new investments in the transmission network.

“Ofgem has argued that the residual charge is a reflection of the sunk costs of the network and from our perspective the evidence shows that that’s not true,” he told Utility Week.

“The locational and residual are mirror images of each other; whatever does not go in the locational goes in the residual. The fact is, the demand locational charge recovers nearly zero revenue for transmission networks so it is obviously not a reflection of the costs that demand users are imposing on the network.”

Outlining the aims of the significant code review (SCR) earlier this month, Ofgem said it would not examine locational charges and would instead focus solely on residual charges and how best to recover them without unfairly burdening some users.

“The risk of the review,” said Graham, “is that it just becomes a case of the residual is the residual and we’re going to recover it from everyone no matter what.”

He urged the regulator to expand the scope of the review to cover the division of transmission costs between locational and residual charges.

His comments chime with those of former Ofgem partner Maxine Frerk, who wrote in Utility Week in April that the regulator was “still only looking at part of the picture”.

The review was first announced by Ofgem back in March as it revealed its controversial minded-to decision to drastically cut the triad avoidance payments available to small-scale distributed generators.

The power they sell is considered as net negative demand during the triad periods used to determine transmission charges for half-hourly metered non-domestic consumers. As a result, suppliers are willing to offer the payments in exchange for reducing their charges.

Ofgem confirmed in June that the residual element of the payments would be almost completely removed, although the locational element would be left unchanged.

Graham said the reduction means it is now especially important that Ofgem’s finds the right split between residual and locational charges: “If Ofgem is going to look at preventing people from avoiding the residual charge, they need to make sure that there isn’t a benefit those users are providing that’s not reflected by the locational charge.”

Despite concerns over the omission of locational charges, Graham said the ADE was still “broadly happy” with the review and its aims. “It’s definitely showing Ofgem is thinking about this in a far more strategic way than it has over the past year,” he added.

The review was also welcomed by Energy UK senior policy manager Kyle Martin, who told Utility Week a report published by the trade association just under a year ago had highlighted concerns among members over piecemeal changes to network charging.

“Our members wanted a holistic approach to charging to be taken forward,” said Martin. “There had been a lot of changes brought forward by different companies trying to tackle different issues that they saw as relevant to them and so asking Ofgem to look at the whole charging framework in one go – and say actually this is quite a significant change needed for industry – was something we supported.”