Residual network charging reforms brush over regional price differences

Cornwall Insight has raised concerns over the lack of consideration given to regional price differences in Ofgem’s ongoing review of residual network charges.

The regulator proposed in November to recover the sunk costs of the existing network through fixed or capacity charges on consumers. The main aim of the reforms is to prevent network users from avoiding residual charges by lowering their demand on the power grid using behind-meter-generation or demand-side response.

But Dan Starman, lead consultant at Cornwall Insight, said because residual costs vary significantly between regions – from 0.292p/kWh in London to 2.623p/kWh in the South West – the inability to avoid these costs will have a much greater impact on network users in certain parts of the country.

“Distribution network operator data shows that in the year 2020-21 most of the residual value will be clustered in the South West, Scotland and Wales,” Starman explained.

“There are several factors behind such large local differences – population density, the topography of the region and the amount of commerce or industry in the area. Generally speaking, rural regions will have higher residual costs.”

Residual network costs by region

He continued: “This cost currently represents value to behind-the meter generation, energy efficiency improvements and behavioural changes that all can avoid these charges; these are presently levied on a volumetric basis. From 2020-21 it is likely they will lose this value, severely damaging the business case for such assets.

“With considerable regional variation, the loss of value will be felt the most in regions that have the most significant constraint and network management issues – areas where such assets, if used flexibly, could provide the most value.”

He said the failure to address this issue will have “wider implications” for decarbonisation and the development of a smarter, more flexible power grid.

A spokesman for Ofgem said the reforms will ensure residual costs are split fairly between consumers: “Under these proposals, many homes and businesses will save money, although some, including those that generate electricity at home or on-site, could pay more.”

He continued: “The targeted charging review does not propose changing the current regional distribution of network charges. We undertook a review of the regional differences of network charges in 2015, and found no compelling regulatory case to move to a Great Britain wide network charge.”