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Ofgem unveils raft of sweeping reforms to distribution network charging regime

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Ofgem has set out its plans to overhaul the charging arrangements of the UK energy system to allocate more costs to distributed generation to reflect ongoing changes in the sector.

Seeking views on ‘getting more out of our electricity networks through reforming access and forward-looking charging arrangements’, the regulator has put the case forward that the current approaches for allocating and using capacity – and charging for the associated network usage – are no longer fit for purpose.

It is therefore proposing a wide review of distribution charges, covering both connection charges and ongoing use of system charges, and a more focused review of transmission network use of system charges (TNUoS).

“Our aim is to ensure the electricity networks can be used efficiently and flexibly, so that we can each have the access we need and benefit from new technologies and services, while avoiding unnecessary costs on energy bills in general,” Ofgem states in its consultation.

Enabling growth, managing constraints and increasing interaction

The review sets out to address three main priorities in the energy system identified by consultants Baringa Partners, which was commissioned by the regulator to advise what issues were most pressing within the current arrangements.

This includes enabling growth in demand, particularly from new low carbon technologies such as electric vehicles (EVs), while managing constraints that Ofgem says have become commonplace, particularly at distribution network level.

It has determined therefore that network access and charging arrangements need to provide better signals about the costs and benefits of using the network at different times and locations.

Secondly, the consultation argues that current arrangements do not provide sufficiently refined access choices and forward-looking charging signals to generation on the distribution system about the impact at different points on the network, nor a good signal for where investment in new network capacity would be beneficial.

This includes ensuring sources of flexibility are provided with the signals needed to determine what benefit they can have to network.

Ofgem is also seeking to address the separation between arrangements for transmission and distribution access and charging, which it says could be distorting competition between different sizes and types of project.

The increasing prevalence of generation assets connecting to the distribution system rather than transmission has increased the interaction between the two levels of the UK energy system; a fact that has not been reflected in charging arrangements, Ofgem argues.

It is therefore proposing to launch a Significant Code Review (SCR) to provide a process in which Ofgem can initiate “wide-ranging and holistic” change, similar to its work in the Targeted Charging Review, which is considering changes to the residual electricity network charges.

Firming up access across the system

For large users, the review would set out to improve the definitions and choice of access to the system, particularly around the ‘firmness’ of connections.

As more intermittent generation has made its way onto the distribution system, network companies have rapidly adopted the use of non-firm, or flexible, connections. These allows generators to benefit from cheaper connections and fast-tracked access in exchange for allowing networks to curtail their output when required.

Ofgem is proposing improvements in this area, potentially with caps on the amount of time that a user with a flexible connection can be curtailed without payment being available. This it says would make curtailment risk easier to manage for users while making non-firm connections more attractive.

The regulator is also proposing improving clarity around firmness of ‘standard’ connections; enhancing the scope for non-firm access at transmission system level; and improving clarity of access to the transmission network for small distributed generation.

It will also consider access rights based on time of day use of the system - for example many solar generators only want access during daytime hours. This use of ‘time-profiled’ access rights could lead to better use of existing network capacity and allow more users to connect quickly without the need for expensive reinforcement.

According to Frank Gordon, policy manager at the Renewable Energy Association, such a proposal is well overdue.

“Any solar developer will tell you the system for connecting to the grid has almost become a lottery and must be addressed,” he said.

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Short term access rights will also be considered for distribution system users similar to those on the transmission network. Ofgem suggests that these options could allow greater utilisation of existing network capacity and provide additional choice to users. For example, closer to real time, additional short term capacity could be made available, as real-time conditions ‘on the day’ allow.

The move away from triads

Long expected changes to distribution use-of-system (DUoS) charging have also been suggested, with Ofgem seeking to make the regime more reflective of ‘actual local network conditions’. This could see generation in constrained areas pay a charge to the system, with increased demand to receive a credit.

Significantly, Transmission Network Use of System (TNUoS) will be a focus, specifically how they are charged to small distributed generation. Instead of being treated as ‘negative demand’, whereby generation the likes of solar and other small generators are not seen as generation but a reduction in energy coming onto the overall system, charges could be aligned with that of larger generators.

This would mean that TNUoS charges for small generators would no longer be capped at zero and could be charged based on a generator’s agreed capacity, rather than generation during triad periods.

This signals the long-expected move away from triad periods towards fixed time of use periods, or charging based on an agreed capacity.

Addressing the EV revolution

Ofgem’s proposed changes to the use of system charges regimes are also likely to impact on households, particularly those with distributed energy resources of their own such as electric vehicles.

The proposals would seek to give incentives for customers to charge their EVs flexibly and move their demand out of peak periods. Ofgem says this would free up existing grid capacity to allow new generators, including businesses or other organisations which want to generate their own power on-site, to get connected to the grid more quickly.

Analysis from the regulator claims this would also facilitate more EVs on the road, saying at least 60% more EVs could be charged up compared with ‘inflexible’ charging where they are only charged at peak times.

Jonathan Brearley, executive director, systems and networks at Ofgem, said: “The proposals we have announced today will also harness the benefits of electric vehicles and other new technologies to help manage the energy system and keep costs down for all consumers.”

Those that fail to take up this ‘flexible charging’ method could be hit with increased network charges under plans by Ofgem, which is considering targeting users (including households) who consume more at peak times.

Industry stakeholders have until 18 September to submit their responses to the consultation, with Ofgem suggesting that any reforms would be in place between 2022 and 2023.

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