Ofgem has withstood fierce criticism from the clean energy sector and will press ahead with controversial reforms to residual charges under the Targeted Charging Review.
The regulator confirmed its decision this morning, revealing that residual charges would not be recovered from households via fixed charges for all households and businesses, simultaneously scrapping some embedded benefits payments for generators.
Residual charges
Ofgem confirmed it would levy residual charges on final demand users in a bid to make them simpler and more transparent, opting for a refined version of a fixed charge. The implementation of these charges will be staggered, with fixed transmission charges introduced in 2021 and distribution charges a year later.
Embedded benefits
A decision has also been reached to address each of the three embedded benefits originally consulted on last November, reforming two of those through the Significant Charging Review. Transmission Generation Residual charges are to be scrapped, while suppliers will no longer be able to contract small distributed generators to reduce their balancing services liabilities.
Instead, balancing services charges are to be recovered on a gross consumption basis rather than a net consumption basis, and this will be conducted at the Grid Supply Point. These reforms will be implemented in 2021.
Meanwhile, the embedded benefit which exempted small distribution generators from paying balancing services charges is to be the subject of a second Balancing Services Charges Taskforce, which will be tasked with applying Ofgem’s TCR principles to it. The taskforce is to consider who should pay for those balancing charges and on what basis, paving the way for what the regulator has described as “fundamental reforms”.
Ofgem has said that in moving to fixed residual charges for all households and businesses connected to grids, costs will be spread more fairly and ultimately save consumers as much as £300 million per year from 2021.
The regulator also claimed that the policy decision was “laying the foundations for a net zero economy” and would help the UK achieve that goal.
Meanwhile, it defended the decision to scrap certain embedded benefits payments by arguing that they distorted the competitive market, added cost “unnecessarily” to energy bills and failed to reward the most efficient generators connected to the system.
Ofgem has reiterated its stance that while all generators, including renewables, will see their revenue streams affected by these changes, similar levels of decarbonisation can be delivered at “significantly lower costs to consumers”.
The full details of Ofgem’s decision, and its impact assessment, can be read here.
Analysis: Liam Stoker, editor in chief, Current±
While Ofgem persevering with what, in effect, is its original minded-to decision is not necessarily a surprise, it will nevertheless be a hugely contentious decision and one which will have lasting repercussions in the renewables and distributed generation sector.
The regulator has spent much of the last year being pulled from pillar to post on the topic, defending a policy which will inevitably be bad news for renewables, and yet it continues to claim that it stands to deliver decarbonisation at a lower cost than the status quo.
The renewables sector is far from convinced. Various studies have countered Ofgem’s analysis, drawn up by Frontier Economics, claiming that the policy stands to wipe £2.50 off the value of each megawatt hour generated by renewables, damaging project economics and wiping multiple gigawatts off of post-subsidy pipelines.
Privately, trade bodies and developers alike have become exasperated at a perceived lack of engagement with Ofgem on the issue, especially given its apparent conflict with the regulator’s intentions outlined within the Smart Systems and Flexibility Plan. Some use slightly more colourful language when describing their discussions on the issue.
Either way, the TCR has all the makings of a regulatory decision which will continue to attract criticism until its implementation.
Making net zero “harder to reach, not easier”
Reform to embedded benefits has been forecasted to trim some £2.50 off each megawatt hour generated by onshore renewables, significantly impacting revenue streams and business models. As a result, the proposals have been met with continued criticism and anger from the renewables lobby, which has attacked them for being counterproductive. A study compiled by economics consultancy Oxera on behalf of energy giants ScottishPower, innogy, Vattenfall and RES in the spring found that not only could the proposals jeopardise renewables investment, but also result in higher bills for consumers.
Those findings were compounded by a separate study by Aurora Energy Research, also released in the spring, which concluded that the TCR stood to delay the onset of subsidy-free renewables in the UK by as long as five years and scrub 6GW off pipelines.
Responding to today’s announcement Chris Hewett, chief executive at the STA, attacked both the decision and the regulator, insisting that changes made under the TCR made net zero “harder to reach, not easier”.
“With the urgency of climate change, it is abundantly clear that the regulator’s current objectives are now outdated and absolutely vital that the next government addresses this,” he added.
The Association for Renewable Energy and Clean Technology (REA) has echoed those sentiments, claiming today’s decision “undermines the move towards a more flexible power system.”
“These reforms mean that businesses and homes which have taken responsible steps to install low carbon technologies will effectively pay more to use the wires needed to support the system.
“Ultimately, this decision will negatively impact subsidy-free renewables and until the ‘forward looking charges’ review is enacted we risk further shrinking the pipeline of new projects,” Nina Skorupska, chief executive at the REA, said.
