Access and Forward-looking Charges Significant Code Review – consultation response

Published: 1 September 2021

Ofgem are consulting on minded to positions for three key areas of their Access and Forward-looking Charges Significant Code review:

  1. Distribution connection charging,
  2. The definition and choice of access rights, and transmission charges for small
  3. Distributed generators.

Energy Systems Catapult welcomes Ofgem’s consultation on their minded to position for electricity networks access and forward-looking charging review. In addition to responding to the specific issues that Ofgem are consulting on, we would like to offer some broader strategic observations.

Key points

  • We welcome Ofgem’s Full Chain Flexibility programme and wider review of TNUoS charges and therefore accept the postponement of the decision on forward-looking DUoS in this context; this review, however, is belated and delay lengthens the uncertainty that users face. We, therefore, urge that completion and implementation of the Full Chain Flexibility programme and wider review of TNUoS charges be treated as a high priority.

In relation to the forward-looking TNUoS and DUoS charges:

    • We believe that Locational Marginal Pricing (LMP) and Local Flexibility/Energy Markets have a role to play in driving much greater efficiency in the power system. We would therefore expect these initiatives to include full consideration of the LMP and local markets alternatives. At present, LMP will likely only be practical at a higher voltage level (e.g. 132kV and above – though this could change with improved network monitoring/data/control at lower voltages and with growth in distributed energy resources that would ensure sufficient liquidity behind nodes) and below this, the choice should be a combination of DUoS charges and options implemented through Local Flexibility/Energy Markets where DNOs/DSOs would potentially undertake local balancing and aggregation to facilitate interaction with national markets. We hope that Ofgem’s further consideration of DUoS charges, to be published later in the year, will also include consideration of Local Flexibility/Energy Market options implemented in combination with LMP applied to the transmission level.
    • For the upcoming minded-to decision on DUoS, consideration must also be given to fairness and equity issues in a broad sense, though particular attention should be paid to consumers’ rights to access the full value of their flexibility (via self-control/automation or third party control/automation). For example, it will be important to create an incentive for owners of electric vehicles to adopt smart charging (to limit the network capacity required and reduce the need for new generation) but this should not lead to higher charges for those not able to afford or not yet transitioned to zero/low carbon technologies.
  • On connection charges, we welcome shallow charges for demand given the need to accelerate the electrification of demand to achieve Net Zero goals but urge all generations be exposed to charges incorporating wider locational signals beyond local reinforcement costs to influence its siting.
  • In principle, generation of different sizes and located at different voltages need to be treated equitably, not just in relation to network charges but also with respect to targeted policy outcomes (e.g. carbon, air quality, reliability, resilience), technology support policies (e.g. CfD eligibility) and market design rules (e.g. fully incorporate marginal costs, internalise externalities, remove price distortions and market barriers). A key objective should be to ensure that system costs are accurately reflected in price signals, with all generators exposed to those signals. Inconsistent application of such principles results in an unlevel playing field between different energy resources.
  • On access rights, we welcome the clearer definitions for distribution level resources and the requirement for DNOs to procure flexibility above thresholds agreed with users – but work must continue as the market develops to progress development of options for the future, moving in the direction of more equal treatment of transmission/distribution assets and resources. In the end, it is crucial that flexibility be fairly compensated, including at distribution level and in ANM zones.
  • Discontinuities in the regulatory regime can distort investment decisions as they can incentivise developers/investors to size plant based on cut-off points. It will be important to fully consider the potential for distortion associated with any proposed discontinuities in regulatory treatment as otherwise corrective action will be needed later, which is highly disruptive for innovators, developers and investors.
  • The focus of all new proposals – relevant to this whole consultation, not just this question – must be on achieving more optimal outcomes, requiring close attention to the detail of design and implementation. Charges should be designed to be cost-reflective and free of distortions in order that efficient and optimal outcomes result in relation to investment and network use. Close attention must be paid to the incentives or disincentives that DNOs and ESO are subject to, and their coordination, with the objective of achieving optimal outcomes from a whole systems perspective. Key to driving efficient development of the network and investment decisions will be effective incentives for DNOs and ESO through the RIIO price control regime, effective implementation of whole system planning processes (e.g. Local Area Energy Planning (LAEP)) and reforms for better coordinating ESO(FSO) and DNOs(DSOs).