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14 January 2019
On 28 November 2018, Ofgem published its "minded to" decision on its Targeted Charging Review. The decision sets out Ofgem's view that the residual aspect of electricity transmission and distribution network charges should be based on fixed tariffs for different classes of consumers rather than the other options under consideration such as usage during periods of peak demand. Ofgem also proposes to remove most of the remaining "embedded benefits" enjoyed by smaller distribution-connected generators. In this article, we consider the decision, and its implications for the industry, in more detail.
Alongside its procedure for setting the RIIO-2 price controls, which will determine the maximum allowable revenues for transmission and distribution network operators, Ofgem has been reviewing the network charging regime to consider the best way for these revenues to be recouped from system users to ensure that the correct price signals are sent to the market. Ofgem is conducting this review in three separate workstreams:
Alongside the TCR "minded to" decision on 28 November, Ofgem also published an open letter confirming that it has asked National Grid Electricity System Operator to launch a task force to review balancing services charges as a priority. Ofgem will take account of the conclusions of this task force when deciding on the balancing services charges aspects of the TCR and the electricity network access project.
The stated aim of the TCR is to find a fair and proportionate method of ironing out harmful distortions to the market. In particular, Ofgem aims to prevent users with the means to modify their behaviour to avoid residual charges from doing so at the expense of users without such means. Ofgem considers that a segmented fixed charges approach best achieves this aim.
Network residual charges are currently determined for larger users by reference to consumption during the Triad periods of peak demand, and for smaller users via per-unit consumption charges. Ofgem has provisionally decided to shift to a scheme of fixed charges based on different user "segments". Under this scheme, segments would be determined by reference to the voltage level and line loss factor class of each connection. The fixed charge allocated to each segment would seek to reflect the volume consumed by that segment as a proportion of total consumption.
Ofgem has also confirmed the opinion it has given in previous publications that network residual charges should be levied on only demand users (i.e. suppliers) and not generation users.
In Ofgem's view, the most viable alternative to the fixed charge approach, allocating charges on the basis of agreed connection capacities (or, in the case of smaller users, deemed capacities), still presents a risk of manipulation by users who can afford to be flexible with their connection capacity.
Smaller distribution-connected generators ("EGs") have been able to obtain certain benefits in relation to residual network charges by virtue of their treatment as "negative demand" when ascertaining supplier volumes for the purposes of determining use of system charges. However, Ofgem continues to consider that these benefits reward behaviours that are not necessarily beneficial to the market, and has proposed further restrictions on them:
Stakeholders have until 4 February 2019 to respond to the decision. Ofgem has opened the question of timescales for implementation up to stakeholders:
For further information on this topic please contact Robert Lane, Munir Hassan, Sarah King or Louise Dalton at CMS Cameron McKenna Nabarro Olswang LLP by telephone (+44 20 7367 3000) or email (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com). The CMS Cameron McKenna Nabarro Olswang LLP website can be accessed at cms.law.
This article has been reproduced in its original format from Lexology – www.Lexology.com.
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