Ofgem has published proposals to reform charges for use of the network apply to storage as part of a ‘Targeted Charging Review’ review of network charging. The consultation is open until 5 May 2017.

The review follows Ofgem ‘minded to decision’ to significantly reduce the value of transmission network credits for embedded generation – which Regen recently published our thoughts on Ofgem’s embedded benefits consultation.

Network charging is a complex but vital area as it sends key signals through the system to energy generators, demand customers and storage operators. Regen recently published a paper on “Network Charging for a Flexible Future” and below we have analysed the potential impact of Ofgem’s proposals below.

If you want to hear what the experts think about the topics raised in this update come along to Regen’s Smart Energy Marketplace event at Sandy Park in Exeter on Tuesday 28 March.

Targeted Charging Review

Regen, along with other organisations, has argued that Ofgem ought to review embedded benefits as part of a more holistic review of network charging and we are pleased that Ofgem has responded by publishing a Targeted Charging Review (TCR) consultation which will look more broadly into a number of areas around transmission and distribution network charging.

The regulator’s end goal here is to instigate a “Significant Code Review (SCR)” process, which: “…provides a vehicle for Ofgem to initiate wide-ranging and holistic change and to implement reform to code based issues.

A more open and inclusive process could go some way to rebuild industry confidence, and address the concerns raised by the process by which Ofgem came to its ‘minded to decision’ on embedded benefits.

The TCR consultation covers a wide range of issues related to the future of charging at both the transmission and distribution level. There is a specific focus on proposed changes to the ‘residual[1]’ element of transmission and distribution charges which has incentivised demand shift away from peak times through the TRIAD and Red Zone charging regimes, but which Ofgem have stated in the consultation is creating market distortion.

[1] Residual charges are a component of network charges and are intended for the recovery of sunk or fixed costs of operating the grid and distribution network. All types of connected storage assets will also still need to pay the ‘forward looking’ component of network charges, which reflect current and forward-looking costs associated with generating or consuming energy.

See Ofgem article ‘Spreading the costs of networks fairly’, 15 March 2017

Dangerous territory

This is potentially dangerous territory for the regulator and could be counter-productive. Partly because of the charging incentives the UK has seen a significant reduction in peak time demand (winter evenings from 5-7pm) which has in turn allowed the country to operate with less generating and network capacity than would otherwise be the case. If the regulator rolled back such incentives, it could end up costing the energy consumer through both the capacity market and an increase in network infrastructure costs.

Regen analysis based on average TRIAD demand 2007/08 – 2015/16 data source National Grid

Removal of “double charging” of storage

On a positive note for energy storage providers the TCR review will also be looking at the issue of energy storage “double charging”. Currently, storage is charged for using the energy network as both a demand customer and a generator, i.e. it is charged network costs both when drawing power from and discharging power back to the system. Many in the industry have argued that this penalises energy storage and that storage assets should not be considered as demand users.

It appears that Ofgem has largely accepted this argument and has proposed changes that would treat energy storage as generation “only” for the purpose of network residual charges. They propose removal of transmission and distribution residual demand charges for energy storage which is standalone or co-located with energy generation.

The changes would not apply to storage co-located with demand, thus any system that is, for example, installed behind-the-meter with a high energy user would have to pay to charge up their storage systems under the existing demand residual tariff structure.

The consultation also proposes two options to change balancing system charges for storage.

The below table summarises the changes to network charging for storage that Ofgem are proposing, with some indicative current values:

These changes will provide additional support for both standalone and generation co-location storage investment, with Ofgem stating:

We think the proposed changes should apply to storage units co-located with generation when relevant to ensure generation with co-located storage can compete on a level playing field with other forms of generation.

However, while the proposed changes are positive it is important to note that the highest network charges for demand users are currently made during peak demand periods (i.e. during Triads or Distribution Use of System “red band” times). During these periods, it is very likely that storage systems will be discharging electricity to the network.

So, unless the wider consultation results in Ofgem moving to significantly flatten network charges across the board, the value of removing demand residual charges for storage may provide a relatively small cost saving.

Government priorities

BEIS suggested earlier this week[2] that proposed changes to network charging for storage could potentially be a separate process from the broader review and should be “straightforward to deliver”. BEIS also referred to the current double charging issue for storage as an ‘accident’, suggesting it resulted from an outdated regulatory system.  These are encouraging signals that implementing changes to charging for storage will be a priority.

[2] Beth Chaudhary, Head of smart energy policy at BEIS, spoke as part of the “Working towards a smarter energy system” session at this year’s Future Networks Conference.

Transitional Arrangement Auction

On a related topic there was an interesting result in the latest Transitional Arrangement Auction for Demand Side Response (DSR) which shows a much higher price than last year but only 360 MW of DSR capacity bid into the auction, with up to 500 MW on offer. This raises the question as to whether there not enough potential DSR capacity out there to deliver significant flexibility to the system, or whether the DSR market will now expand as more energy users realise their DSR potential through smarter systems and aggregation?

If you want to hear what the experts think about the topics raised in this update come along to Regen’s Smart Energy Marketplace event at Sandy Park in Exeter on Tuesday 28 March.

Credit Image:  AES