As Ofgem begins a review of how network usage and access is charged, AMP Clean Energy’s chief financial officer Mark Tarry explains why the focus of reforms should be on location.
The transformation of the UK’s energy system is underway, with the growing adoption of smarter, cleaner technologies that will help deliver a decarbonised future. The growth of smaller ‘distributed’ generation and energy storage is helping to provide flexibility for our energy grid, ensuring more intermittent renewables can flow onto the system and providing extra power during periods of peak demand, without the need for more costly large-scale fossil fuel power plants. Furthermore, the prospect of the electrification of vehicles and heat is likely to present greater challenges at lower voltage levels where most electricity users connect.
The UK’s energy regulator Ofgem has reflected upon how this transformation impacts current arrangements for using the energy networks and has decided upon a major review of how network access and usage is charged.
Its main aim is to ensure greater cost-reflectivity of network charges, and at the same time create the right signals to support continued decarbonisation. A Significant Code Review (SCR) is expected to commence later in the year to give the matter closer scrutiny.
One crucial area that Ofgem will consider is new charging structures for distributed generation (DG). These small-scale plants can be a highly cost-effective way to manage network constraints, particularly in non-generation dominated areas where demand outstrips generation. AMP Clean Energy’s own Urban Reserve peaking plants are located in and around urban and industrial areas where flexible generation is needed most.
The growth of flexible generation is essential to meeting clean growth targets, however there is a concern that changes to the current arrangements could create unintended consequences that alter the current direction of travel set out by existing government policy. This could stifle the emerging markets of both peaking plants and battery storage by undermining the business case of existing assets and deterring future investment.
We believe the focus of any review should be providing better locational signals which incentivise DG developers to build projects where they add the greatest system value.
Flexible generators connected to the local HV network already receive a transparent, simple and fundable incentive from the distribution network operators (DNO’s) in the form of distribution use-of-system (DUoS) credits. The problem is that these credits are the same across a DNO’s entire licensed area and therefore don’t provide the correct locational signals or incentivise local generation in areas of greatest system need. Instead we believe that DUoS credits should and can be set with more locational granularity, specifically at a primary substation level. Simply put, embedded generation should be incentivised at substations where demand exceeds generation and discouraged at substations where generation exceeds demand.
The clearer the locational signals, the more likely we are to reduce the costs of running the system and achieve the required flexibility and capacity in the right parts of the network. Key to this is a more transparent system with network capacity data made available to ensure assets are built in the right locations. Any changes must also ensure early movers that build assets in the right locations are not penalised if subsequent connections tip the balance too heavily towards generation over demand. Both steps would allow investors to determine where to focus development, based on where the system value would be highest, and avoid deterring future investment by stripping away revenue midway through an asset’s life.
Correctly located distributed generation and storage hold the key to unlock greater flexibility and a smarter energy system. Building a more effective and transparent process that encourages and rewards this system value should be encouraged, but caution should be exercised to avoid deterring the very investment needed to deliver a cleaner, smarter energy system that works for all consumers.