Regen and the Electricity Storage Network (ESN) have responded to the recent consultation from Ofgem on the Targeted Charging Review which outlines how they plan to reform the distribution of residual network charges.
Residual network charges are sunk costs which pay for existing network infrastructure, whereas forward-looking charges pay for future infrastructure and capacity and are the focus of a separate review. The decision to split these two charges into separate reviews is making it difficult for industry to assess the current proposals.
Regen and the ESN have engaged closely with these reviews since they were trailed in 2016. In 2016, Regen published a paper on “Network Charging for Flexible Future” making the case for change. We also sit on the Charging Futures Forum and recently held an event on the future of network charging. We have had a lot of impassioned feedback from members about the extent that these changes will affect them and we have reflected these in our consultation response.
The key points of the response are:
- The principles behind the review are not aligned with the UK’s wider energy policy aims. Network charging is a crucial method for sending signals to the system, the market and beyond. To protect existing and future consumers the objective of the TCR should be to support government energy policy goals in a fair, efficient and practical way.
- Decarbonisation should be a key objective of the review. By failing to make carbon reduction a principle of the review, Ofgem are not meeting their statutory and moral duty to protect consumers.
- Renewable generation, storage and flexible technologies are disproportionately affected. By removing incentives to reduce demand and increasing balancing system charges for distribution connected assets, these reforms will result in higher costs, greater uncertainty and decreased deployment.
- The review is out of step with the reform of forward-looking charges. Residual and forward-looking charges are explicitly linked and it is difficult to assess one without knowing the structure of the other. The uncertainty caused by this disconnect is preventing industry from accurately modelling future business cases and, in turn, deterring investment.
The objective of the way energy networks are regulated and funded should be to support the UK’s key energy policy aims in the most efficient way – not a chimerical search to reduce ‘harmful distortions’.
The objective of reducing ‘distortions’ in one part of the energy system whilst ignoring all the other distortions in the system is flawed. There are numerous factors that affect the signals sent to energy users and generators, from extensive subsidies for all types of energy generation to market failures such as the cost of pollution to the economy and society. For example, fossil fuels currently receive annually around £2.6bn more support from the UK government than renewables[1].
Ofgem are viewing these reforms through a narrow lens with the sole aim of creating an efficient, cost effective network which reduces bills for consumers. While this is an important goal, we believe that Ofgem have a duty to consider emissions reduction more centrally and take into account the impact that these reforms will have more broadly on renewable and storage deployment.
[1] Based on £9.4bn (€11.62bn) in support for fossil fuels compared to £6.8bn (€8.43bn) in support for renewables, 2016 data. EC Trinomics report, 2018, page 429 https://ec.europa.eu/energy/sites/ener/files/documents/energy_prices_and_costs_-_final_report_-_annexes_v12.3.pdf
