All change for network charging - Significant Code Review launched in relation to network access and forward-looking charges

On 18 December 2018, Ofgem published its decision to launch a Significant Code Review (“SCR”) into the electricity network access and forward looking charging arrangements(the “Electricity Network Access Project”) (the “Decision”). The Decision sets out the scope and guiding principles for the SCR, along for a timeline for the process. This article sets out the key points from the Decision.

What is the Electricity Network Access Project?

Ofgem is reviewing the charges levied by electricity network businesses through a number of workstreams, as we have recently set out here. The three separate workstreams are:

1. the Electricity Network Access Project, which is the subject of this article;
2. the Targeted Charging Review, in relation to which Ofgem published its “minded to” decision in November 2018; and
3. the Transmission Demand Residual payments reform, which will reduce “Triad” payments available to embedded generation.

The Electricity Network Access Project concerns: (i) charges and processes for connection to electricity networks; and (ii) the “forward-looking” aspects of transmission and distribution network use of system charges, based on the future impacts of a connection on the network operator’s costs. For more information on the project, see our previous updates here and here.

What is a Significant Code Review?

Modifications to electricity industry codes (including the Connection and Use of System Code, the Grid Code, the System Operator Transmission Owner Code, the Balancing and Settlement Code, the Distribution and Use of System Agreement and Distribution Network Operators’ own connection charging methodologies) are approved, but not administered, by Ofgem. Administration of code modifications is carried out by the various code administrators, including National Grid ESO, Elexon and the Distribution Network Operators. An SCR is a mechanism by which Ofgem can facilitate a holistic review and catalyse and fast-track wide-ranging changes to industry codes in a coordinated and consistent manner.

The aims of the SCR include:

• achieving network access and charging arrangements that provide more cost-reflective and effective signals to users where and when to connect;
• encouraging the better use of existing network capacity and minimising future network costs; and
• reducing distortions in the current charging arrangements helping ensure a level playing field and reduce whole system costs.

Scope and guiding principles for the SCR

Taking the aims of the SCR into account, Ofgem set out in its Decision the following guiding principles against which to assess the options developed under the SCR:

1. the arrangements support efficient use and development of network capacity;
2. the arrangements reflect the needs of consumers as appropriate for an essential service; and
3. any changes are practical and proportionate.

To achieve these objectives, the Decision stated that Ofgem will consider potential code changes in relation to:

• types of transmission and distribution connection, including time-profiled, limited firmness and shared access;
• distribution charging methodology design, including considering the rebalancing between capacity-based and usage-based charges;
• the distribution connection charging boundary, including a potential increase in the assets to be paid for through use of system charges rather than connection charges; and
• the forward-looking transmission use of system (“TNUoS”) charges applying to distributed generation and demand users, including demand side response users, to ensure a level playing field.

The Decision excludes the following issues from the scope of the SCR:

• the introduction of fixed-term and location-specific access rights, on the basis that evidence to date shows that other options within the scope of the SCR are more likely to achieve the SCR’s objectives;
• charging boundaries for transmission network charges;
• any review of allocation practices (e.g. queue management), on the basis that “the Electricity System Operator and network companies should lead on reviewing incremental improvements” in this area, for example via the Open Networks Project; and
• any review of balancing services charges, since this is to be carried out by a dedicated task force announced separately by Ofgem.

Next steps

Ofgem proposes to:

• publish SCR working papers by summer 2019;
• consult on a minded-to decision in spring 2020; and
• publish a final decision by autumn 2020.

Ofgem will direct industry participants to propose the relevant code modifications identified by the SCR rather than driving them through itself. The resulting code modifications are anticipated to be progressed for approval in 2021 and implemented in 2022-23.