Renewable Power Association - Developing Network Regulation: Open Letter to the Chief Executives

Cemil Altin

Head of Price Control Development

Dear Cemil

Developing Network Regulation: Open Letter to the Chief Executives of Distribution Network Operators (DNOs) Regarding Distributed Generation

The Renewable Power Association is a trade association representing producers of renewable energy. It is pan-technology – its members are involved in all forms of renewable energy, including biomass, wind energy, solar, biogas, energy-from-waste, landfill gas, hydropower, wave, tidal stream and sewage gas. Its membership also includes producers of heat and biofuels and those working in the field of hydrogen, fuel cells and recovery of waste heat, which, when combined with renewables, have the potential to offer a totally sustainable package. Legal, accounting and energy trading businesses are also represented. Together the RPA’s membership accounts for almost 70% of ROC-accredited generating capacity.

We are grateful for the opportunity to comment on this important issue. We regard it as key to facilitating the connection of increasing amounts of environmentally friendly generation to distribution networks and thus meeting Government targets renewables.

Our comments are attached. I hope you find them helpful. Please let me know if there is any aspect of them that you wish to discuss further.

Yours sincerely

Gaynor Hartnell,

Director of Policy,

Renewable Power Association

Developing Network Regulation: Open Letter to the Chief Executives of Distribution Network Operators (DNOs) Regarding Distributed Generation

Comments from the Renewable Power Association

Introduction

In this consultation Ofgem has asked for views on the following topics in particular:

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• the objectives that we have identified for this project;
• whether it is appropriate to put in place arrangements that recognise additional costs that DNOs incur which were not forecast at the time of the last price control review, and if so, what form these arrangements should take;

• how DNOs should be remunerated for the costs that they incur in relation to distributed generation and whether consumers should bear any of the costs associated with the deep reinforcement of the network and/or costs that DNOs incur in transforming their networks from passive to more active operation;
• the principles that we have identified for assessing different incentive mechanisms;
• our initial thoughts on possible incentive mechanisms for DNOs in relation to distributed generation – both for incentivising the efficient access to and reinforcement of the network and the efficient operation of the network. We would particularly welcome views on any other mechanisms that could be used which have not been identified already;

• how to ensure that any arrangements are flexible to accommodate the changing nature of distribution networks and in particular how we should ensure they are aligned with the regulatory framework for transmission; what are the minimum features necessary for this and whether such minimum features should form part of the regulatory framework by 2005;
• the issues raised by registered Power Zones; and
• the initial timetable for taking this project forward and how it links to other areas of work including the DNO price control review and work on structure of charges and losses.

We have used these as a basis to structure our comments, responding only on those points where we have a positive contribution to make.

Objectives of project

We agree that the framework for DNOs should be consistent and flexible and able to accommodate the uncertainty of how much distributed generation will wish to connect to distribution networks in the period being considered. With respect to the first aim of the framework, that it should be consistent with enabling the DNOs to run their networks efficiently, facilitate competition and help meet the Government’s security of supply and environmental objectives, we would like to quote from last February’s PIU report to the Government which recommended that:

“where energy policy decisions involve trade-offs between environmental and other objectives, then environmental objectives will tend to take preference over economic and social objectives.”

Although this is a high level recommendation to Government at present we support its sentiment fully and urge you to set the framework to give as much priority to environmental objectives as you feel you are able to within your statutory powers.

Allowance for additional costs

The Renewable Power Association is in favour of DNOs being able to recover costs associated with the connection of generation to their networks that were not envisaged at the time of the last price control review. With the current “deep connection charging” methodology, there is unlikely, generally, to be significant additional costs that are not charged directly to the generators concerned, irrespective of how much additional generation is connected. This is even if annualised payments are allowed for the last two years of the present price control.

However in situations where accommodating a generator precipitates an optimum reinforcement that is also of benefit to demand or where benefits cannot be attributed to a single generator, then it would be welcome if this could be allowed as additional revenue for the DNO, to the extent that it was not envisaged when the current price control was set.

It is also possible that investments in facilities to allow for more active network management are initiated before the new price control period starts. We would regard it as entirely reasonable that DNOs be allowed additional revenue for this type of additional general enabling investment.

Possible incentive mechanisms in relation to distributed generation

We regard this as the most important aspect of the work to get right. Our comments fall into three parts:

1. Comments on some of the proposals suggested
2. A proposed incentive mechanism that was not suggested
3. The removal of a current disincentive mechanism

Comments on proposals suggested

Basically it is important to distinguish two types of “revenue driver” that may be used for evaluating DNO allowed revenues.

• Basic revenue drivers that ensure that DNOs recover expenditure efficiently incurred in meeting their statutory and license objectives
• Additional revenue drivers or incentive arrangements to encourage DNOs to “go the extra mile” in order to achieve desirable objectives

The first category of revenue driver has no option but to be as cost reflective as possible in order to encourage efficient achievement of appropriate objectives and ensure that DNOs are fairly rewarded for this. This category of revenue driver is not discussed further in this response.

It is in the second category where we believe there is scope for incentivising DNOs to connect renewable generation. It is less imperative for incentives in this category to be strictly cost reflective. Current examples of this type of incentive include payments made under the IIP scheme as well as mandatory payments to customers for breaches of guaranteed standards of performance.

The primary incentive should be based on MW connected. This also happens to be more cost reflective than a MWh based driver and is simpler to implement than an enhanced rate of return for specific types of investment. We do agree however that an incentive to minimise constraints on the operation of embedded generation has benefits and a low-key scheme along the lines of the current NGC System Operator incentive scheme may be appropriate.

Some generators may opt for economic forms of connection where lower initial investment costs are balanced against the need for occasional constraints on the operation of generation. We would not want any MWh based subsidiary incentive to discourage generators opting for this connection arrangement.

As we are advocating a MW connected revenue driver to encourage DNOs to “go the extra mile” to achieve desirable objectives, rather than as a base mechanism by which DNOs recover the costs efficiently incurred in carrying out their statutory and license duties, we think it appropriate that it is restricted to “desirable” categories of embedded generation i.e. ones that it is Government policy to encourage.

A proposed mechanism not identified by Ofgem

One mechanism that may encourage DNOs to connect generation to their networks is to give them an incentive to make efficient use of the transmission system. Ofgem has not identified this, but we believe it has merit.

There are two changes that could be made either individually or together that would do this.

The first is to change the 100% pass through allowance of NGC connection charges that DNOs currently get. Changing this to some type of sliding scale scheme would give them a better incentive to make efficient use of their connections to the transmission network, perhaps benefiting from savings made by connecting more generation to their network rather than reinforcing a connection to the transmission system.

The second is to make DNOs, rather than suppliers, responsible for paying NGC transport charges. This could have a sliding scale incentive / pass through scheme to enable DNOs to benefit from reduced use of the transmission system from connecting generation to their network. As well as its advantages in encouraging embedded generation it is also an efficient charging mechanism, particularly if a system of long-term transmission rights is introduced. It is the DNOs rather than suppliers who should contract with the System Operator for long term transmission capacity as they must plan their own networks over similar time scales and are not affected by customers changing from one supplier to another. They of course already contract for connection to the transmission system anyway so it is both logical and consistent that if long-term transmission rights are to be introduced they should be the parties contracting on behalf of the demand connected to their networks. The fact that it also provides an incentive for DNOs to connect embedded generators is an added bonus.

The removal of a current disincentive mechanism

The Renewable Power Association would like to see the current revenue driver of units distributed discontinued, as it is a direct disincentive to the connection of embedded generation. Furthermore it is not reflective of the costs that DNOs incur in providing, maintaining and operating their networks.

Registered Power Zones

The concept of registered power zones has merit in two particular cases:

1. As temporary institutions to trial new technical, commercial and network management concepts
2. As a more permanent feature in a few well defined areas where there are specific concentrations of embedded generation

As renewable generation is generally geographically dispersed we tend to agree that registered power zones should not be a permanent feature of a network. An exception may be made for a few well defined areas where there is likely to be a concentration of distributed generation. This may initially be largely associated with areas suitable for large amounts of wind power, particularly offshore wind.

Registered Power Zones will be useful as a proving ground for new technology and network management techniques. Clearly they will have to be in areas where there are prospects of connecting sufficient generation to allow trials to be meaningful. As they are essentially development and proving exercises it may be expedient to allow additional expenditure for each DNO to set up a small number of zones as part of their main price control. It may also be possible to obtain some type of grant funding from central Government.