Ofgem Recommends Change to Charging Methodology (UK)

Ofgem has today announced it is minded to approve a change to the methodology for calculating what generators pay to use the electricity transmission network across Britain. It is proposed that the new charges would come into effect on 1 April, 2014.

The aim of this change is to facilitate the timely move to a low carbon energy sector, while maintaining a robust and efficient supply of electricity across Britain’s high voltage network. The main update to the methodology is that it would better take into account the type of generator and how it uses the network to transmit power to parts of the network where the demand for that power is situated. In doing this, Ofgem considers that the proposed methodology change would better reflect the costs placed on the high voltage system by all forms of generation, including new kinds of generators, located at different points on the network.

The locational element from the existing methodology, whereby generators are charged more the further they are located from demand is retained under the proposals. This is to reflect the cost of running and upgrading the transmission network. Charges that provide users with efficient signals that reflect these costs will help to promote sustainable development goals and support long term decisions on the efficient location of generation.

Industry looked in detail at the effect of the changes for the development of prospective island links (e.g. transmission links to the Scottish Islands). These tend to be far from demand and will impose higher investment costs and transmission charges for generators using these links to transmit power to where demand is located. The proposed methodology change would factor in recovery of costs of the proposed subsea links, which once built, would enable the transmission of electricity from the islands to the mainland. Overall, the changes would mean that transmission charges would be lower for the Scottish Islands than may have been expected if the methodology was not changed, but still remain higher than the mainland due to the cost of building and running the subsea links.

This proposal will narrow the difference in generation tariffs between the north and south of Britain. Tariffs in the north will decrease whilst tariffs in the south will increase relative to the status quo. For example, indicative industry modelling suggests that in 2014 wind generators in the north of Scotland may pay on average £13/kW less than under the current methodology for access to the main transmission network and those in south west of England may pay £5/kW more.

Implementing this new approach is considered to be in the interests of existing and future consumers. This is primarily because it is considered to be the most cost reflective of the options presented and therefore drives more efficient decisions by companies which create value for consumers. This view is supported by the modelling analysis submitted by industry which suggests that between 2020 and 2030 consumer bills could be up to £8.30 per annum lower than under the current methodology. This outweighs a much lower impact in the period up to 2020 where consumer bills could on average be up to £1.60 per annum higher than under the current methodology. This reflects the difference between short term impacts on generators’ decision making and longer term impacts where it would be expected that the new methodology results in more efficient decisions on the location of generation.

Press Release, August 2, 2013

 

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