National Grid’s cure will not fix the ‘problem’ of distributed generation benefits

Franck Latrémolière argues that wider transmission charging questions should be addressed before considering whether distributed generation benefits are appropriate

 

At present, distribution-connected generators below 100MW are treated as negative demand. They have no transmission entry capacity and therefore no generation-side transmission network use of system charges; and they reduce their supplier’s demand-side transmission charges if they generate during triad periods.

National Grid appears to have the view that distributed generation treated as negative demand receives a benefit, and that this benefit needs to be justified. It says that a generator that offsets demand on a distribution network saves costs on the transmission network, because less capacity is needed at grid supply points. It suggests that the non-locational cost savings for the transmission network are equivalent to just £1.41/kW/year.

National Grid says that under current charging arrangements the distributed generation benefit is not cost-reflective. It is holding a short – just three-week – consultation on its Review of Embedded (Distributed) Generation Benefit1.

But it does not even ask whether this might indicate a more general lack of cost-reflectivity in its current charges.

The reality is that the distributed generation benefit may indeed be too high. But that only reflects the fact that National Grid’s charges for triad demand are well over any measure of cost. According to National Grid’s figures, avoiding triad charges is worth £27.07/kW/year to a supplier or generator, on top of cost-based locational charges.  This is 19 times higher than the estimated cost saving of £1.41/kW/year.

The reasons for this discrepancy are clear from National Grid’s charging methodology.

There are two main parts in the calculation of transmission charges: an estimate of the cost of providing long-distance bulk electricity transfer capacity, and a residual charge smeared across all users to bring National Grid’s income up to the maximum level allowed under its price control.  The residual element represents more than 80 per cent of transmission network use of system income[JW1] .  This means that, under the methodology approved by Ofgem, National Grid’s main source of income is a non-cost-based tax on transmission system entry and exit flows designed to earn the maximum profits that Ofgem will allow, rather than a charge for the reasonable costs of any service that it provides.

Why is the residual so big? Maybe the allowed revenue allowed by Ofgem’s price control is too high. Maybe it is at the right level, but only if National Grid charged for all the services that it provides: for example the existence of a transmission network brings security of supply and frequency control benefits that go beyond meeting demand at the time of triad or accepting power from generators onto the network.

Distributed generators compete with National Grid in delivering electricity where there is demand for it.  They earn a financial benefit from doing so which is comparable with the price that National Grid charges for equivalent services – which is much higher than the cost.  Competitors targeting areas in which the incumbent is charging too much is a healthy manifestation of market competition.  It ought to bring pressure on National Grid to correct its charging arrangements to bring charges closer to costs, so as to remain competitive.

Unfortunately, in the world as seen from National Grid’s boardroom, transmission allowed revenue is sacrosanct and is legitimately recovered from any odd charges even if this means that the residual element of triad charges is 19 times greater than the relevant costs. Meanwhile nobody else — least of all those pesky distributed generators who dare compete with National Grid — should be allowed to earn any above-cost benefits.

National Grid’s preferred solution to the alleged problem of excessive distributed generation benefits appears to be gross charging. That would mean distributed generators above a size threshold would be charged for transmission entry capacity (with a small, cost-reflective, distributed generation discount) even though they do not have transmission entry rights. In addition, generation at the time of triad would not offset demand for charging purposes, even though it does offset it in reality.

What we have here is an incumbent monopolist that is charging 19 times cost for a service. These high prices attract a growing level of competition from distributed generators.  Rather than cutting its prices, the monopolist is trying to adjust its charging arrangements so as to prevent that competitive fringe from earning the same high prices as it does.

Where is Ofgem, the expert sector regulator and competition authority?

1: http://go.reckon.co.uk/c71887

Franck Latrémolière is an independent consultant, see http://dcmf.co.uk/

 

From New Power, October 2013.

Also in this issue:

Cash-out reform; PV’s boom and bust; triad costs under the microscope; are we close to the end game on EMR?

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