Beware an embedded benefits review ‘by stealth’

Colin Prestwich, head of regulatory affairs at Smartest Energy, warns that taking a step-by-step approach to updating embedded benefits could have unintended consequences

The growing gap between the Use of System and other costs faced by transmission connected ­generation and embedded generation is one of the factors cited for the need for a review of embedded benefits. Supporters argue that the allocation of transmission costs across a falling demand base is evidence of unfairness in the system. That is the wrong way to look at this issue.
Although the costs of Transmission Network Use of System (TNUoS) and Balancing Services Use of System (BSUoS) are increasing, it is important to recognise that this is not the fault of embedded generation. It is inevitable that in a world with growing decentralised energy, the cost of the back-up that the transmission system represents will rise for those who are more reliant on it.
If embedded benefits are to be reviewed, a whole-system review – not just transmission charging – is needed, and one which recognises the proximity of generation to demand.
One possible improvement consistent with the current arrangements would be to reflect the costs of exporting Grid Supply Points (GSPs). This was raised in 2013/14 when work conducted for National Grid concluded that the continued net charging of suppliers for TNUoS was appropriate.
At the time it was argued there was a case to make additional charges through distributors for the impacts on the transmission network of exporting GSPs and that it would be economically efficient for distributors to face this charge, as it would be taken into account in their own investment decisions.
Smartest Energy agreed with this conclusion as it maintained the principle of net charging: fundamentally there is no difference to National Grid Transmission (NGT) between an increase in embedded generation at a distribution level and a reduction in demand at distribution level.
Since then there have been two regulatory developments. The Department of Energy and Climate Change (Decc) said Ofgem is reviewing whether it would be in consumers’ interests to change the arrangements for distribution-connected generators. And the Competition and Markets Authority’s proposals effectively remove the transmission losses embedded benefit.
In addition, National Grid has announced that it is widening its review of potential change (over and above the plan to introduce a charge for ­exporting GSPs) and is reviewing commercial charging arrangements as a whole. This could well feed in to an Ofgem review pencilled in for a summer launch.

Net supplier set-up simple but effective
Before looking at the options for change to the charging regime, it is worth reflecting on the ­rationale for the current arrangements.
Short of following the electrons, the ideal way to recognise the proximity of demand to generation would be contractually. The proxy for this is the net supplier arrangement currently used for TNUoS and BSUoS charging. This is simple but effective.
The charging arrangements work on the basis of net flows and benefits or credits are calculated and assigned accordingly so the correct balance is maintained. While this persists it is difficult to see how embedded benefits can be removed without distorting the whole charging balance. As there is no difference to NGT between an increase in embedded generation and a reduction in demand at distribution level, charging embedded generation differently from demand would send a different price signal for the same result.
The proximity of local generation to demand has to be recognised. The extent to which the transmission system is used by embedded generators has to be demonstrated.
If it can be argued that embedded generators use the transmission network then it can equally be argued that transmission generators use the ­distribution networks.

Review ‘by stealth’ the wrong approach
Although embedded benefits as a whole have to be reviewed in the longer term, this should not be done by stealth, with each benefit reassessed in isolation. Such an approach would not take into account the context of the original offsetting principle and the overall benefit that embedded generation brings to the system by virtue of its proximity to demand.
The way in which transmission losses, BSUoS and Residual Cashflow Reallocation Cashflow (RCRC) “flip” in GSP groups that are net exporters already accounts for the situation where embedded generation is not helping the system. Only TNUoS in the exporting GSP scenario really remains to be reviewed at this stage.
If a root and branch review is to be undertaken, we believe that some principles should be established first. Obviously the arrangements must be cost-reflective and transparent, but they must also be as simple and effective as possible. Fair and appropriate charging, reflecting the relative proximity of embedded generation to demand, is paramount.
A level playing field across transmission and distribution connected generation can only be achieved by combining distribution and transmission charging and taking a ‘whole system’ view. An apparent discrepancy on a straight comparison of charges is not evidence that the charging regime is unfair, because embedded generation brings benefits that transmission connected generation cannot.
While it is claimed that there are instances where the transmission network is used within a GSP group, where demand and generation are close to each other they are being double-charged for Distribution Use of System (DUoS). More localised netting may allay concerns of unfairness on both sides but would require a more sophisticated settlement arrangement. This could be done by extending the concept of a trading unit (but this would in itself ­create a rather arbitrary rule around which there would be winners and losers) or by graduating the charging.

Tinkering breaks internal consistency
Smartest Energy believes that, while transmission connected generation is finding it harder to compete in the capacity market, this does not mean that the charging arrangements are fundamentally flawed; embedded generation obviates the need to use the transmission network and it is largely not the fault of embedded generation that the costs of TNUoS and BSUoS are increasing.
The way in which embedded benefits are accrued is still internally consistent (although we agree that the costs that exporting GSPs cause should be reflected in the arrangements).
Tinkering further with the current arrangements would break this internal consistency and a completely new model would be required. In the absence of a simpler way of more accurately assessing the value of the proximity of local generation to demand, we believe the current net charging arrangements are the most appropriate.


Further reading: A Guide to Embedded Benefits

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