UK energy regulator Ofgem has set out its initial thinking around the future of network charging reforms.
In an open letter, director general for infrastructure Akshay Kaul (pictured) said network charges can be used to “send an effective locational signal” to the market following London’s recent decision to retain national electricity pricing rather than moving to a zonal setup.
“Transmission network charges can be a powerful tool to guide investment to make best use of the network capacity being created through the spatial and network plans,” he stated, in reference to the forthcoming Strategic Spatial Energy Plan (SSEP) and Centralised Strategic Network Plan (CSNP).
“We consider that charging methodologies could evolve to better reflect the expected state of the network and the energy system over time.
“In the context of sending locational signals to guide investment, network charges could reflect the availability of grid capacity in the year in which generation customers want to connect to the grid.
“They could do so by encouraging assets to site in areas where spare capacity is expected so constraints volumes can be reduced.”
Ofgem may also consider factoring network charges into the grid connections process as well as Contracts for Difference auctions “should government consider this desirable to improve alignment of investment with the SSEP”.
“We will work closely with government and NESO to explore the best combination of locational levers that can achieve an appropriate balance between coordination and competition,” Kaul stated.
Meanwhile, Ofgem wants to “make network charges more predictable, so they provide more effective signals to investors at the point of making investment decisions”.
“We recognise that there are challenges with the existing Transmission Network Use of System (TNUoS) methodology, in particular that charges can be viewed as unpredictable and volatile. This can hinder investment decisions and increase risk and cost to consumers,” Kaul said.
Options could include fixing TNUoS charges at the point of investment for a certain period of time, or by instead sending a locational signal through the connection charge.
“These charges are set at the point of investment and stay stable. Both approaches would enable investors in future projects to more easily factor in the expected lifetime cost of charges when making an investment decision.”
Government will publish a timeline around network charging reforms later this year in its Reformed National Pricing Delivery Plan. Reforms to TNUoS are not expected to be delivered until 2029.