One step forward, three steps back?

By Dr Jonathan Marshall, ECIU Head of Analysis

Beneath all the fanfare of Britain’s move to a low-carbon, smarter and more flexible electricity system lies a panoply of rules and regulations, very few of which ever receive public attention.

With the National Infrastructure Commission identifying up to £8 billion in annual benefits from the switch to a ‘power system 2.0’, it is easy to see how these underlying details can become very important.

So while on the face of things, ministers can claim that they are taking steps towards the power system of the future, by digging a little deeper it is possible to check if the actions actually match the rhetoric.

It was only last month when the government was embarrassed by an ECJ ruling that declared the capacity market – and all contracts signed to date – invalid, a move that is likely to ramp up financial pressure on small power producers, storage operators and DSR providers by cancelling an income stream on which many were reliant. These products and companies are seen by many as an essential component of the jump to a smarter system.

Now a “minded to decision” from Ofgem could add further confusion to a sector that has historically pulled more than its weight in terms of cutting emissions from the UK’s national budget. This change, along with other modifications to the network rules, run contrary to top level announcements about moving to the grid of the future.

This winter is also the first following changes to the way in which the distribution network is paid for, changes that make it less attractive to shift energy demand away from peak hours energy – another process widely regarded as a key pillar of the transition to a majority-renewables electricity system.

Known catchily as DCP228, the modification to network charges reduce the difference between charging bands that are used to recoup the costs of maintaining the pipes and wires from the companies that use them.

Split into three bands – red, amber and green – the charges increase with load on the grid, the red band covering the highest demand hours. By reducing costs during “red” hours (generally 4-7pm on a school day) and increasing those incurred at other times, a major incentive to increase system flexibility is reduced.

This is hard to tally with interventions in power markets the world over which seek to boost system malleability, reducing the number of power stations that are built solely to meet the winter peak demand, and ultimately bring down costs for homes and businesses, as well as cutting power sector emissions.

Now, add on to this a new wave of changes that Ofgem has announced it is favouring, that could be implemented as soon as April 2020, and the picture starts to look much even worse. Ofgem has declared that they are planning on amending another tranche of network charges, to ensure that those unable to opt out of using the national system are not left to pick up the bill from those who have.

The decision to change two key aspects of network charging will fall in favour of large-scale gas-fired electricity generation. This is exactly the sort of capacity that is currently struggling to be built, and the very same that modelling by Sandbag and others have shown isn’t needed, even as the UK phases out coal.

The proposed changes will see the “embedded benefits” of smaller, distributed generators reduced, affecting both the economics of their day-to-day running, but also the finances behind decisions that see new capacity built and old capacity retired.

Should they come into effect – which seems more than likely based on Ofgem’s position – modelling carried out as part of the consulting process shows that UK gas output will rise. This will be at the expense of imported power in the first half of the decade, but then at the expense of renewables later in the 2020s. With the UK already off target for its fourth and fifth carbon budgets, and the likelihood that the decarbonisation of sectors such as heat and transport will lean heavily on the electricity sector, this doesn’t seem like a good thing.

A long-running criticism of Ofgem is its remit as an economic regulator alone, with emissions targets not falling under its jurisdiction. While this may have been an acceptable position in decades gone by, it is difficult to argue the same now.

Modelling by Frontier Economics shows that Ofgem’s preferred option will save each household around £7 per year. Taken in isolation this appears to be a positive change, but considering the deleterious effects the amendment will have on the low carbon transition, it is reasonable to question if it is a price worth paying.

Discussions remain about the implementation of environmental metrics into Ofgem decisions for individual policies – for example the ongoing discussions around the next RIIO period – but the issue is bigger than this. Without a high-level position on decarbonisation, such as implementing the CCC’s advice into decisions, the issues resulting from the regulator moving in the opposite way to the sector at large could continue for years to come.

This blog originally appeared in Utility Week