Targeted Charging Review - Industry Feedback on the Proposals

At the close of 2018, Head of Renewable Sales, Chris Smith published a blog on the planned industry changes in the Targeted Charging Review, focusing particularly on Balancing Services Use of System (BSUoS) charges and the likely costs to existing generation. In this latest blog, he reflects on feedback from industry stakeholders following his participation in a REGEN panel discussion, which explored the implications of the changes and addressed generator’s concerns.

Over the last few weeks, it’s become clear that whilst many generators are aware of the Targeted Charging Review (TCR) consultation process, many of them are not aware of the scale of the change affecting their projects, which could have a significant impact on profitability.

In December’s blog post, I made reference to a potential £5.50/MWh swing on BSUoS - if this embedded benefit becomes a cost to generators as part of the TCR proposals. From discussions with other parties and consultancies, it now seems that the full impact of the changes to both residual and forward-looking charges could range from £8/MWh to £14/MWh, dependent on location and technology.

The proposed changes and cost implications were the key focus of discussions at the REGEN panel discussion I took part in. Ofgem provided an overview of the proposed changes and rationale, outlining the focus of the TCR. Whilst Ofgem’s intentions are aimed at reducing cost, providing a fairer regime and supporting parties who are unable to change their behaviour, the seminar raised a number of important concerns that I address below; reduced investor confidence and the implications for intermittent technology types (e.g. wind and solar).

Investor Confidence

A number of the panellists and industry stakeholders in attendance at the REGEN event were either significant investors in renewables, developers of renewables, or parties which have relationships with them.

Renewable generation represents the only energy infrastructure of scale built in the last 10 years. These parties still want to build increasingly innovative generation assets, but are finding it ever more difficult to reach financial close due to the continued number of regulatory changes occurring, and the associated uncertainty they create.

Given the well documented issues around financing new nuclear and Combined-Cycle Gas Turbines (CCGT), Ofgem’s proposals caused concerns among the attendees as to how we can reach the UK’s carbon reduction targets, while also meeting the needs of consumers in future.

On top of this, the TCR has highlighted that there will be ‘Winners and Losers’ as a result of Ofgem’s ideas. The losers in this process will be parties who have already made steps to reduce carbon emissions, increase efficiencies and have already invested to reduce cost.

Intermittent technologies

The implication of the changes outlined in the consultation suggest that assets that are intermittent, and therefore require greater levels of network management, will be penalised by higher fixed costs.

The effect of the proposals will be even more extreme in areas which contain high levels of generation compared to demand. At the seminar, parties were keen to point out that some of the affected assets are unable to change their behaviour. As a result, regardless of any changes, the same issues will remain.

A better solution would be to provide the necessary long-term price signals to enable these assets to adopt storage. Then they could provide power when needed and help with efficient grid management. This would also have the added advantage of utilising existing assets and connections, rather than building more expensive generation and infrastructure.

So, what can we take away from all of this?

Firstly, we shouldn’t forget that the current charging regime was developed for a reason. Specifically, it drives behaviour which avoids otherwise unnecessary reinforcement costs for Distribution Network Operators (DNOs) and the Transmission Owner. Changing these signals, which businesses have invested in being able to respond to, could significantly increase costs rather than reduce them.

It’s not just existing projects in the firing line either. The continued uncertainty and negative impact of the changes have of course dampened investor confidence. This is in turn will limit the deployment of, or increase the costs for new infrastructure, which ultimately negates Ofgem’s aims.

Finally, in respect of creating a ‘fairer regime’, consideration must be given to the fact that different assets use the Transmission Network to different levels. In order to ensure ‘fairness’, recovery of fixed costs should not only reflect this, but could also be calculated dependent on the type of generation (i.e. intermittent or non-intermittent).

With the consultation period closing next week on 4th February 2019, it is now over to Ofgem. Participants across the industry have engaged with their minded-to-decision and offered thoughts as to how to find the best route forward. We don’t expect a final decision for a while, but for now we wait with baited breath.

To find out more about the TCR and the impacts it could have for you, contact us.

About the author

Chris joined SmartestEnergy’s Renewables team in 2017 from Danish energy trading company Neas Energy. He works with generators to develop solutions to help them maximise returns in a changing environment for renewable projects. Chris began his career in the energy sector in 1996 with Eastern Natural Gas. He went on to work as a Generation Services Senior Business Development Manager at RWE npower, developing PPA solutions for customers. He has also worked on the supply side with industrial and commercial users. His role as Business Development Manager at Neas saw him build its UK PPA and CHP portfolio from market entry. Chris has a BA in Business Studies from De Montfort University, Leicester.

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