Limited festive cheer to be had from Ofgem

 A shorter version of this article appeared in the New Power January issue.

The standout publication over recent weeks has been Ofgem’s decision from its so-called Targeted Charging Review (TCR). This was made late November and is notable for a number of reasons. While the decision itself was well-trailed, it nevertheless demonstrates an inflexibility of thinking around recovery of costs that sum to some £4bn/year.

With the clock fast winding down we are already nearly half-way between the passage of legislation last July to deliver net zero by 2050 and CoP26 itself, which the UK will be hosting in Glasgow next September. The landmark event will provide a unique opportunity to demonstrate to the world the country’s leadership on decarbonisation, especially after a very lack-lustre CoP25 meeting in Madrid where important decisions on carbon pricing were again pushed back. We have also just witnessed an election that saw all the main political parties trying to outbid each other to show they can go further and faster in delivering the necessary but wide-ranging policies needed to deliver the new target.

The decision itself was not materially different to the minded to decision issued last November and as updated for a refined methodology in September this year. Ofgem has been consistent throughout the process to move residual charges to a fixed basis to ensure they are non-discriminatory and avoid distorting signals from the forward-looking charges that are subject to a separate significant code review (SCR). There will therefore be ten classes or bands for distribution-connected customers and a single homogenous band for those connected to the transmission-system. Implementation will be from April 2022 in the former case, and April 2021 for the latter, subject of course to the enabling changes being progressed and approved through industry code governance.

But there appears to be widespread and continuing stakeholder feedback that Ofgem’s final decision will have far-ranging impacts especially in its treatment of transmission generation residual and its shift from a net to a gross basis for allocating residual demand charges. Notably large parts of the industry continue to argue that it will delay subsidy free renewables by up to five years (see p4, December issue). And many have pointed out that it issued its decision during the so-called “purdah” period, the period in the run up to a general election when officials and regulators are required to avoid politically controversial statements or decisions.

The regulator’s thinking here is – as it has been throughout its protracted reviews of network charging – rigid. Major responses to the analysis set out in the draft decision were offered in the form of highly reasoned reports by both Oxera and Aurora commissioned by a range of low-carbon developers. But these are briefly dismissed.

The regulator’s argument to support these changes relies on eliminating “harmful distortions”. This boils down to reducing the costs recovered from suppliers by eliminating the (negative) generator residual charge and the balancing services embedded benefit credited to suppliers through netting off local generation volumes from supplier demand. There is an unconvincing and partial attempt to justify assessed emissions reductions, with Ofgem arguing benefits will arise from “increases in generation from more efficient CCGT plant and increased interconnection imports (for which no CO2 emissions are attributed”). Both parts of this statement raise important questions.

In the case of the former, how can displacing local, mostly renewable generation with more, larger transmission-connected fossil-fuelled generation than would otherwise have been needed be considered to be consistent with realising the net zero target? And again, as with Ofgem’s crusade against the triad, Ofgem does not take into account potential benefits afforded by embedded generation in terms of local system resilience and thermal loss reduction on grounds that this is simply a matter of non-distortionary recovery of residual charges (which it clearly isn’t in both these cases).

In the case of filling any electrical gap with grid-mix power from the continent (whether they have CO2 emissions attributed to them or not), how does this decrease overall emissions given generally poorer decarbonisation efforts and how will future consumers benefit? And with no clarity on the future terms of trading with the European Union post-Brexit and huge uncertainty over carbon pricing, how can any element of the relevant parts of the supporting impact assessment be relied upon?

Terms like regulatory risk and unintended consequences are also conspicuous in their absence from the decision. Ofgem does concede that its changes will reduce rates of return but turns this around by saying confidence will increase because its decisions will enable timely delivery. But many industry experts have said the net consumer benefit is significantly overstated as Capacity Market and CFD costs will be much higher than estimated. And once again the assessment is very compartmentalised, disregarding differences in connection regimes and impacts on the costs of the physical network.

We are again left awaiting important changes to forward charging and access arrangements. Some of these have since been aired in a further working paper, its second, for its Network Access and Forward-Looking Charges (NAFLC) review, which was published on 16 December.

This is the latest step in its review which considers how to ensure the efficient and flexible use of networks and the future of the forward-looking elements of charges. The regulator is looking at possibly moving to a shallower or “fully shallow” approach to distribution connection boundaries, as well as how to better align transmission network charges for different sizes of distribution-connected and on-site generation. Ofgem also considers potential alternatives to the Triad approach, including having different critical peak periods in different locations.

Views on the paper are welcomed until 24 January, but it looks like further charge disturbance is around the corner. But the holistic review of electricity network charging promised at the beginning of the SCR process remains illusory.

In other significant regulatory developments that will impact the energy market late last year, Ofgem announced on 6 December that the total shortfall for the 2018-19 Renewables Obligation (RO) was just below £100mn. This is greatly reduced over previous estimates but comfortably above the respective scheme mutualisation thresholds. Accordingly, it confirmed what we already knew – that mutualisation will be triggered.

Outstanding payments from failed suppliers total nearly £60mn, which the regulator will seek to recover from the suppliers’ administrators where possible, and this now includes Breeze Energy, which passed into administration on 18 December. But Nabuh Energy has had its Provisional Order revoked after it paid its outstanding RO bill in full. Gnergy still has outstanding payments to make and has received a final order, though industry sources are suggesting that it could soon be in receipt of new investment.

The fall-out from supplier failure is not limited to the RO. Earlier this month the level of mutualisation for the Capacity Market following the standstill period settled down at just over £10mn and a separate process for recovery from other active suppliers was commenced, but wehave since learnt this will not now be needed owing to late payments, credit already posted and some CM projects folding.

And, finally, one supplier iSupply Energy, which was acquired by Vattenfall in 2017, has agreed to pay £1.5mn into Ofgem’s voluntary redress fund after the supplier overcharged customers on its default tariff. The overpayment relates to breaches of the price cap. In the first quarterly period iSupply overcharged around 4,400 customers £36,270, and in the period April to September 25 customers were overcharged by £53. These may not appear to be significant amounts, but senior staff at the company were aware of the breach early doors and failed to report the issue to Ofgem. The regulator ruled that the company had insufficient governance and processes in place to prevent and swiftly address the matter and that it had not corrected customers’ tariffs or issued refunds to those affected in a timely manner.