Why Ofgem’s TCR decision on residual network charging is far from smart and very badly timed

So, we are about half-way between the passage of legislation to deliver net zero by 2050 and CoP26, which the UK will be hosting and which provides a politically unique opportunity to demonstrate to the world the country’s leadership on decarbonisation. Added to that we are also in the middle of an election campaign which is seeing all the credible political parties trying to outbid each other to show they can go further and faster in delivering the policies to deliver the new target.

So what does Ofgem do in the midst of all this? It issues a final decision on its Targeted Charging Review (TCR) that industry consensus suggests could push back subsidy free renewables by up to five years. It has done this in during “purdah”, the period in the run up to an election campaign when official agencies 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. Seasoned regulation watchers will be playing spot the difference against Ofgem’s earlier minded to statement. Major responses were offered at that time in the form of highly reasoned reports by both Oxera and Aurora, but these are summarily rubbished. The only notable change is the strength of the language used, which borders on the dogmatic.

The structure of the regulator’s argument is also anachronistic, based around “reducing harmful distortions, fairness and proportionality and practical considerations”. There is a weak attempt to justify assessed emissions reductions, and this is touched on at paras 5.38 and 5.56. But the benefits are attributed to “increases in generation from more efficient CCGT plant and increased interconnection imports (for which no CO2 emissions are attributed”).

Both parts of this statement should have had alarm bells ringing at Canary Wharf. In the case of the former how can displacing local renewables with more, larger transmission-connected fossil-fuelled generation than would have been needed be considered to be consistent with net zero? In the case of filling any gap with grid-mix power from the continent (whether they have CO2 emissions attributed to them or not) with generally poorer decarbonisation efforts be considered to be to the GB consumer’s benefit? And over-arching the qualitative and quantitative processes is a worrying bias against decentralisation. Chris Skidmore in his short turn as energy minister said the “future of energy is local” but it won’t be with decisions such as this.

Terms like regulatory risk and unintended consequences are conspicuous in their absence from the decision. Ofgem does concede that its changes will reduce rates of return but turns this round by saying confidence will increase because its decisions will enable timely delivery. There doesn’t seem to be any consideration of impacts on system losses, and everyone I have talked to thinks 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 partial, disregarding differences in connection regimes and impacts on the costs of the physical network, and we are left awaiting important changes to forward charging and access arrangements.

Even in the absence of these important limitations around scope, method and logic, for the reasons set out in my opening paragraph, the timing is rubbish.

It is to be hoped that the new administration will take a cold, long look at the decision and seek important clarifications. We also need to consider how this sort of segmented vision plays out in the cross-vectoral world that policy needs to embrace, and why Ofgem seems to be rooted to an old order that is predicated on large, controllable generation remote from demand.

The one good outcome of all this is that for those of us who have been pushing for a clear primary statutory duty on Ofgem to support net zero that day is now closer. Until the vires issue is sorted, however, this work programme and its implementation needs to be put on ice.