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Rule changes affecting licence exempt supplies of electricity

Part 1: Electricity network charges and private wire supplies

There has been a raft of recent announcements relating to aspects of energy regulation, many of them not entirely positive for developers of renewable energy projects.  This includes:-

  • Ofgem's consultation of 28 November proposing the removal of "embedded benefits" relating to balancing services use of system charges – potentially affecting revenue streams for all scales of distribution network connected projects, including both existing and future projects;
  • the recent consultation response from BEIS confirming that that there will be no continuation of the FIT export tariff for new projects beyond 31 March this year. This has since been followed by a new consultation on a proposed "Smart Export Guarantee" (read more in our previous article).

Of more specific relevance to those looking at some form of on-site or private wire generation, i.e. generation which is connected directly to a source of demand:-

  • the 28 November consultation referred to above also confirmed that Ofgem is minded to set transmission and distribution "residual" charges as fixed charges. In the case of transmission charges, this would be in place of the current charges set by reference to consumption during "Triad" periods;
  • ·on 18 December Ofgem separately launched a "Significant Code Review" which amongst other matters will consider how "forward looking" network use of system charges should be calculated.

In this context, we look again at some of the issues relevant to projects in which there is a direct supply of electricity by a "licence exempt" generator to an end-user customer. For these purposes, "licence exempt" refers to a generator who sells electricity directly to an end-user customer (rather than an electricity supplier under a normal grid export PPA) and is therefore involved in the "supply" of electricity, but who nonetheless falls within the scope of an exemption from the requirement to hold an electricity supply licence.

In our experience, licence exempt supplies usually arise where there is a direct wire connection between the generating plant (e.g. a solar array) and the end-customer's premises and we comment further on arrangements of this kind below. In principle though, a project might also involve a licence exempt supply which is effected via the grid and we will publish a second article shortly outlining what some of the features of a project of this kind might be.

On-site/private wire supplies

Our previous article on private wire PPAs included a simple illustration of what is likely to be the main driver for most parties to establish an on-site/private wire PPA arrangement. This driver is the scope for sharing between the parties the value to the end-customer in avoiding a range of charges which the customer would otherwise be exposed to when buying electricity supplied via the grid by a licensed electricity supplier. In principle, this value sharing should allow the generator to receive a price that is higher than it would likely be able to achieve under a normal grid export PPA, whilst at the same time allowing the end-customer to pay a price that is lower than it would likely have to pay for grid electricity.

In broad terms, the relevant avoided charges fall into two categories:-

  • charges for use of the transmission and distribution networks, being charges which are levied by the relevant network operators on licensed electricity suppliers for use of the relevant networks (in delivering electricity to end-customers) and then recovered by suppliers from their customers, either as part of an overall electricity supply price or on a specific pass-through basis;
  • charges which relate to "final consumption levies" payable by licensed electricity suppliers (but not licence exempt suppliers) in support of various subsidy schemes, based on the amounts of electricity treated as being supplied by those suppliers during particular periods. As with network charges, suppliers then look to recover these levy costs from their customers, again as part of an overall supply price or on a specific pass-through basis.

On network charges, the scope for these being avoidable through use of some form of on-site/private wire generation is likely to hinge on those charges being calculated on a "volumetric", per unit basis. For any charges which are set on a fixed basis, regardless of how much electricity is actually imported from the grid at a particular time, there may be limited or no scope for avoidance through the use of on-site/private wire generation.

In light of recent Ofgem announcements, it now seems likely that from around 2021 at least one key network charge associated with use of the transmission network will move from being a charge based on consumption during the Triad periods to one set on a fixed basis. It is also possible that certain distribution use of system charges will move towards a fixed or capacity based calculation mechanism and away from calculation based on consumption during certain periods, although exactly what changes might be made and when they might be implemented is not clear at this stage.

What all this means is that there is likely to be an erosion of at least some of the overall "savings" value which can be achieved for an end-customer through the use of on-site/private wire generation. In turn, depending on the wider commercial context for a particular transaction, this may mean a generator having to accept a lower PPA price with its end-customer than would previously have been achievable.

At the same time, the good news from the perspective of both developers and customers interested in private wire opportunities is that a complete erosion of all "savings" value seems unlikely. Some scope may continue to exist for reducing an end-customer's exposure to particular types of network charges, especially those which are time of use based and so intended to incentivise a reduction in grid consumption at certain times. In addition, we are not aware of any imminent proposal to revisit the basis on which "final consumption levies" are calculated as a matter of the various pieces of legislation which govern relevant subsidy schemes – so in this respect some significant value may continue to exist for licence exempt suppliers to achieve savings for their customers relative to the prices charged by licensed electricity suppliers.

Timings

The deadline for responding to Ofgem's consultation of 28 November is 4 February. We can then expect to see further announcements during 2019 confirming the direction of travel on "residual" network charges and providing updates on when relevant changes are likely to be implemented.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2019. Specific advice should be sought for specific cases. For more information see our terms & conditions.

 

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