Structure of Charges Year-end review for DCMF

22 November 2007

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Background

• Interim arrangements were put in place in 2005

– Consistent connection boundary for demand and generation

– Introduction of GDUoS

• Long term arrangements were planned for implementation in 2007

– Forward looking charging methodologies, priority EHV

– HV/LV generation

– Charges to IDNOs

– Charging products and structures

– Generators connected pre-April 2005

– Common format for charging methodology statements

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Current position

• WPD– Implemented EHV methodology in April 2007– Continuing to progress outstanding issues

• G3 (SSE, SP, CN), UU & EDF– Consulted in 2007

• CE– Developing detailed project plan, discussions with Bath

University

• Most have made progress on load flow analysis

• We do not anticipate any new methodologies for implementation in April 2008

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Planned implementation

• Previously said that new charging models should be implemented prior to start of DPCR5

• Progress to date has been slow and the work and time required has been underestimated

• Since April 2005, 81 mods submitted

– 58% not vetoed

– 19% withdrawn

– 23% vetoed

• Still no guarantees that revised methodologies will be in place by 2009

• Since 2005 understanding of charging principles has substantially increased

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HV/LV generator charging

• Existing generation charging model simplistic; EHV models cannot be readily extended

• At last ISG it was agreed that DCMF would progress

• DE is becoming increasingly important:

– DEWG has identified the importance of DUoS charges that take into account the benefits of generation

– Short haul demand related tariffs more cost-reflective?

• Needs to be progressed as a matter of priority

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Boundary charging

• IDNOs constitute an important change to the DNOs’ business

• IDNOs will be competing with DNOs to provide part of the service of distributing electricity

• In doing so they will be dependent on monopoly services provided by the DNO

• Vital that DNOs ensure that charges for use of the upstream network are consistent with the requirements of competition law

• Remains a risk that current charging methodologies could distort competition

• We have repeatedly urged DNOs to review their approach to charging IDNOs without delay

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Specific considerations

• What costs are assumed to be avoided? How are these calculated?

– What cost elements make up the fixed charge, in the boundary & end user tariff?

– What cost elements are represented by scaling, in the boundary & end user tariff?

• Justification for additional costs and how these are calculated

• Use of average assumptions

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Principles

• Principle of equivalent charges for same loads is desirable but secondary to compliance with competition law requirements

• Charges based on the same model that is used to set charges for end-customers can be appropriate, subject to specific considerations above

• Differences in the tariff structure at the boundary compared to the structure applied by the DNO to its own end customers gives rise to the potential for inappropriate margins

– e.g. Capacity charges at the boundary for predominantly domestic sites could potentially restrict competition

• Risk that average assumptions may result in inappropriate charges in a number of situations

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Options for taking forward SoC

Three options:

1. Continue with individual methodology development

– 42% mods to date vetoed or withdrawn

– Probable resource clash with DPCR5

2. Postpone development until after DPCR5

– Not appropriate for generation charges/benefits or for charges to IDNOs

3. Introduce a common methodology for all DNOs

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A common methodology for all DNOs

What are the benefits?

• Consistency in methodology across DNOs – benefits to suppliers and customers

• Most cost and time effective way to achieve a positive outcome within the original timescales

• Manage resources during busy price control period, for DNOs and for Ofgem, but would require commitment from all parties

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A common methodology for all DNOs

How would this be achieved?

• Draft common methodology for all DNOs, facilitated by Ofgem

• Likely to allow different versions of load flow analysis to determine time to reinforcement

• Taken forward through industry meetings in first half of 2008

• Implementation:

– high degree of buy-in at start, DNOs submit mods Sept 08; or

– implement as part of DPCR5 through licence mod and/or via DCUSA; need to consider governance process

• Look to approve methodologies in 2008/09

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Any views?

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