Investment in renewable energy to support UK decarbonisation targets may be undermined unless Ofgem’s proposed network charging reforms are reconsidered, an independent study by economic consultants Oxera ^[1] has found.

The report recommends the proposed reforms, part of Ofgem’s Targeted Charging Review (TCR) ^[2], should be further assessed to identify the likely impacts on deployment of renewable generation before being fully implemented.  

Oxera found that elements of the TCR (specifically the ‘TGR/BSUoS’ reforms) ^[3] could:

• Adversely impact the economic viability of onshore renewable generation, as well as increasing cost to consumers by as much as £1.3bn (under Ofgem’s baseline Future Energy Scenario (FES)) or £7.6bn (under Ofgem’s alternative FES) over the period 2019–40 compared to Ofgem’s own estimate.
• Have ramifications for decarbonisation across the UK: Ofgem estimates the average annual increase in CO₂ emissions in the GB as a result of the TGR/BSUoS reform to be between 0.20m and 0.42m tonnes over the period 2019–40. However, the Oxera report, using plausible alternative emission factors, put it into a range from 0.24m to 0.56m tonnes.
• Increase the costs of the energy system; system costs could be £168m to £879m higher than Ofgem’s modelling suggests over the period 2019–40 given the uncertainty of emissions, CO₂ and gas prices.

While the TCR reforms are intended to reduce harmful distortions to competition and promote fairness in the interests of consumers, Oxera’s evaluation of Ofgem’s Impact Assessment found that a greater focus is needed to fully understand the impacts on renewables and decarbonisation to ensure that the TGR/BSUoS reforms do not become counterproductive to achieving Ofgem’s main objectives of affordability, security of supply and sustainability.

The impact of the reforms will also be dependent on the outcome of ongoing related work by National Grid on the TGR, by the BSUoS Task Force on BSUoS, and a separate Ofgem review of forward looking network charges, the first two of which are due to conclude this summer.  Given the uncertainty over the impact of the TGR/BSUoS reforms and the potential interactions with these other workstreams, Oxera concluded it may be prudent for any final decision on TGR/BSUoS reform to be withheld until Ofgem has fully assessed the impacts of its proposals.

Lucy Whitford, Managing Director – Development and Construction, RES, said: "Our electricity network needs to become a smart flexible system, fit for the future and utilising greater amounts renewable generation to provide homes and businesses with access to the cheapest forms of electricity – onshore wind and solar.  We are committed to working with Ofgem and the industry to find a solution to network charging which delivers decarbonisation at the least cost to consumers."

Lindsay McQuade, CEO of ScottishPower Renewables, said: “At ScottishPower, we’re focused on delivering clean, affordable renewable energy to build a low carbon future powered by electricity.  Whilst we support the principles of competition and fairness, we need to be sure that reform to network charging may not unintentionally have the opposite effect, and impact investment in much needed generation, such as in onshore wind and solar.  Oxera’s analysis sets out that risk – potentially creating a more costly system – with further consideration needed prior to any decisions being taken. “

Danielle Lane, UK Country Manager for Vattenfall said: “Oxera have shown clearly that reasonable alternative scenarios to those presented in Ofgem’s analysis turn the benefit case of charging reform on its head. Vattenfall supports the principle of fair network charging but reform cannot come at the expense of higher consumer bills and higher carbon emissions. Now, more than ever, we need predictability and stability in energy policy so companies like Vattenfall can invest with confidence in our low-carbon energy system.”

Paul Cowling, Managing Director of Innogy Renewables UK said: "Oxera’s analysis shows that Ofgem’s current minded-to approach in relation to TGR/BSUoS reform could well increase whole system costs to the consumer and make the UK’s legally binding decarbonisation targets more expensive to meet. We fully support Ofgem’s goal to encourage competition and improve fairness in network charging. We hope that the new analysis will help them to avoid unintended consequences and look forward to working with Ofgem, BEIS and the broader industry to find a route to achieving this which takes into account the benefits that low carbon technologies provide to consumers."

Notes to Editors

1. Oxera’s report, ‘Review of Ofgem’s Targeted Charging Review Impact Assessment’ is available here. The report was commissioned jointly by Innogy, RES, ScottishPower and Vattenfall.
    
2. Ofgem’s Targeted Charging Review (TCR) is a project to assesses how residual network charges should be set and recovered in Great Britain and to keep under review other ‘embedded benefits’ that may distort investment or dispatch decisions. Ofgem published a ‘minded-to’ decision on reforms to residual network charging and to embedded benefits on 28 November 2018.  
    
3. The main elements of the TCR embedded benefits reforms relate to the way that the Transmission Generation Residual (TGR) charge is set and the arrangements for charging Balancing Services Use of System (BSUoS) costs to distribution-connected generators (the ‘TGR/BSUoS reforms’).