Use of system charges for distributed generators – an update


3 November 2011


Distribution network charging for distributed generators (DG), i.e. those generators directly embedded in the distribution network, is currently in somewhat of a hiatus pending decisions by Ofgem on the treatment of DG connected pre-2005 and the extra high voltage (EHV) distribution charging methodology (EDCM), which will apply to DG. Ofgem has recently issued an update on their current thinking by letter dated 11 August. This article summarises the current position on distribution use of system (DUoS) charging and looks at what changes are expected going forward. 
What are DUoS charges?

DUoS charges were introduced in April 2005, following Ofgem's approval of National Grid plc's changes to Use of System charging methodology. The charges are payable by generators and suppliers to Distribution Network Operators (DNOs) for the use of the distribution network. They are payments to cover the use of the network, and associated operation and maintenance (O&M) costs.
What is the current position for DG?

Generators connecting prior to April 2005 paid, in full, the cost of connection to the distribution network, in addition to a further sum to cover O&M, in the expectation that they would continue to enjoy rights of access to the network with no further fee to be paid. This is known as a "deep connection charge". To take account of their payment of deep connection charges, Ofgem granted an exemption to these charges for the period 1 April 2005 – 31 March 2010 to DG connected pre-April 2005. However since 31 March 2010 there has been no enduring policy on how these generators should pay DUoS.

Post-April 2005 connected generation currently pays a lesser "shallowish connection charge", which is topped up with GDUoS charges to cover O&M costs, and a proportion of network reinforcement costs.
The consultations

Ofgem published two consultations in July 2010 and May 2011. Both of these consultations focused on the issue of compensatory payments to pre-2005 connected generation. Ofgem acknowledges that there is a need to compensate DG connected pre-2005 considering their initial payment of deep connection charges. The consultations proceeded on the basis that DUoS charges will be imposed for pre-2005 DG - Ofgem having decided, at that stage, not to extend the exemption.

The May 2011 consultation suggested that Ofgem guidance on the determination and funding of DNO compensation would be published in the summer of 2011, however this has been delayed (see below).
Industry concern

The Association of Electricity Producers (AEP), the Renewable Energy Association (REA), the Combined Heat and Power Association (CHPA), RenewableUK and Scottish Renewables raised concern regarding the clear signal that DUoS charges will become payable for pre-2005 DG. In a joint consultation response, these bodies cited the Ofgem consultation entitled "Structure of Electricity Distribution Charges", dated December 2000, which provided that DUoS charges were intended to cover the residual costs associated with the provision and reinforcement of network assets, i.e. the costs already covered in the deep connection charge paid by pre-2005 DG. Industry stakeholders take the view that there was an expectation at that time that no further payments would be required to secure continued use of the distribution network in the case where deep connection charges were paid.  
Change in approach – extension of exemption

Ofgem's recent update letter noted that they are now considering a time limited exemption for pre-2005 DG from having to pay DUoS changes. A further consultation will be published sometime in the next six weeks to consult on the rationale for a further time-limited exemption, the criteria that would be applied, the duration of the exemption and implementation.
A result of this change in approach and continuing uncertainty regarding the treatment of pre-2005 DG, Ofgem have also stated that the EDCM export charges for DG will be introduced later than originally planned – now April 2013 or later. The work on the methodology for EDCM import charges will continue as scheduled, with a decision expected this month. 
Next steps

Ofgem has invited initial feedback on their plans for pre-2005 DG and the consequential delay to the introduction of the EDCM export charges in advance of the consultation published later this month, or in early October.