Economist and consultant Franck Latrémolière thinks Ofgem will lose the legal challenge it now faces over cuts to embedded benefits.
On 20 June 2017 Ofgem directed implementation of WACM4 of CMP264 and CMP265. This would change the Transmission Network Use of System charging methodology to phase out the major part of the benefit that most distributed generators receive if they generate power during triad periods. The change would affect charges from 1 April 2018, with the phasing out period ending on 31 March 2020.
A group of distributed generators is seeking a judicial review of Ofgem’s decision.
Whilst justice is, in principle, public, the courts are not pro-active in promoting hearing dates or access to records. The parties in this case have not shared much. I do not know what stage the process has reached, or what the arguments are on both sides. Can readers help?
Pending information, here is some speculation:
Ofgem may explain its decision by explaining that triad charges had grown out of proportion with any measure of the cost of transmitting power to meet peak-time demand from distribution systems, and therefore that giving Triad benefit to generators who offset that peak-time demand is overpaying these generators.
Ofgem may say that its decision would tend to restore a competitive playing field between distributed generation and generation that is connected to the transmission system or is too large to be exempted from paying transmission charges directly, in that after the cuts all these forms of generation would only receive benefits from offsetting local demand that are commensurate with the cost of transporting electricity to meet local demand.
In the context of a judicial review, such Ofgem claims are likely to be accepted by the court without much in-depth examination. They are probably true anyway.
What might the arguments be from the other side?
Some distributed generators might be tempted to vent their displeasure about the way in which the cut in Triad benefit would damage their business and make them regret bidding into the Capacity Market. They had an expectation that they would earn money from Triad benefit. They might threaten to throw their toys out of the pram, claiming that dashing their expectations will increase the return on capital that people require to play in the UK energy sector.
But their lawyers will probably convince them that a whinge about political risk does not win a judicial review; and that the expectation that was dashed was not a “legitimate expectation” on which they can hang a winning claim, because:
- They were not given that expectation by Ofgem or Government.
- Such an expectation would not be legitimate because (on Ofgem’s evidence) it would amount to an expectation of being paid over the odds.
So what is the real basis for seeking judicial review?
I think that it will turn on the allegation that investors who have backed distributed generation projects had a legitimate expectation that they would not be punished for using licensed electricity distribution networks to distribute their output to customers.
By choosing to use licensed electricity distribution networks, these developers naturally accepted that there would be a charge. Currently that charge is primarily in the form of demand distribution use of system charges: other ways of delivering power such as on-site power generation, private electricity wires, or using engines to produce mechanical power without going through an electricity conversion, would all have resulted in lower electricity distribution charges to meet the same final demand.
Of course, distributed generation developers would not have had a legitimate expectation that the charges for using licensed electricity distribution networks would never change. But they do have a legitimate expectation that these charges would be explicit, transparent and they would be able to validate and challenge their cost-reflectivity. This is that legitimate expectation that Ofgem is proposing to breach by changing the transmission charging regime in order to punish users of licensed distribution systems.
Seen from the transmission system, there is no difference between distributed generation and behind-the-meter generation: they both offset GSP load. A transmission charge that discriminates between these two scenarios is a backdoor way of punishing users of licensed distribution systems, without any cost basis, and without even going through the proper governance process for distribution charges.
Investors in distributed generation had a legitimate expectation that, in a civilised country, backdoor punishment of this kind would not receive regulatory approval.
In order to weaken arguments based on undue discrimination between front-of-meter and behind-the-meter generation, Ofgem might argue that their ongoing targeted charging review will remove that discrimination by forcing everyone to pay transmission charges on the basis of a measure of gross demand, not net import. Sounds powerful? But it would not be.
First, what the complaint would be about is a legitimate expectation that distributed generation would not be punished through transmission charges for using licensed distribution systems. That is not the same as jealousy about on-site generation not being punished too.
Second, it is hard to imagine a post-review world in which everybody would be punished equally. Ofgem does not propose to charge domestic demand on a gross basis, and it would find it difficult to charge a large municipal CHP microgrid scheme for a transmission system that it does not use. Ofgem cannot punish customers who disconnect from the system and run entirely on their own power sources and storage. Ofgem cannot punish the port that opts to build diesel cranes, instead of electric cranes powered by a biomass power station.
Ofgem might be tempted to re-emphasise the point that their change reduces discrimination between distributed and transmission-connected (or very large distributed) generation. And to note that exemptible distributed generation would still receive favourable treatment compared to transmission-connected generation, by avoiding transmission charges for export capacity and balancing services use of system charges.
That would not help. Can you excuse introducing one form of undue discrimination by reducing another? Even if you could, the pretence of symmetry would not be relevant: distributed generators had a legitimate expectation that they would not be punished for using licensed distribution systems, whereas transmission-connected generators had no basis for any legitimate expectation that the existing unfair arrangements would be rebalanced in their favour between 2018 and 2020.
I predict an Ofgem defeat.
And because I am an eternal optimist, I predict that post-defeat Ofgem will redirect its targeted charging review so that it identifies the valuable services provided by the electricity system, and develops reasonable charges for these services, instead of the old approach of smearing all costs on demand and then firefighting the inevitable adverse consequences like excessive Triad benefits.
Franck Latrémolière is an economist and consultant who finds electricity network charges interesting. He runs the dcmf.co.uk website.
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