Economist and consultant Franck Latrémolière outlines the key arguments in the embedded benefits legal challenge, why they failed, what could have been, and what may now rear its head as a result.
In November 2017 I predicted that Ofgem would be defeated in the application for judicial review of its decision to reduced embedded benefits for distributed generation.
By January 2018 my confidence in that prediction was shaken by information that had emerged during a hearing about an interim injunction.
I predicted that the claim on grounds of discrimination would fail. But I was expecting a complaint based on Ofgem’s alleged failure to take proper account of other relevant factors to succeed – provided that the claimants expressed it in terms of an argument that Ofgem had ignored the way in which their decision would have the effect of introducing a charge on use of distribution systems through the transmission charging regime.
A claim on grounds of discrimination between distributed generation and behind-the-meter generation or demand-side response did indeed fail.
Another discrimination ground was raised and rejected; that ground looks completely misconceived to me, as the claimants seemed to be alleging that more equal treatment (between transmission-connected and distribution-connected generation) would be a discriminatory thing.
The complaint about Ofgem’s alleged failure to take proper account of other relevant factors was described by the judge as amounting to a criticism of the basis on which Ofgem’s rejected the arguments in a NERA report for the ADE.
But since Ofgem staff seemed to have read and understood that report, there was nothing to complain about.
The judgment (rightly) avoids getting into a detailed discussion by pointing out that the claimants did not allege that Ofgem’s rejection of the NERA arguments was irrational. Even if they had, this would probably not have gone anywhere since the NERA report does not seem to propose a better charging method or a good reason for keeping the old one. In fact, even with the best possible report on this topic, with well-evidenced positive conclusions, I expect that this line of argument would have failed, because I believe that only a small amount of transmission system capacity would be avoided as a result of distributed generation displacing even a large proportion of the large transmission-connected generation.
Provided that the judgment gives a fair description of the claimants’ arguments, the claimants’ failure was well deserved and no successful appeal is likely.
The claimants framed the question in terms of “is it fair for distributed generators to lose the big competitive advantage that they currently get through triad benefits?”, to which the answer is “yes, that does sound fair enough”.
I had hoped they would have framed the question as “is it permissible to apply transmission charges to power flows that do not use the transmission system?”, to which the court would have said “no, the aim of removing the competitive advantage of distributed generation over similar transmission-connected generation might be fair enough but the vehicle is wrong, as transmission charges must always be based on uses of the transmission system”.
At which point Ofgem and its allies would have had to work out a more legitimate charging basis for transmission charges.
My guess is that this would have included both charges to distributors for individual GSP capacity (and charges for exporting GSPs), and charges for transmission capacity used to provide system security against in-feed loss (payable only by interconnectors and large gensets). Such changes could have had significant beneficial effects by allocating transmission costs on the CCGTs, nuclear and interconnectors which make a big transmission system necessary, thus focusing competitive advantages on generation technologies that truly deserve them because of their flexibility or locality, irrespective of the voltage of their grid connection.
But enough of my dreams. In reality, now that Ofgem has won the right to levy transmission charges on the use of distribution systems, there is nothing to stop the next stage, which is to apply distribution charges on volumes of electricity generated behind the meter that never use any licensed distribution or transmission system.
In this brave new world, as soon as you use any service from any licensed network, you could be made to pay for anything and everything that the licensed sector does.
Franck Latrémolière is an economist and consultant who finds electricity network charges interesting. He runs the dcmf.co.uk website.