A boom in private wires may be tempered by incoming regulatory change, writes Ali Lloyd, senior principal consultant at Pöyry
Recent years have seen a growth of interest in private wire electricity supply arrangements, sometimes referred to as ‘on-site generation’ or ‘behind the meter’ generation.
Under this arrangement an electricity generator supplies electricity directly to an end user via a direct, unlicensed ‘private’ wire rather than over the ‘public’ electricity grid comprising licensed distribution and transmission networks.
The end user may also own the generator and private wire, or these may be owned by a third party who sells electricity to the end user through a power purchase agreement. Examples include an industrial manufacturing site installing a gas engine on its site to provide back-up and load management capability, or a large warehouse renting out its roof space to a solar developer and buying the resulting solar generation.
The business case for private wire supply is driven by the fact that on-site generation generally avoids certain network charges and also avoids the various levies imposed on licensed supply to fund renewable and other support schemes such as the Renewables Obligation and the Capacity Market.
These savings are shared between the generator and the end-user, so that the latter buys electricity below the retail cost of grid electricity while the former sells above the wholesale market price. As network charges and supplier levies have increased significantly in recent years, so interest in private wire supply has grown.
However there are some regulatory clouds on the horizon which need to be considered by developers and end users contemplating such schemes.
Ofgem is currently reviewing network charging rules, with the likely outcome that there will be a shift toward recovering more costs through fixed or capacity-based charges, and less from variable unit charges.
This reduces the cost which can be avoided by a private wire arrangement, assuming a back-up connection to the grid is still required.
It is also possible that the government may seek to limit avoidance of supplier levies by private wire generation, if there is concern about the growing volume of demand avoiding these levies.
So while private wire supply may look economically attractive in the near term it will be important to address potential regulatory risks when contemplating such an arrangement.