Promoting choice and value for all

1
Promoting choice and value for all gas and
electricity customers
2
Recent developments in regulation

• Arthur Cooke
• Head of CHP and Levy Manager

3
Topics to cover

• Distribution price controls from 1 April 2005
• British Electricity Trading and Transmission
  Arrangements (BETTA)
• Distributed Generation Co-ordinating Group (DGCG)
• Microgeneration consultation
• Questions
• http//www.ofgem.gov.uk

4
Ofgems overall remit

• Protect the interests of consumers, where
  appropriate by promoting effective competition.
• Electricity and gas are not just another
  product, so
• vulnerable consumers
• environment
• security of supply
• safety (work of HSE and DTI Engineering
  Inspectorate)

5
Distribution price control review 4(DPCR4)

• The concept of price control
• Overview of the new control
• Incentives to connect distributed generation
• Innovation Funding Incentive (IFI)
• Registered Power Zones (RPZs)

6
Controlling monopoly revenue(not end-user prices)
7
DPCR4 overview(significant new challenges)

• Network investment
• asset replacement
• distributed generation
• 5.7bn (48 increase)
• Quality of service
• reward best performers
• stronger incentives for quality targets and
  telephone response
• streamline arrangements for severe weather
  compensation
• stronger incentives to supply restoration after
  storms
• Distributed generation (IFI and RPZs and
  connection charges)

8
DPCR4 Incentive to connect DG(0.5bn incentive
package)

• Revenue allowance?
• reduces costs (no more!)
• Cost pass-through?
• encourages behaviour
• no cost-reduction
• /MW allowance?
• reduces costs
• behavioural change?
• Hybrid of partial pass-through and lower /MW
  allowance
• changes behaviour at acceptable cost

9
The need for innovation
Risk
Research
Development
Demonstration
Adoption
Time
Time
Greater network company involvement needed here a
distinguishing feature is the requirement for
field testing and the insufficiency of laboratory
simulations alone
10
The innovation process
Risk
Innovation Funding Incentive
Research
Registered Power Zones
Development
Demonstration
Adoption
Time
Time
IFI RPZ Targeted incentives for network
companies
11
Innovation Funding Incentive

• The companies fund a proportion of each project
• Expenditure is allowed on a use it or lose it
  basis
• Annual, open, reporting of projects to promote
  best practices

Registered Power Zones

• Ofgem registers, but does not approve projects
• The enhanced financial incentive (3x price
  control DG incentive) provides a balance to
  innovation risks
• Open reporting of RPZ projects to promote best
  practices

12
New incentives from 1 April 2005

• A general financial incentive for connecting
  Distributed Generation - Cost pass-through (80)
  plus annual revenue (2.50/kW)
• and
• Two new Innovation incentives
• Innovation Funding Incentive (IFI) an annual
  funding for network RD of
  0.5 turnover (1-2m per Co.), and
• Registered Power Zones (RPZ) an enhanced DG
  financial incentive where new
  technology is used on
  networks to connect and
  integrate DG.

13
What is BETTA?(apart from months of work for
Ofgem and DTI)

• Introduction of-
• single competitive GB wholesale electricity
  market
• single set of arrangements for access to/use of
  GB transmission system
• Main impacts-
• significant changes to GB transmission network
  operations
• EW wholesale market arrangements basis for GB
  arrangements
• effects felt mainly, but not exclusively, in
  Scotland

14
Scotland post-privatisation(basic data)

• Scotland
• Generation 10,000 MW
• Max. Demand - 6,000 MW
• Excess 4,000 MW

15
Scotland post-privatisation

• Two vertically-integrated companies owning
• generation (98 market share)
• transmission (natural monopoly)
• distribution (natural monopoly)
• supply (80 market share)
• Scottish nuclear generation fully contracted to
  the two Scottish Companies in must take
  contracts.
• Other generation-sharing contracts in place

16
The need for BETTA

• Barriers to entry (including the interconnector)
• Access to EW market for Scottish independent
  generation
• Administered wholesale prices not reflective of
  market conditions
• Need to spread cost of transmission investment
  for renewables fairly across GB
• Choice and competition for customers

17
BETTA, system operation and ownership

• NGC to be single GBSO (independent of generation
  and supply) responsible for
• contracting for connection/use of system
• despatch and balancing
• planning outages
• transmission charging and
• Co-ordination of GB investment planning.
• Scottish licensees are TOs, responsible for
• maintenance
• investment planning and
• switching the system, as directed by NGC.

18
BETTA Main tasks completed

• New and amended connection and use of system
  agreements
• Mechanisms for Scottish transmission licensees to
  provide information to NGT (for offers to users)
• Amendment of user-facing codes
• Balancing and Settlement (wholesale electricity
  trading)
• Connection and Use of System
• Terms of access to and use of the transmission
  system
• Requires compliance with the Grid Code
• Grid Code
• specifies technical parameters for connected
  parties
• specifies data communication requirements

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BETTA Opportunities created

• One set of rules for supplying consumers
• Lower bills for domestic consumers (SSE estimate
  -9)
• Competitive prices for industrial consumers in
  Scotland
• Better market access for Scottish renewables
• Interconnectors become part of the wider
  transmission system, ending separate
  interconnector charges

20
Distributed Generation Co-ordinating Group (DGCG)
2001-2005

• Set up by DTI and Ofgem
• Response to the Embedded Generation Working Group
• Advice on removal of unjustifiable barriers to
  the connection and development of distributed
  generation and CHP as an integral part of the GB
  power system.
• DGCG set up a Technical Steering Group (TSG) to
  manage a range of technical projects

21
Key issues identified by the EGWG

• Absence of incentives on DNOs to connect DG
• Lack of co-ordinated RD
• Connection process and practice
• Active management of distribution networks
• Potential for ancillary services from DG
• Microgeneration issues (especially potential
  volume of DCHP)

22
TSG Workstreams (48 projects)
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DGCG Key achievements

• 19/24 perceived barriers removed
• Published guidance on
• connection process
• technical solutions for connection
• Methodology for network security contribution
• Procedures for multiple connection applications
• Major paper on DG and ancillary services
• Major paper on islanded operation
• Assessment skills and human resource requirements

24
Future work on networks

• Electricity Networks Steering Group (ENSG)
• ENCG committees on transmission and distribution
• Completion of remaining TSG projects
• Technical architecture a non-prescriptive
  framework
• flexibility for networks to implement innovative
  solutions
• identify scenarios and manage risks of innovation
• best practice and cost efficiency
• Emerging issues include (for example)
• islanded operation, supported by DG
• ancillary services from DG
• active management of distribution networks
• utility-scale storage

25
Ofgems microgeneration consultation

• Published on 20 April. Responses invited by 15
  July.
• Focus on domestic-scale microgeneration
• Why consult now?
• DTIs Microgeneration Strategy may require
  regulatory response
• Proposals from DGCGs microgeneration workstream
• Possible volume of DCHP
• Minimise extension to scope or burden of
  regulation
• Issues include
• selling exports
• metering
• possible supply licence modifications to protect
  consumers

26
Conclusion

• A considerable amount of regulatory work
  completed
• Clear benefits for consumers and market
  participants
• More change to come in terms of networks and
  smaller-scale electricity generation
• www.ofgem.gov.uk
• www.distributed-generation.gov.uk