APPENDIX 64
Memorandum by the Office of Gas and Electricity
Markets (Ofgem)
1. Ofgem is the regulator of gas and electricity
industries in Britain. Ofgem's principal objective is to protect
the interests of present and future gas and electricity consumers,
where appropriate by promoting effective competition. We also
have important duties relating to the environment, sustainable
development and security of supply. In response to the extension
of the above inquiry's terms of reference to include microgeneration
and other forms of distributed generation we are happy to submit
this additional memorandum.
OVERVIEW
2. We believe that microgeneration and other
forms of distributed generation have the potential to help tackle
carbon emissions. Microgeneration may also have a role to play
in helping to alleviate fuel poverty, in particular providing
alternative energy sources to customers in non-gas communities.
3. Our role is a dual one covering networks
and markets. We regulate networks to make sure there are no barriers
to the development of new technologies and that charges and charging
structures properly reflect the costs and benefits associated
with distributed generation. In markets, strong incentives are
provided through emissions trading and the Renewables Obligation
(RO) for microgeneration technologies that are low- or zero-carbon.
We also monitor the market closely in order to ensure there are
no barriers to further development. In addition, we have set up
a Microgeneration Forum for dialogue with key players in the microgeneration
sector, thus helping us to highlight key challenges and identify
possible solutions.
4. By December 2005, 13,310MW of distributed
generation was connected.[30]
549MW (4%) of this was connected in the previous 12 months and
3,647MW of connection offers[31]
were made during this time.
5. As part of the Energy Review, we committed
to work with government on a comprehensive review of the incentives
and barriers to entry that impact on distributed electricity generation,
including Combined Heat and Power (CHP). This review will report
in the spring of 2007. Its scope will include, among other things,
options for resolving potential barriers to the sale of electricity
by small generators, licensing procedures (including exemptions)
and technical standards for connection.
REDUCING BARRIERS
6. Our work on network regulation includes facilitating
reductions in commercial and technical barriers to new system
users. For example:
— We co-chair the Electricity Networks
Strategy Group (ENSG) and are actively contributing to the working
groups and workstreams associated with this, as we did with the
predecessor organisations. This group has overseen extensive work
on technical issues associated with distributed generation over
several years.
— We have led a project to review commercial
arrangements in electricity distribution and have now secured
commitments to the introduction of a multilateral use of system
agreement. Subject to consultation, it is our current intention
that this agreement will take effect on 5 October 2006 and this
will provide legal clarity to the "plug and play" arrangements
for individual microgeneration units.
— We are running a forum on connecting
microgeneration, covering both networks and market issues.
MICROGENERATION
7. Ofgem is working to ensure that obstacles
to the development of microgeneration are identified and addressed,
and that, where appropriate, we work with government to ensure
that any new arrangements are well-designed and work within the
market framework. We will shortly be publishing a document discussing
the specific challenges and regulatory issues posed by microgeneration
across all areas of our work.
8. Relevant examples include our review
of electricity and gas supply licences, where we propose to remove
regulatory constraints, such as the 28-day rule, on suppliers
offering more sophisticated and innovative supply arrangements
that may include microgeneration. We will also ensure that our
measures to promote innovation in metering take account of the
interests of microgeneration, notably our work with stakeholders
and the industry to encourage the development of interoperability
standards for smart meters.
9. The potential for microgeneration can
be further enhanced by measures under the government's environmental
programmes administered by Ofgem, the Renewables Obligation and
the Energy Efficiency Commitment. We are working with the Department
of Environment, Food and Rural Affairs (Defra) and the DTI to
implement recent legislative changes, and also to ensure our administrative
procedures are as easy to use as possible for non-expert generators.
ELECTRICITY DISTRIBUTION
PRICE CONTROL
10. The current electricity distribution
price control was finalised in 2004 and runs from 2005-10. This
places incentives on distribution companies to connect and utilise
distributed generation efficiently and introduces new incentives
for innovation, as set out below:
Distributed Generation (DG) Incentive
The DG Incentive is specifically aimed
at encouraging electricity distribution network operators to connect
DG to their network in a timely and efficient manner. 80% of the
capital cost is passed through by the distribution network operator,
with a £1.5/kW per annum incentive rate for connected distributed
generation and a £1/kW per annum rate in respect of operations
and maintenance costs.
Innovation Funding Incentive (IFI)
Expenditure is allowed on a "use
it or lose it" basis up to 0.5% of revenue (amounting to
£1-2 million per company). The companies fund a proportion
of each project (averaging 20%). Annual, open reporting of projects
is required to promote best practice. This scheme started in October
2004. This covers innovation in network engineering generally,
including but not limited to distributed generation.
Registered Power Zone (RPZ)
RPZ status is given to areas of a
network where distribution network operators (DNOs) employ innovative
approaches to connect new generators to their systems. An enhanced
financial incentive (three times the main DG incentive) provides
a balance to innovation risks. As with the IFI, open reporting
of RPZ projects is required to promote best practice across the
sector.
11. As part of the price control, we also
changed the incentive on distribution companies to reduce losses
so that they benefit from reductions in losses from generation
located close to demand. This provides a further incentive to
encourage the distribution companies to facilitate and utilise
distributed generation.
STRUCTURE OF
CHARGES
12. Alongside the price control, the structure
of distribution charges introduced from 1 April 2005 involved
a movement from deep to shallower connection charges and the introduction
of generator use of system charges. We are encouraging the distribution
companies to undertake further work to develop more economic charges,
including consideration of the benefits of distributed generation
in avoiding network reinforcement. This is expected to lead to
improved charging models in the next year or so. The price control
and charging developments must work together as a package to encourage
efficient, co-ordinated solutions.
September 2006
30 Source: Electricity Networks Association. Back
31
A connection offer is a formal offer from a network company to
a customer developing a generation connection. The offer details
the connection charge and the terms of the connection. Back
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