The Energy Transition | Ofgem approves new Demand Flexibility Service and alterations to the boundary connection charge system

This week we look at upcoming electricity test events to improve grid efficiency, the possible impact of the EU carbon tax on the UK renewables sector, and more.

ESO's 2023/24 Demand Flexibility Service approved by Ofgem

Ofgem has approved the updated terms of the National Grid ESO's Design Flexibility Service for the upcoming winter period.

The ESO expects to run 12 test events for consumers to contribute to directly. These will run in tandem with live uses of the service which are expected to support the balancing of the network.

In addition, there will be a guaranteed £3/kWh for at least six of the 12 test events for electricity suppliers, aggregators and businesses who directly contract with the ESO. The ESO has confirmed that these test events are expected to begin this month.

Last year's Demand Flexibility Service cycle had 22 service events with 1.6 million households and businesses taking part. Across this cycle, participants in the service shifted over 3,300MWh of electricity during peak time, helping to provide support for the grid during periods of increased strain.

Claire Dykta, head of markets at the ESO, stated that: "households and businesses across Great Britain can now benefit from actively participating in helping balance the network during tight winter periods and be incentivised to do so. Creating more flexibility on our electricity system will be vital for running the clean, green and fair energy system of the future."

Ofgem approves change to transmission demand charge for boundary connections

Ofgem has approved a modification to the Connection and Use of System Code (CUSC) allowing users connected to the transmission network on a boundary between demand zones to pay an average Transmission Network Use of System (TNUoS) charge.

TNUoS charges are set by location, with users grouped into demand zones which match the boundaries of distribution network operator (DNO) regional monopolies. Tariffs are calculated by reference to a weighted average of all demand sites' costs within the demand zone but the CUSC does not currently define how these would be determined where demand users are connected to a transmission substation which services multiple DNO regions. These users are often energy storage systems.

The approved modification sets out that such users will pay a tariff determined by reference to the average zonal tariffs of each relevant DNO region. This will be effective from 1 April 2024 and apply to Peak Security and Year Round tariffs. In its decision, Ofgem states the change is a "pragmatic solution" that will result in greater clarity and therefore "promotes efficiency in the implementation and administration of the system charging methodology".

Energy UK indicates concerns for UK renewables over EU carbon tax

Energy UK has this week called for a link between the UK and EU Emission Trading Schemes (ETS) to stop the “detrimental effect” that the EU’s incoming carbon tax could have on the nation’s renewable sector.

The trade association has raised concerns that a weak carbon price framework within the UK ETS would have adverse consequences on clean energy investment, particularly once planned EU carbon tax legislation comes into effect.

Carbon prices from the UK ETS prices have dropped to historic lows in recent months, with auctions raising £1 billion less between April and the beginning of October this year than they would have done had prices remained at 2022/2023 levels.

The EU is planning to introduce a Carbon Border Adjustment Mechanism (CBAM), which could be implemented in January 2024. This would impose an EU border tax on imported goods that have paid a lower carbon price than that imposed under the EU ETS, meaning that UK companies will be forced to pay the difference between carbon prices in the UK and EU ETS.

According to Energy UK, the UK and EU’s ETS price disparities mean over £500 million per year could be paid by UK companies in EU carbon taxes. These taxes would be payable on energy exported from renewable sources, despite being carbon-free. The report highlights that this could deter investment in UK clean energy at a time of growing international competition for green investment as a result of initiatives such as the US Inflation Reduction Act. To mitigate this risk, Energy UK has called for the UK and EU ETS to be linked. This would create a carbon price equivalence between the two Schemes, meaning that the UK would be exempt from the EU’s CBAM.

Ofgem supports locational wholesale pricing in new report

Ofgem has released a report into the potential impacts of introducing locational wholesale pricing into the UK electricity market. The assessment was conducted in conjunction with FTI Consulting and Energy Systems Catapult and forms part of the government's Review of Electricity Market Arrangements. It concludes that locational pricing would offer significant benefits to the majority of consumers over the current framework.

Locational pricing would allow electricity prices to be adjusted depending on the location in which it is consumed. This would mean that pricing reflects the actual expenses of delivering power to that particular point on the grid. The report explores two methods of implementation against the base scenario which reflects current national pricing. The potential designs are:

• a zonal market in which the country is split into seven defined zones; and
• a nodal market in which the pricing structure varies across 850 individual "nodes", each with their own prices.

The report concludes a zonal market would lead to a consumer benefit of between £15 billion and £31 billion between 2025 and 2040, and a nodal market would result in a saving of between £28 billion and £51 billion over the same period.

Most of the savings would come from avoiding network constraint costs which are projected to total over £5 billion per year by 2040 if the current market design remains unchanged. Another main benefit would be congestion rents, which arise where electricity is purchased at a low price and subsequently transported through the transmission network to be sold to consumers at a much higher price.

While the report is overwhelmingly positive, Ofgem recognises that locational pricing would need to be implemented alongside other extensive reforms including to balancing markets and network charges.

400MW flexibility tender launched by Electricity North West 

Electricity North West (ENW) is seeking in excess of 400MW of flexibility across its entire network, with up to £7 million to be made available for flexibility providers.

In total, ENW's latest invitation to tender is calling for a total of 413MW from 2024-28. This will cover 29 locations. The distribution network operator has said that this could save billpayers more than £28 million by deferring costly reinforcement work.

Additionally, following a summer consultation, ENW has outlined a number of changes to facilitate greater participation in its procurement process and technical specification. These include:

• lowering the minimum threshold for participation from 50kW to 10kW per location;
• removing the annual commercial qualification requirement on PicloFlex;
• accepting alternative metering granularity such as half hourly metering where minute by minute metering is not possible; and
• adopting the latest version of the Common Contract (V2.1), as agreed by the Energy Networks Association’s Open Networks Project.

The deadline to complete commercial and technical pre-qualification for the flexibility tender is set for 26 January 2024. The bidding window will be open from 12 – 23 February 2024.

DSO Commercial Manager at ENW, Lois Clark, stated that: “responses to our latest consultation highlighted some key barriers that providers have been facing, so we have implemented changes where possible to demonstrate our commitment to accessibility and simplicity within our service offerings, ensuring equal opportunity for all. We look forward to incorporating more of our stakeholder’s valuable input throughout the year as we continue to work together to achieve the common goal of a net zero carbon energy future.”

This article was written with the assistance of Luke Webb and Jack Duffy, trainee solicitors.