Distribution price control review and incentives for DNOs to connect distributed generation

1. Distribution price control review and incentives for DNOs to connect distributed generation Glasgow workshop, 24 July 2003 Martin Crouch, Director, Electricity Distribution

2. Overview • Context • Challenges for regulation • An integrated approach • Incentives for DNOs to connect and utilise DG • Distribution losses • Further issues

3. Context Planningconsents ROCs Network Access Transmission Distribution Incentives Charging

4. Challenges for regulation • The expected substantial growth in distributed generation is likely to necessitate significant investment • Current regulatory arrangements: • rely on obligations to connect • do not provide incentives to act or to deliver efficient DG-related reinforcement • Regulatory arrangements need to change to deliver: • positive incentives to respond to users’ requirements • efficient, economic and co-ordinated network investment • focus on “outputs” not “inputs” (access provided rather than poles in the ground) • efficient and effective locational signals to network users

5. An integrated approach • Distribution Price Control Review (consultation paper 15 July): • incentives on distribution companies to connect and utilise DG efficiently; and • developing ideas on Registered Power Zones and Innovation Funding • Structure of Distribution Charges (initial conclusions June 2003) • moving from deep to shallower connection charges • introducing generator use of system charges • Distribution Losses review (initial proposals June 2003) • including DG impact on losses within the incentives • These must work together as a package to encourage efficient, co-ordinated solutions (clustering? active management?)

6. Incentive mechanisms • January 2003 letter to DNO Chief Executives: • shallow aspect of connection covered by competition • incentives to provide network access including reinforcement (pass-through to RAV or £/MW) • incentives to operate the network (avoided investment, £/MWh, losses) • Registered Power Zones concept raised • July 2003 initial consultation: • proposals for form of network access incentives; • recognise need for opportunity of premium returns to encourage efficient behaviour (generally funded by DG) • avoided investment already incentivised, losses being progressed • initial thoughts on a possible model for RPZs and innovation

7. Hybrid mechanism DNOs' revenue pass-through hybrid incentive (=A+B) £/MW revenue driver (A. partial pass-through) (B. supplement £/MW revenue driver) DNOs' cost

8. Evaluation

9. Hybrid mechanism • Given the range of uncertainty over reinforcement costs arising from DG, need a flexible mechanism which mitigates risk but also provides a positive incentive on DNOs to act • Of the mechanisms identified to date, hybrid approach appears to offer best prospects • Other ideas welcome • Work underway to assess range of reinforcement costs • Data and projections requested from DNOs by mid September • Consultants engaged to review • Also considering whether this mainstream approach is sufficient…

10. Technical challenges • Not “Business as Usual” for networks • TSG confirms substantial technical challenges • Any incentives structure should promote efficient network development and operation for DG • This includes effective innovation

11. The Innovation Process Risk Innovation Funding Initiative Research Registered Power Zones Development Demonstration Adoption Time Time IFI & RPZ – Targeted incentives for DNOs

12. IFI and RPZ headlines Innovation Funding Incentive • DNOs allowed opex for innovation, capped at [0.5%] of turnover • A proportion of which would be funded by the DNO • Expenditure allowed on a ‘use it or lose it’ basis Registered Power Zones • Designated zones which are nurseries for network innovation • Higher business risks to DNOs offset by potential for higher returns • Promote best practices for network innovation across GB

13. Distribution losses • Incentive framework for losses • current arrangements involve 10-year moving average with arbitrary adjustment intended to remove effect of DG • propose simpler incentive based on a fixed target level • propose to remove current DG adjustment so impact of future DG on losses will feed through to DNOs in a more transparent way • needs to be considered alongside incentives to connect and utilise DG (as part of the price control) and in the light of DNO ability to signal costs to DG through connection and use of system charges

14. Further issues • Form of incentives • Alternatives? • How to validate network availability? • Valuing incentives • Cost information due mid September • Establish range of reinforcement costs • Continue to consult on DG willingness to pay for incentives • Propose values (% pass through and £/MW, etc) • Broader commercial/structural challenges • Balancing and active management • Interaction with ROC review including levy arrangements

15. Promoting choice and value for all gas and electricity customers