Structure of Distribution
Charges
A User’s perspective
David Tolley
Innogy & Npower
Network charges in the electricity market
The Grey Area
Some competition possible
Competitive
Monopolistic
Grey Area competitive pressures force
innovation and economic efficiency
 Move towards distributed generation increases need for charging
structures to provide locational signals
 Seamless treatment between transmission and treatment would
resolve the “Solway Firth” question
 Licence Conditions require compliance with principles of nondiscrimination; cost reflection and not distorting competition.
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Charging Principles
 Cost reflection. Of course … but which costs? Marginal or
average, historic, modern equivalent, or future.
 Simplicity. No! Creates distortion, inhibits cost reflection,
increases opacity. Might lower transaction costs but that
should be a consideration below
 Ease of implementation. Transaction costs should be a
consideration here.
 Transparency. Yes, but implies sophistication. Need for
supplementary documentation and processes.
 Predictability. Important in terms of both charging structures
and levels.
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Supplementary charging principles
 Flexibility to changing market conditions.
– Yes, but notions of tradable access rights have been
misconstrued. Cannot “commoditise” the the transportation of
electricity
 Facilitate competition
– Wider importance than just the traded markets of generation and
supply. Pressure must be sustained in the “grey area” to
encourage efficiency in the monopolistic area.
 Consistency with social and environmental objectives.
– Yes, but should not distort underlying economics.
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Application principles
 Siting signals essential for efficient evolution of networks
 Monopolistic charges should reflect long run marginal costs,
I.e. marginal costs that include cost of incremental investment
 Importance of connection boundary not so much about
barriers to entry but ensuring charges are “cost reflective” …
and thus encourage efficient siting
 Harmonisation of application important - “simplifies” charging
approaches for the user
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Governance
 Should be a composite of “hard” and “soft” governance
– Hard governance makes clear rules and timetables;
– Soft governance requires Users forum to enable issues to be
fully understood before proposals are made, and to obviate
“piecemeal” approach to resolving issues..
 No distinction between transmission and distribution. Why not
a NUSC rather than a CUSC and DUSC.
 Description and rationale for charging methodologies are an
essential adjunct to charging statements, as is publication of
pricing models.
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Connection boundary
 Connection costs will be a consideration in project evaluation, but
main importance of connection boundary is that it should discriminate
between the charging principles that apply either side of it.
Generation
Load
Users Network
Connections
Use of System
Competitive
Potentially
contestable
Monopolistic
Connection charges
Reflect opportunity cost to
connected party. Implies:
•asset linked
•based on historic cost
•reasonable rate of return
Use of system charges
Reflect LRMC for economic
efficiency; also raise
sufficient revenue to meet
regulatory principle of capital
maintenance.
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Definition of connection assets
 Problem of boundary definition still exists but criteria for its
location now defined
 Current transmission conceptual basis right - recent NGC
thinking must be rebutted
 Connection assets are those for the sole use of a User or
group of Users. Sole use should not be the criterion since it
does not encourage sharing (I.e efficiency).
 Free riding issue addressed by giving first user financial rights
to assets.
 Connection assets a function of both geography and voltage.
EHV should be within price control, but connection assets
could be without!
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Use of System charges
 Consultation paper “thin” on basis for UoS methodology
 LRMC, but how should this be applied. Current methodology
is based on average costs allocated on kW or kWh. No
efficiency signals.
 Transmission approach conceptually right. ICRP created
charges reflect incremental costs to system in siting of
demand or generation.
 Currently based on a “transport” model that costs the
“distance” power must travel to meet demand. Generally
believed that basing approach on a DC power flow model
would be an improvement. Easier to visualise DC power flows
in a distribution context..
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400 kV
Is it practical to apply ICRP to
Distribution?
ICRP identifies costs and benefits of adding
increments of load or generation at specific
locations
33 kV
Expansion constants need to reflect attributes
of different parts of the system
15 MW
GSP based models? Sufficiently large to
provide stability to charges, but sufficiently
CHP
disaggregated to reflect local topography.
Probabilistic approach to treatment of
generation (and load) dictates minimum size of
model.
Model could reflect surplus capacity where
appropriate.
ICRP provides locational siting message - not
full cost recovery.
132 kV
50 MW
33 kV
11 kV
10 MW
1 MW
3 MW
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Detailed implementation issues
 Generators already connected
– Need to identify implicit financial rights that have already been
acquired in terms of connection assets, O&M. use of the system,
otherwise double charging will occur (breach of charging
principle)
 Power Factor Charges. Determined from cost of correcting
low power factor not from proportion of system, I.e effectively
capped by cost of local correction.
– Part of “Grey area” since User has choice. Charges should
ensure efficient outcome of that choice.
 EHV charges. Voltage should not be the consideration in their
regulation. Distinction between connection and use of system
could be.
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In conclusion
 Generic charging approach needed for both distribution and
transmission
 Distinction between use of system and connection charges
must be developed to aid economic efficiency
 Connection charges should be based on opportunity cost to
User
 Use of System charging methodology should be consistent
between transmission and distribution - solves 132 kV problem
 ICRP model should at least be a contender for distribution
 Governance must facilitate open discussion in a holistic
manner
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Structure of Distribution
Charges
A User’s perspective