Scottish Renewables Conference

James Veaney

Head of Distribution Policy

Smarter Grids and Governance, Ofgem

Connecting Distributed Generation

19 March 2013

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GB Distribution System

• 14 electricity distribution networks owned by six groups

• Much of network installed in 50s and 60s with some assets over 80 years old

• 17% of the average domestic electricity bill

• £4bn paid annually by GB customers

• Combined Regulatory Asset Value (RAV) of £18bn

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Growth in Distributed Generation (DG)

• Many types and sizes of distributed generation facilities

– Combined heat and power (CHP)

– Wind turbines

– Hydro electric power

– Solar PV

– Anaerobic digestion

– Heat from biomass

Electricity

generating

plant

Why has DG increased?

•Historically, electricity generated at power plant and transmitted to individuals •The government has incentivised renewable energy to meet targets (15% by 2020) and reduce CO2 emissions • Incentive programmes such as: - Feed-in-tariff (FiT) - Renewable Heat Incentive (RHI)

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What does this mean for DG customers/DNOs?

DNOs •historically have not had to manage electricity being generated and coming back onto the network •need to ensure the integrity of the network •need to remain compliant with relevant legislation

Customers: •are not energy experts •may be tied to a location •want a decent service at reasonable cost – both for new connections and ongoing use of system •may have limited choice in use of connections provider

Ofgem Working to ensure that development of DG is not unfairly treated by the

way networks are operated and regulated

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Role of Ofgem - Regulatory Tools

Tools Outcomes

POLICIES •Charging for network connections & use of distribution system

ENGINEERING RECOMMENDATIONS

P2/6, G83 & G59 to ensure the integrity of the network

LICENCE CONDITIONS

•Requirement to offer a connection •Timescales for issuing quotes •Ability to recover costs for connection and Use of System •Requirement to have charging methodologies

PRICE CONTROLS •DPCR5 (2010 – 2015) •RIIO-ED1 (2015 – 2023) (Strategy Decision-March 2013)

Primary Duty: to protect the interests of consumers by making sure there is a reliable network both now and in the future, whilst delivering value-for-money for customers.

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Recent initiatives

DG Connection Guide

Long-term Development Statement

DNO standard application

form

Guaranteed standards of performance

Broad measure of customer service

DG Forum events

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Overcoming challenges: DG Forum

• Platform to share issues associated with connecting and using the network

• Hear directly from the DNOs on their progress since last year

• Provide springboard for ongoing engagement between DNOs and customers

• Provide framework for Ofgem to maintain engagement with stakeholders to inform policy

Opportunity for customers and DNOs to discuss

issues and take steps to improve

arrangements

Ongoing concerns that DG customers are encountering a number of

difficulties in connecting to the network

Need to understand the challenges faced by all parties involved in the connection of DG

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DG Forum events 2012

•UK Power Networks (CEO) - Renewable UK

•Electricity North-West (CEO) - National Farmers’ Union

•Northern Powergrid (CEO) London

•Western Power Distribution(CEO) - Regen SW (CEO)

•Scottish Power (Head of Connections) Cardiff

•SSE (Director of Distribution) - Community Energy Scotland

•Scottish Power (CEO) - Scottish Renewables Glasgow

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Issues raised at DG Forum 2012

“What progress has been made by

the DNOs in providing information to

generation customers on connection

capacities at all voltages across

their areas.”

“Do the DNOs pass too much of the

reinforcement costs to the customers

– why should DG operators pay to

enhance the DNO’s asset base?”

“How can DNOs ensure that

ALL their staff are helpful

and innovative”

“Can DNOs provide briefs on

technology development

they would like to see?”

“ Why don’t DNO

formally

acknowledge

receipt of

applications for

connection,

informing the

applicant of the job

reference number

and the person

responsible for

handling the

application?”

Only (less than 10% in one DNO) of connection applications

accept the connection offer from the DNO. (Many customers submit multiple applications to obtain quotes for different

sites/sizes. This is not cost-efficient for the DNO and the acceptance rate

could be improved by the DNO providing more upfront information.)

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Next steps following DG Forum

Each DNO has published a DG Workplan www.ofgem.gov.uk

Stakeholder Engagement

Following DG Forum

Set out and agreed between DNOs and DG customers

Regular monitoring of work-plan progress

DNO DG Workplans - Stakeholder

mapping - Improve customer

service eg. account managers

- Provision of information eg.lists of approved technologies and technological advice

- Transparent charging and fair deposit

- Develop A&D proposal

- Ofgem development of Price Control

- Sharing of good practice

- Address barriers to competition

Surgeries, feedback, DNO DG Forum events

RIIO - ED1 and Policy Development

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RIIO-ED1 (2015-2023)

• Set periodic controls on prices networks can charge.

• Allow networks to recover revenues that will fund their activities. Revenues linked to delivery of specified outputs that reflect customer interests: RIIO

Revenue = Incentives + Innovation + Outputs

2012 2013 2014

Launch consultation: Feb 2012

Initial Strategy consultation: Sept

Strategy Decision: Mar

Business plans submitted: Jul

Fast track Consultation Oct

Fast track Decision: Feb

Initial Determination: June

Final Determination: Nov

policy development

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RIIO-ED1 Connections

• Connection services remain an area of concern. Seeking improvements in overall service provided

– Desire for flexible/innovative solutions that reduce customer costs.

– Provision of information

– Quality of service

– Timeliness of connections

• Competition is the most effective method of achieving this but in its absence we seek incentives to deliver the right outcomes for consumers (no financial incentive where there is effective competition)

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Incentive on Connections Engagement (ICE)

Strategy Set out strategy in Business Plan for major customers demonstrating senior management buy-in and high level approach (no score against this)

Stakeholder engagement

- Stakeholder mapping - Engage with broad variety of major customer stakeholders -Identify and justify actions to respond to stakeholder needs (incl. Publishing KPIs for critical aspects of service)

Major Customer Work-plan

- Publish a work-plan of commitments (evidencing how DNO is responding to stakeholder concerns) - Demonstrate how DNO is improving overall: (i) Quality of connections service (ii) Timeliness of connections (iii) Provision of information

Performance -DNO to provide evidence that they have assessed their performance against the commitments in the work-plan -DNOs to provide external validation of their performance against the commitments e.g. Customer Satisfaction Survey Mystery shopping Commissioned a report from a representative body Carried out an external audit

• Financial penalty (up to 0.9% of revenue) for those that fail to meet minimum criteria

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Benefits

• Tailored to meet the specific requirements of different groups of customers through meaningful engagement

• Assessment throughout period allowing service propositions to evolve

• Publically holds DNOs to account – require DNOs to publish ‘how to engage’, ‘results of engagement’ and ‘progress on delivery’ on website

• Requires DNOs to mimic the behaviour you would expect from a company competing to win a customer’s business

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Summary

• New and developing part of the connections market – working collaboratively with customers is key. As is sharing best practice with other DNOs

• Not a ‘cure-all’. There is cost (and time) associated with connecting to the network and in some areas this may be prohibitive – upfront awareness of these restrictions is critical

• Significantly increased the financial and reputational incentives on DNOs to improve service and work – use this as leverage to get your views heard

• We will continue to listen, monitor and intervene where necessary

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AF-Mercados EMI

Distribution:

investment and connection

Scottish Renewables Annual Conference

19 March, Edinburgh

AF-Mercados EMI

Why have price control regulation?

Why is electricity not like baked beans?

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AF-Mercados EMI

Why have price control regulation?

Why is electricity not like baked beans?

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Need for additional control

Delivered direct to

home

Dangerous

Resource / security

Customer can’t

easily store

Essential Quality

difficult to judge

Pay in arrears

Supply on demand

Natural monopoly

AF-Mercados EMI

Regulatory objectives

Ensure or promote effective competition and efficient

markets

Control of natural monopoly

Competition may not be possible

Regulator acts as surrogate competitor

Protect interests of current and future customers

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AF-Mercados EMI

RPI - X

Original system developed by Ofgem at privatisation

Network companies expected to be more efficient than the

public sector

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RPI projection

RPI minus X

allowed

revenue

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RPI - X Regulated companies can make extra profit by reducing

costs faster

But this exposes efficiency savings… which consumers

benefit from in the long run (50% reduction in network

costs since 1990

More recent price controls share this benefit (Information

Quality Incentive)

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RPI minus X

allowed

revenue

Incurred cost

Extra profit

AF-Mercados EMI

What is RIIO ED1? New challenges “RIIO”

Significant investment needed to maintain a reliable and

secure network

Sustainability

“Smart Grids”(electric vehicles and heat pumps)

Revenue = Incentives + Innovation + Outputs

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AF-Mercados EMI

What is RIIO ED1? New challenges “RIIO”

Significant investment needed to maintain a reliable and

secure network

Sustainability

“Smart Grids”(electric vehicles and heat pumps)

Revenue = Incentives + Innovation + Outputs

First RIIO price control for distribution network

RPI-X aimed at reducing costs… but now, much more

spend is required…

RIIO should promote efficient and more innovative

investment…

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AF-Mercados EMI

What is RIIO ED1?

Over 1,000 pages of consultation and

decision documents on Ofgem website

Not including the Distribution Companies own consultations

on their business plans

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AF-Mercados EMI

What is RIIO ED1?

Your investment environment for distributed generation

2015 to 2023

This will affect you.

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Distributed Generation Connection Work Group

Meeting between generators and distribution network

operators.

Discuss key issues for distributed generators

Access to the network and information on constraints

Connection payment schedules and security requirements

Customer service

Collegiate atmosphere – work together to find solutions

Good level of engagement on both sides

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AF-Mercados EMI

Some ideas for the debate What is most important to distributed renewable generation?

Reliable timescales for quote and connection?

Speed of connection, management of queue to avoid

unnecessary delays, investment to enable more connection?

Flexibility to find the most economically efficient connection?

Value for money in connection costs?

Up front costs not too onerous, payment schedules, reasonable

management of securitisation?

Predicable longer term costs?

Clear information, good customer service?

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AF-Mercados EMI

Some ideas for the debate What is most important to distributed renewable generation

Reliable timescales for quote and connection

Speed of connection, management of queue to avoid

unnecessary delays , investment to enable more connection?

Flexibility to find the most economically efficient connection

Value for money in connection costs

Up front costs not too onerous, payment schedules, reasonable

management of securitisation

Predicable longer term costs

Clear information, good customer service

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Priorities?

1. Certainty

2. Speed - Cost

3. Flexibility

AF-Mercados EMI

Some ideas for the debate What is most important to distributed renewable generation?

Reliable timescales for quote and connection?

Speed of connection, management of queue to avoid

unnecessary delays , investment to enable more connection?

Flexibility to find the most economically efficient connection

Value for money in connection costs

Up front costs not too onerous, payment schedules, reasonable

management of securitisation

Predicable longer term costs

Clear information, good customer service

To what extent will RIIO help deliver this?

To what extent will Distribution Network Operators help to

deliver this themselves?

To what extent might competition and new providers

deliver this?

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AF-Mercados EMI

Alice Waltham

Suite 43, One St Colme Street

Edinburgh EH3 6AA

T: +44 131 220 8280

E: alice.waltham@afconsult.com

Skype: alice.waltham

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