GB energy industry

An introductory guide to the

2018

ENERGYINNOVATION CENTRE

GB ENERGYNETWORKS05C

HA

PT

ER

Contents

ENERGYINNOVATION CENTRE

05 GB energy networks 42

5.1 Electricity networks 42

5.1.1 Ownership 43

5.1.2 Electricity distribution networks 43

5.1.3 Ownership 43

5.2 Gas networks 44

5.2.1 Gas transmission network 44

5.2.2 Ownership 44

5.2.3 Gas distribution networks 44

5.2.4 Ownership 45

5.2.5 Monopoly regulation 45

5.3 Network price controls 45/46

5.4 Charging principles 46

5.4.1 Electricity transmission 47

5.4.2 Electricity distribution 47

5.4.3 Gas transmission 47

5.4.4 Gas distribution 47

5.5 Ofgem’s Targeted Charging Review (TCR) 48

Disclaimer: While Cornwall Insight considers the information and opinions given in this report and all other documentation are sound, all parties must rely upon their own skill and judgement when making use of it. Cornwall Insight will not assume any liability to anyone for any loss or damage arising out of the provision of this report howsoever caused. The report makes use of information gathered from a variety of sources in the public domain and from confidential research that has not been subject to independent verification. No representation or warranty is given by Cornwall Insight as to the accuracy or completeness of the information contained in this report. Cornwall Insight makes no warranties, whether express, implied, or statutory regarding or relating to the contents of this report and specifically disclaims all implied warranties, including, but not limited to, the implied warranties of merchantable quality and fitness for a particular purpose. Numbers may not add up due to rounding.

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05GB energy networks

GB electricity

transmission

operators

(adapted from

Ofgem)

GB electricity

distribution

network

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5.1 Electricity networksThe electricity networks are used to transport electricity from generators to end users. The system is made up of transmission and distribution networks. It is worth noting that these assets are wholly privatised and as natural monopolies are regulated in how they can charge for their services.

The transmission networks transport high voltage electricity from power stations to the distribution networks. In England and Wales, the transmission network operates at 275kV and 400kV voltages, and in Scotland, the transmission system additionally operates at 132kV. In England and Wales, the 132kV linesare part of the distribution network.

This generates geographical differences in connections for some generators and consumers. Typically, in England and Walesany consumer of generator above 100MW will connect at the transmission level. For South Scotland this falls to above 20-30MW and for Northern Scotland most sites above 5MW areconnected on the transmission level. The reason for this discrepancy is due to the need for greater management of theconstrained Scottish areas.

FIGURE 9: ELECTRICITY TRANSMISSION AND DISTRIBUTION NETWORK

OWNERSHIP

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5.1.1 OwnershipIn Great Britain (GB) there are three onshore transmission owners (TOs) who develop, operate and maintain the system withindistinct transmission areas. In England and Wales, National Grid Electricity Transmission (NGET) perform the role, with Scottish Power Transmission operating the system in southern Scotland and Scottish Hydro Electric Transmission operating the system innorthern Scotland and the Scottish islands.

Additionally, there are also Offshore Transmission Owners (OFTOs) who own and operate the transmission system connections to offshore wind farms. These are competitively tendered for by National Grid, who pass on the costs of these into general transmission system charges.

5.1.2 Electricity distribution networksThe distribution networks connect the transmission networks to the end consumer. Electricity enters the extra high voltage distribution network through grid supply points, where it has a voltage of 132kV. From here, electricity typically passes through bulk supply points which reduce voltage to 33kV, before entering the high voltage distribution network through primary substations, which reduce voltage to 11kV. Secondary substations then lower the voltage to 230 volts for the low voltage distribution networks, which are connected to properties at connection points.

While ultimately these networks are focussed on delivering electricity to the end consumer, increasing levels of distribution connected generation assets also mean these networks are managing flows onto the system. In some distribution regions, there have been pauses on any new generation connections to ensure grid stability. This is especially the case in regions of high renewables penetration, such as the south west with solar PV and north Scotland with onshore wind.

5.1.3 OwnershipThe distribution networks are owned and operated by 14 distribution network operators (DNOs), whose licences are held by six companies due to acquisitions and mergers. These companies are Electricity North West Limited, Northern Powergrid, Scottish and Southern Energy, ScottishPower Energy Networks, UK Power Networks, and Western Power Distribution.

Additionally, there are a number of independent distribution network operators (IDNOs). These companies operate small local networks which connect to other DNOs or other IDNOs. Such networks are usually used to connect new developments such a housing estates or shopping centres to the distribution network.

5.2 Gas networksThe gas networks are used to transport gas from beach terminals, liquified natural gas terminals, and the three interconnector terminals around the country and to end users. The system comprises the transmission and distribution networks.

5.2.1 Gas transmission NetworkThe gas transmission network transports high pressure gas from entry terminals to gas distribution networks, or directly to power stations and other large industrial users. The National Transmission System (NTS) consists of 7,660km of high pressure pipeline. Compressor stations along the transmission network ensure that the flow of gas is managed to maintain operational security. Before the gas enters the distribution network an odorant is added so leakages can be quickly identified.

5.2.2 OwnershipIn GB, the entire transmission system is owned and operated by National Grid Gas. It performs the role of gas system operator and gas transportation owner.

5.2.3 Gas distribution NetworksThe gas distribution networks are used to transport gas from the transmission network to the end user. The distribution network is broken up into 13 local distribution zones (LDZs), and gas enters these zones from the transmission network through LDZ offtakes. At an LDZ offtake, the pressure of the gas is reduced so that it is ready to enter properties.

FIGURE 10: GAS DISTRIBUTION NETWORK OWNERSHIP

44

GB gas

distribution

network

operators

(adapted

from Ofgem)

45

5.2.4 OwnershipThere are currently eight gas transporter licences held by four companies who own and operate the gas distribution networks.

There are also a number of independent gas transporters (IGTs), who operate small scale local pipelines. New housing and commercial developments form the largest share of the IGT market.

5.2.5 Monopoly regulationBecause of the huge amount of investment required to build, maintain and operate the networks, it is not practical for the networks to be fully open to competition, and as such they are natural monopolies in their region. In the absence of competition, Ofgem regulates the networks in order to keep costs down for customers. It does this through price controls, which set the amount of revenue that network companies can recover from its customers for using the network.

These customers are usually suppliers or generators, who pass on costs to the end consumer. The regulator has introduced some elements of competition to network activity including connections and in some instances (such as electricity transmission) opening up the construction of new assets (e.g. offshore transmission links) to competitive tenders.

5.3 Network price controlsThe process by which the regulated network companies can recover revenue from users is known as the price control. At a high level this is a negotiation between the network companies and Ofgem to determine the level of revenue required over a period of time to maintain networks and invest in new assets.

The current set of price controls are based upon the Revenue + Incentives + Innovation + Outputs model, known as RIIO. This is a performance-based model designed to encourage network companies to put consumers at the heart of the decision-making process, make efficient investments to ensure safe and reliable services, innovate to reduce network costs for current and future consumers, and play a role in the delivery of a low carbon economy and wider environmental objectives. Through the RIIO price control, Ofgem set the amount that companies need to operate their networks, and what needs to be delivered in return.

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Essentially, the revenue that network companies are allowed to collect is based upon performance against the incentives set through the price control, which are assessed through the impact of the innovation projects that they are involved with, and the outputs that the companies deliver.

Incentives for network companies under the RIIO price controls typically offer financial rewards or penalties in areas such as reliability of the networks, customer satisfaction, network innovation, and the environment.

Innovation on the networks see companies invest in developing more innovate ways of running the networks and their companies in general, in order to deliver benefits to consumers.

Outputs vary between the different network companies, but typically allow companies to recover money for areas such as:

— Ensuring that the network is safe and reliable

— Demonstrating participation in the achievement of broader environmental objectives

— The maintenance of high levels of customer satisfaction and stakeholder engagement

— Ensuring that customer connections are made quickly and efficiently.

5.4 Charging principlesThere are several different charges levied on users of networks. These charges are how network companies recover the allowed revenue that is set by the RIIO price controls. Network companies are required to accede to codes under their licence conditions, and these codes set the charging methodology that can be used. The overarching principle is that network charges should be cost reflective.

Broadly speaking cost reflectivity covers:

— Location: the more of the network a user utilises to move energy to or from their connection, the higher the charge. This is why households tend to have higher (on a pro-rata basis) charges than large industry users as energy has to flow through more network to reach their meters.

— Time: charges will tend to include an element of peak use of networks. Although different between gas and electricity and transmission and distribution, the principle holds that where users are utilising the network at a time of peak usage, the charge will be higher. Where a user can see this price signal they may be able to adapt their behaviour.

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5.4.1 Electricity transmissionThe costs of the transmission system are recovered through three main charges:

— Connection charges, which are based upon the costs of connecting users to the network

— Transmission Network Use of System (TNUoS) charges, which cover the costs of installing and maintaining network assets

— Balancing System Use of System (BSUoS) charges, which cover the costs that National Grid incur when balancing the network

5.4.2 Electricity distributionThe costs of maintaining and operating the distribution network are recovered by DNOs through Distribution Use of System (DUoS) charges. These are mainly set using the Common Distribution Charging Methodology.

5.4.3 Gas transmissionCharges for the gas National Transmission System are recovered separately by National Grid as the transportation owner and system operator.

For the transportation owner, revenue is mainly recovered from shippers through capacity charges which grant shippers the right to flow gas on or off the transmission system. These are split roughly 50:50 between entry capacity charges and exit capacity charges.

For the SO, revenue is mainly recovered through commodity charges, which are based upon the actual amount of gas taken on or off the system.

5.4.4 Gas distributionThe charges placed on shippers for using the gas distribution networks are split into Local Distribution Zone capacity charges and Local Distribution Zone commodity charges. Charges are based on how much of the network, by pressure tier, is used by a customer. Charges are skewed towards capacity, as this stabilises revenues and charges for the network owner and users.

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5.5 Ofgem’s Targeted Charging Review (TCR)As more and more assets connect to the electricity distribution networks and many businesses and homes start to the generate their own electricity through so called “behind the meter” generation (for example from rooftop solar panels) many market participants have become concerned with current charging arrangements. With charging often based around usage, the charging structures are being put under strain. Distribution connected generation and behind the meter developments have many implications for current charging including:

— National Grid as the SO cannot actively track generation from assets not connected to the transmission system, making it harder to manage supply and demand

— Network companies see lower demand usage from behind the meter customers, leading to under recovery of charges and a higher allocation placed on other users

— Suppliers charging their customers on a volume basis also see lower demand levels (and revenues) from their customers with behind the meter assets

— Those investing in small-scale and behind the meter assets tend to be wealthier businesses/ individuals, putting more of the cost elements on less well-off customers. This is something Ofgem has focussed on with its remit to protect vulnerable customers

With these impacts in mind, and the anticipation of greater behind the meter deployment and embedded generation in the future, Ofgem has released a Targeted Charging Review (TCR) Significant Code Review (SCR). The SCR allows Ofgem to make industry decisions by itself, rather than it being industry lead. Proposals in the TCR include options to move to gross charging, capacity charging and hybrid approaches. These changes would likely see a dampening on the incentives around time of use charging and peak cost avoidance.

Industry would then be expected to take forwards any code changes necessary, with final decisions on modifications in early 2019 and implementation of the changes in April 2020, ready for the 2020-2021 charging year.

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