SP TRANSMISSION & DISTRIBUTION
DETAILED RESPONSE TO AN OPEN LETTER FROM CALLUM MCCARTHY
EXECUTIVES OF DISTRIBUTION NETWORK OPERATORS
1.
TO THE
CHIEF
Background.
1.1. The urgent need for action if government targets on renewable energy are to be met has been
well recognised. Within SP Transmission and Distribution we believe that much can be
achieved if a few pragmatic steps are taken now. We are currently handling in the region of
4000MW of connection enquiries from around 30 different developers. These projects range
from single domestic properties up to some of the biggest windfarm projects in the world.
Similarly, the developers involved range from household names to single project developers.
1.2. Our experience in handling these enquiries leads us to believe that there is a need for Ofgem
to take a two stage approach. The first stage is to urgently address the key commercial and
regulatory elements that will permit delivery of 2010 targets and a second phase which
permits the experience that is gained from the first phase to inform the necessary refinements
to longer term arrangements.
1.3. In order that DNOs can play their part in ensuring that as many distributed generation
developments as possible can proceed in the period to 2010 two key elements need to be
addressed.

DNOs must be enabled to invest strategically to match the network capacity to the level of
activity in the areas where it is most needed; and

distortions in the regulatory process must be addressed to allow DNOs to make better use of
generation for network support.
It is essential to introduce these changes quickly in order that the generation market, as well as
the DNOs, can adjust quickly and smoothly to new arrangements in order to get on with the
task in hand.
1.4. During the period to 2010 these arrangements can be developed to ensure the correct balance
between efficient network development and facilitating competition in generation and supply.
It is crucially important, however, that the main enablers are put in place and that the more
sophisticated instruments are developed as more information is gathered.
2. Principles
2.1. We support the broad principles that Ofgem has outlined as being appropriate to the
development of incentives: effective and economic, predictable, understandable and
consistent. We note, however, that in many applications these principles could be in conflict,
and that the correct balance between them needs careful consideration for each situation. Of
particular concern is the requirement for consistency. While we accept that all customers of a
business should be treated consistently we are cautious of assuming that between sectors this
is also the case. Arrangements for transmission will not always present a useful example for
developing distribution incentives, due to the potentially much larger generation population at
distribution and relatively less sophisticated operators of that generation.
2.2. Connection charging is one instance where consistency between transmission and distribution
would jeopardise the achievement of other principles. The definition of shallow charging for
NGC (the ‘generator spur’ concept) has no immediate analogy in distribution, particularly at
lower voltages. Attempts to interpret distribution connection arrangements on the same basis
could produce inconsistencies between connectees
2.3. As outlined in our recent response to the Structure of Charges consultation, the use of deep
connection charges has led to very clear locational messages being sent to generators. Whilst
there is merit in locational messages we accept that to continue this policy would have a
detrimental effect on the rate of deployment of distributed generation.
2.4. The guiding principles for incentives could more readily be achieved if the current
distribution principles for connection charging used for load were extended to generation. We
believe that it is appropriate for generation and load to pay the costs associated with their
connection when they arise at the voltage of connection and at the voltage above, subject to
the limitations of the ‘25% Rule’.
3. Incentives for access to and reinforcement of the network
3.1. Ofgem sketch out two alternative methods for incentivising DNOs to connect generation and
carry out the necessary reinforcement works. These alternatives are not necessarily mutually
exclusive however, and they could both be developed, either sequentially or to operate in
tandem.
3.2. We believe that the single most significant step that we can take is to strategically develop
networks in areas where there is considerable developer activity.
3.3. Within our networks we have particular areas that are attractive to developers. The level of
enquiries for connection in these areas is far in excess of the capabilities of the local network.
It is unlikely that the increase in capacity required to satisfy the level of interest could be
funded by any individual developer or group of developers.
3.4. We will be proposing that specific reinforcement schemes proceed within these areas to
enable the connection of our anticipated level of generation. We do not believe that
investment in these instances should be triggered by market signals, as is proposed for NGC.
The problems encountered by potential developers are substantial enough without the added
uncertainty and complexity of network access arrangements. We see this development as a
barrier to entry and, depending on the specific arrangements adopted, can be akin to deep
connection charging. This would appear to be inconsistent with Ofgem’s preference for
shallow connection charges. It is premature to consider investment and access arrangements
for electricity distribution which are as yet unproven in gas, and are yet to be introduced in
electricity transmission.
3.5. Coupled with the changes to connection arrangements outlined above we believe this strategic
reinforcement will remove significant barriers to the deployment of distributed generation,
commensurate with timescales implied in government targets.
3.6. This step change in network capacity would best be promoted by treating it in the same way
as load related reinforcement i.e. by funding as part of the RAV at a appropriate risk adjusted
cost of capital.
3.7. One drawback of this proposed approach is that it would lead to higher DUOS charges
imposed by the companies most affected by distributed generation. We believe this to be
inequitable and propose that a scheme be devised to spread the network costs of meeting
renewable targets across GB. There are a number of ways in which this could be achieved and
we would be happy to work with Ofgem and others across the industry to develop these.
3.8. At this time there remains considerable uncertainty on the final levels of generation that will
connect to our networks. This uncertainty stems partly from factors unrelated to the network.
It is therefore essential that robust mechanisms are introduced to adjust for the level of
investment in distributed generation reinforcement that is agreed during this Price Control
review.
3.9. While we believe the most effective method to facilitate connections of generation would be
to fund reinforcements via the RAV, there could be merit in also developing a MW revenue
driver to operate in addition to this mechanism.
3.10. The introduction of a MW revenue driver would have substantial drawbacks if it were
proposed as the main or only incentive for connection of distributed generation. There is no
experience of how distributed generation would act if shallower charging arrangements were
introduced and as such it would be impossible for DNOs to make reasonable predictions of
whether cost would be recovered.
3.11. However, if this driver were designed such that only costs associated with ‘incremental’
investment were exposed to this mechanism the level of risk might be acceptable. For
example, if we were to upgrade parts of our network to release, say 100MW of capacity, but
subsequently received 105MW of applications for connection, the additional 5MW could be
catered for under a revenue driver scheme.
3.12. There would be very limited experience on which to base the level of the driver ahead of the
next review, and there would be concerns that efficient costs might not be recovered.
Limiting the exposure by limiting the level of costs that a MW revenue driver scheme is
designed to recover may give sufficient comfort to allow such schemes to be set up,
encouraging innovative behaviour where it is appropriate.
3.13. Such a scheme should be limited in its extent during the next review period and that it should
be coupled with a robust mechanism for correcting unanticipated investment. Evidence
gathered over the period to 2010 would allow a more wide ranging and more robust approach
at the next review, if that were appropriate.
3.14. It is important that DNOs be clear as to what might constitute a ‘firm signal’ for investment in
deep assets. While considerable effort has been expended on discussing transmission access
and deep SO incentives schemes over recent times, it seems to us that these matters are far
from being resolved. Indeed in gas where a similar scheme has been in action there appears
to be some consternation at how it is operating. It would therefore seem wholly premature to
contemplate a similar scheme for distribution. Not only would distribution networks, with
their far greater number of entry and exit points, necessarily result in a more complex scheme,
the participants in any distribution access scheme are likely to be wholly unsuited to such a
task.
4. Incentives for Efficient Operation of the Network
Network Support
4.1. To date DNOs have made little use of the output of generators for either system planning or
operational support. This has been the result of a number of factors, some of which are
outside the influence of the DNO. In order to ensure that the greatest use is made of
generation where this is appropriate, it is essential that DNOs are not penalised for doing so.
Current regulatory benchmark processes compare operational expenditure across DNOs, with
frontier companies being judged the most efficient. This discourages generator friendly
behaviour because DNOs are reluctant to jeopardize this position by implementing more
effective opex solutions.
4.2. Removal of this barrier to interaction between generators and DNOs is crucial to the
development of active network management solutions and ultimately to the economic
deployment of distribute generation. We therefore welcome Ofgem’s intention to address this
issue during the next Price Control Review.
4.3.
Initial discussions with some generators have not been fruitful, in the main because the
commercial drivers faced by the generators outweigh any value that might be attributed to
network support. This may change when generator numbers increase and DNOs develop
more confidence in integrating generation into their networks.
MWh Revenue Driver
4.4. At the current time there is very little correlation between the volume of energy produced by
distributed generation and the actions of DNOs. Constraints on distribution networks tend to
result from unforeseen circumstances, rather than economic design criteria and so it is hard to
imagine what behaviours are being targeted by an incentive to minimise constraints.
4.5. The most promising way for incentivising efficient network operation would be to enable
DNOs to utilise generation without jeopardising their efficiency benchmark position and with
some confidence that any expenditure of this type would be adequately recovered. Over the
period to 2010 this would allow more sophisticated incentives to be developed in the light of
experience
5. Registered Power Zones
5.1. Ofgem’s suggestions on Registered Power Zones have a number of attractions for the further
development of technical and regulatory arrangements during the next Price Control period. A
number of questions remain on how such zones would be defined, operated etc. We would
welcome an opportunity to discuss this further.
5.2. Our suggestions for strategic network reinforcements could be further developed in line with
the Registered Power Zones concept. This would have the advantage of defining the zones in
the areas most attractive to distributed generation and would enable us to cost effectively
develop techniques for actively managing these networks.