Utility Week

UTILITY WEEK | 13TH - 19TH APRIL 2018 | 25 Operations & Assets Market view D istribution network companies (DNOs) are legally obliged to pro- vide a connection offer on request, and in doing so they incur assessment and design (A&D) costs. These typically include the costs of undertaking surveys, site visits, drawing plans, accommodation and equip- ment, among other things. Before August 2008, DNOs could charge upfront for A&D fees. But aer this was chal- lenged by a customer, Ofgem judged that DNOs "be required to amend their charging methodologies to remove upfront charging for A&D work". Hence, from thereon A&D fees could only be recovered aer a connec- tion offer was accepted. Problematic consequences The unintended consequence of this rul- ing – not helped by the twin birth of the Renewable Obligation and feed-in tariff regimes – was that DNOs were inundated with connection applications for distributed generation. While the volume of applications to DNOs since 2008 has been problematic, it is the low rate of accepted applications – and there- fore the frequency that DNOs can recover expenses – that has caused the damage. Acceptance rates range from just 6 per cent to 17 per cent, depending on the DNO, for generation requiring EHV (22kV+) works. With abortive rates well over 80 per cent, the brunt of A&D fees has fallen exclu- sively on those customers who accept offers. Many applications have been speculative. For example, Electricity North West (ENWL) once received 250 applications in a 12-day period – all from a single applicant. While 50 of these were cancelled, offers were issued for the remaining 200 within the statutory 65 working day limit. Few were accepted, and the net cost to ENWL ran to some £250,000. Every DNO has similarly shocking statistics around application volumes and general abuse of the position which Ofgem took in 2008. New legislation On 28 February 2018 the Department for Business, Energy and Industrial Strategy (BEIS) laid the Electricity (Connection Offer Expenses) Regulations 2018 in Parliament and published a Government Response and Impact Assessment. The new regulations allow DNOs to charge A&D fees to grid con- nection applicants, irrespective of whether they accept the subsequent connection offer. Not surprisingly, DNOs seem unani- mously relieved that from 6 April 2018 they have been able to charge expenses against any new applications submitted. However, the legislation is deliberately non-prescrip- tive as to which reasonably incurred costs can be recovered, when, how and at what level. While there has been some liaison between the six DNOs, each has mapped out its own approach. DNO charging intentions Sitting on the connections steering groups of most of the DNOs, I've surveyed their inten- tions. The strongest similarities are in their selection of affected market segments. Initially, most DNOs will limit charges to connections requiring HV and EHV works. Western Power Distribu- tion's (WPD's) current probable position is to apply the regulations to demand and genera- tion connections requir- ing EHV works only, and Scottish Power Energy Networks (SPEN) currently plans to only charge distributed generation applicants. Northern Powergrid (NPG) is also expecting to apply modest charges for LV works, but not for small works and G83 applications. ENWL's current, minded-to position is to invoice £1,000+VAT on issuing EHV- related offers, with the offer valid only if the invoice is settled within 30 days. It will then invoice a further, non-refundable expense of £22,000+VAT on acceptance of the offer. Where DNOs do choose to apply fees, some are proposing to introduce them at the levels quoted in their existing charging statements. While others, such as Scottish and Southern Electricity Networks (SSEN) expect the early costs to be somewhere between those published figures and ENWL's £1,000+VAT. Perhaps fearful of a dramatic increase in budget estimate applications, NPG is proposing to start charging for budget estimates at up to £510+VAT, depending on market segment. Most DNOs will be implementing a cool- ing-off period between providing notification of the fee and incurring the expenses. Consistent across the DNOs is an intent to monitor the impact of the expenses on appli- cation and acceptance rates. Neither the fees they have shared with me, nor the market segments affected, have been set in stone. The DNOs surveyed have indicated a strong desire to continue engaging with stakehold- ers. Some, too, will still let customers submit some applications at multiple capacities, but under the same application. With most planning to invoice for accrued expenses on issue of the connection offer, there is a concern among DNOs that bad debt may become an issue. Currently, under their licences, DNOs are obliged to release connec- tion offers within 65 working days, even if the applicant has not paid the A&D fee. Ofgem is proposing to change this licence condition to exempt the DNO from this obligation – so the DNO does not need to offer terms where the requester has not paid the relevant charge within a reasonable timescale. Ofgem has issued a consultation in this regard, with a response deadline of 28 March 2018. If Ofgem decides to make the proposed modification, it will take effect not less than 56 days aer its decision is published. No DNOs have yet suggested their initial approach would require this modification, and at time of writing only ENWL was plan- ning to introduce the new charging regime immediately in April – with others suggest- ing they would follow in the weeks aer. Hugh Taylor, chief executive, power consultancy Roadnight Connections correction Hugh Taylor looks at recent changes to the rules governing how DNOs can recover often substantial design costs when quoting for new grid connections – and surveys how DNOs are responding. "ENWL once received 250 applications in 12 days from a single applicant"

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