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Home / Domestic markets / Network access - electricity / Embedded generation working group report

The Embedded Generation Working Group Report into Network Access Issues.

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Chapter 3:  Recommendations from the group

Overview

1.1 The group's detailed recommendations fall into seven main categories These are:

• Ways of ensuring that DNOs facilitate competition in generation
• The way in which the contribution of embedded generation to network performance should be assessed
• The potential contribution that embedded generators might make to services secured by the high voltage transmission network operator including :
• local arrangements for the management of reactive power and islanded operation
• the longer-term structure of ancillary service market arrangements
• The principles to be employed for charging embedded generation for connection to and use of distribution network
• The special issues which arise with domestic and other micro generators – in particular charging and metering arrangements
• The principles for providing information to developers both in respect of charging and of locational opportunities,
• The way in which distribution networks may be designed and operated in the longer term and incentives which will be needed to secure such arrangement

Each of the above is the subject of an annexed rapporteurs’ paper.

1.2. The following sections contain summaries of six of the seven rapporteurs’ papers, together with their recommendations. (The conclusions of the subgroup which looked at ancillary services issues have been incorporated into the section on the contribution of embedded generation to network operation.) These recommendations have in turn been used to develop the Group’s main recommendations in Chapter 1.

1.3. The rapporteurs set out options and comment on their relative merits, but usually they do not indicate a preferred option. In considering options, Ofgem and Government will need to take account of both the consensus views set out in the ‘options’ and ‘recommendations’ sections of each paper and the ‘points of view’ of the stakeholder groups in each paper.

1.4 A detailed timetable for implementation of the recommendations is also set out in Section 8 leading to full implementation by 2006.

Network Operator Reporting on Facilitation of Competition

(See Annex 1 for Rapporteurs' Paper)

2.1 The Utilities Act 2000 gives DNOs a statutory duty to facilitate competition in generation and supply. Establishing effective information flows, understandable processes for market entry, and equitable and transparent terms for connection and use of system are key to demonstrating that the duty is being discharged.

2.2 Under the existing regulatory framework there is no financial or operational benefit to DNOs from embedded generation. Indeed such generators often result in additional costs to DNOs rather than providing an opportunity for business development. ( DNOs can develop their business through increased load connections and collect revenue through Use of System charges.) Ofgem should consider what regulatory changes are needed to remedy this. [target date January 2002]

2.3 Consideration should be given to establishing an appropriate form for a commercial forum in which distribution customers can meet distribution company representatives.

Assessment of Embedded Generation Contribution to Network Performance

(See Annex 2 and Annex 3 for Rapporteurs' Paper)

3.1 Ofgem should put in place a co-ordinated programme of work to assess the changes discussed below and to implement those which are appropriate. These changes cover three main areas:

• Design codes
• Ancillary services
• Islanded operation

The programme should include a clear timetable for delivery (suggested dates are included below)

3.2 Appropriate arrangements for incentivising DNOs should be put in place. Ofgem should look to assess the costs and benefits of the changes proposed with a view to making any necessary licence changes.

Design codes for distribution networks :

3.3 Ofgem should review the potential network benefits from the provision of security services from embedded generators. This should assess the contribution to network security from embedded generation - particularly with regard to the requirements of, and assumptions in, P2/5 and the potential effects on system performance as experienced by customers. It should also seek to identify short term measures under the existing standards to allow fuller recognition of the contribution of embedded generation to network security and performance.. [target date January 2003]

3.4 Ofgem should also examine the present arrangements for amending P2/5 to ensure that all interested parties have an appropriate mechanism for initiating changes to it. It may also be appropriate to carry out a similar review of other relevant Engineering Recommendations used by DNOs. [target date January 2002].

Power Quality , Voltage and Ancillary services :

3.5 Ofgem should assess the services - other than security - that generators can provide to networks, concentrating on services such as voltage support; provision or absorption of reactive power, frequency response; reserve and black start. This would differentiate between those services that could be traded with the operator of the high voltage transmission network or with others and those relevant to the local needs of DNOs’ networks. DNOs or others could act as an aggregator of the services that could be provided by small independent embedded generation within a DNO network area. All these services become more relevant for DNOs if a generator is supplying an island of load within a DNO’s network. [target date January 2003 ]

Islanded Operation :

3.6 Ofgem should review the benefits and disadvantages that could result from allowing embedded generators to operate in islanded mode, supporting local supplies to demand customers in the event of network failure. In certain circumstances, such an arrangement could reduce significantly the number of customer minutes lost - though this is likely to be localised in nature. Responsibility for maintaining voltage, frequency and network safety would be likely to remain with the DNOs and they would need to consider arrangements for operating the network safely under such conditions. [target by January 2003]

3.7 HSE and DTI should review the implications of connecting widespread embedded generation for the safety of distribution network operation. Without suitable safeguards, DNOs could no longer be confident that a particular part of distribution network would be “dead” in the event of circuit outages if unknown owners of generation equipment were still connected to the network. [target date January 2004]

Charging Principles

(See Annex 4 for Rapporteurs’ Paper)

4.1 Under present charging arrangements, generator customers pay deep connection charges, that is the costs of the direct connection to the distribution network together with any necessary costs of reinforcing the network as far as the local grid supply point. Any reinforcement necessitated by the connection of an embedded generator is fully financed by that embedded generator at the time of connection. On the other hand, demand customers pay relatively shallow (‘shallowish’) connection charges along with Distribution Use of System (DUoS) charges. All other reinforcement costs are met through DUoS - which are presently paid only by load customers.

4.2 The present arrangements seem to favour load customers and it is questionable whether this approach is sustainable given the new requirements of the Utilities Act. In those circumstances where network reinforcement costs are high, the current arrangements can present a significant financial barrier to the connection of new generation. Often they are regarded as inequitable since the developer may only require a portion of the capability of the minimum reinforcement for which it must pay - leading to inequities between first and second comer generator connections. A move towards sharing more of the benefits with others such as existing and future customers and future embedded generators is required.

4.3 Possible alternative charging arrangements which address these problems to varying degrees are set out in Annex 4. While the group did not identify a preferred solution , the duty to facilitate competition in generation makes it important to move from the present arrangements. In order to achieve this, significant changes would be needed to the way in which DNOs charge for the connection to and use of distribution networks. The business environment will need to change accordingly to encourage this behaviour.

4.4 There are two principal alternatives for generator connection charges which could result in more equitable treatment for generators:

• Shallow Charges – the generator pays only for the connection to the nearest suitable point at an appropriate voltage on the distribution network. This is similar to connection charges applied to generators connecting to the transmission network but is less onerous than the charges currently placed on load customers of DNOs.
• Shallowish Charges – the generator pays for his connection as above and for reinforcement made necessary by the connection to the distribution network at the same voltage as the connection and one voltage level above that of the connection. This is similar to the connection charges applied to load customers connecting to distribution networks.

4.5 Both the above options would reduce the capital cost incurred by the generator and would be likely to encourage significant additional connections of such plant. The former is likely to be more effective than the latter in this respect. It would also cause a step change in net capital expenditure by DNOs – the former option having a greater impact than the latter. Taken on their own, these options weaken the locational signals presented by deep charging – indeed the former provides no locational signal but this can be addressed in other ways as described below.. Adoption of shallower charges for connecting larger plant may place significant costs on other users.

4.6 The options also require that reinforcement costs be met through other charges. Possible ways of achieving these include :

• Load customers pay all reinforcement costs caused by generators through increased DUoS. Significant embedded generation would result in significant additional costs to load customers. Load customers would be likely to regard this as inequitable.
• Generation customers pay all reinforcement costs for generators through a new generator entry charge.
• Both load and generation customers pay reinforcement costs through entry and exit charges. This option is equitable while providing significant encouragement overall to the connection of new embedded generation. It could also provide the locational signals to generators and customers lost through a move to shallow or shallowish connection charges. DNOs would have to develop a new charging regime.

Each of the above results in winners and losers - but the third method is likely to level the playing field most effectively.

4.7 It is for Ofgem to consider, in the light of wider Government policy objectives, to what degree embedded generation should be encouraged through connection charging policies. Whichever solution is selected, urgent analysis is required to assess the potential impact of changes, both in the short term (up to 5 years), and in the longer term (beyond 5 years). In considering the options, the position of existing embedded generators that have already paid deep connection charges will need to be considered. A possible timetable is :

• The options should be identified and analysed by January 2002;
• A statement of intent by Ofgem in respect of its future approach to charging options should be made by June 2002,
• DNOs should move to this new connection charging policy by January 2003, and
• the overall package should be formalised in the next price control review in April 2005.

Domestic and Other Micro-Scale Generation

(See Annex 5 for Rapporteurs’ Paper)

5.1 The development of micro generation such as Stirling Engine or Fuel Cell based central heating systems and Photovoltaic (PV) roof systems will have enormous implications for the future operation of distribution networks. At present a typical household demand averages less than 1 kW but can have a peak of around 10 kW. Typical domestic or micro generation would meet most of this demand. If micro CHP or PV systems gain wide acceptance it is likely that the role of the distribution network will change as a consequence of changing load and generation profiles. Distribution networks would see no net flow of electricity over certain portions of the day. At these times the system would become more like balancing networks providing the appropriate level of backup capacity and security. While the key cost driver for network provision will continue to relate to maximum rather than aggregate energy flows, this has significant implications for DNOs. It will also affect suppliers, generators of all sizes, and the transmission operator.

5.2 Domestic and micro generators are faced with a number of technical and financial decisions when setting up their systems :-

• connection charges
• payment mechanisms (via metering, profiles and fixed charges) for use of the distribution system, selling exports and buying imported electricity
• technical requirements for connection to the distribution network to enable ‘parallel’ operation;.
• metering arrangements for measuring the generation output, export to and import from the network

Taking each of these in turn :

5.3 A simpler and transparent connection and payment structure should be considered for smaller generators. Distributor charging options have already been identified in the section above. These should be developed in a way which is appropriate to micro-scale generation technology. [Target Dates : as for Section 4]

5.4 The potential costs associated with the metering and charging alternatives identified should be established including:-

• installation cost ;
• any change to meter reading cost ;
• developing and implementing new profiles suitable for domestic and micro-scale generation ;
• the effect of using simple bi-directional metering (often known as net metering) solutions - taking account of DNO and supplier concerns. This is a complex issue and requires further work to analyse the full costs properly;
• the cost of implementing low cost half-hourly metering (particularly if there are economies of scale and a change of metering on-site.)
• stranded costs of existing metering assets ;

5.5 Small Inverter-connected PV systems may connect to a distribution network, provided they comply with a technical standard known as Engineering Recommendation G77. All other forms of micro-generation must comply with a more complex Engineering Recommendation G59/1. Work should be started to apply the principles of G77 to other inverter based generators and to apply a simpler form of G59/1 to small non inverter generation units - such as Stirling Engines. [Target date :June 02] The simpler standard would need to be suitable for assessing mass produced equipment, perhaps using a type testing approach, and take fully into account a number of important security and safety issues.

5.6 The key requirement for metering is that it should be economic to install and be linked to tariff arrangements which allow all the parties concerned to measure or estimate with confidence the information they need. The main alternatives can be summarised as follows :

• Retention of the existing one way meter linked to a tariff based on a profile which estimates typical power flows in both directions. This would minimise installation costs but might be complex to administer;.
• Installation of a bi-directional meter which would operate with a net energy tariff or a profiled tariff which could estimate typical energy flows in both directions;.
• Use of import export-meters (which may not be significantly more expensive than bi-directional meters) would provide measurable information as to power flows in both directions and so reduce the dependence on profiles and reduces the scope for profile error.

Note : A generation production meter which would, with suitable changes to legislation, provide householder generators with a possibility of benefitting from Renewable Obligation Certificates.

5.7 The Balancing and Settlement Code (BSC) does not presently permit certain options for settlement by suppliers. Ofgem should ensure that the Code works to enable options for micro generation.

Provision of Information

(See Annex 6 for Rapporteurs’ Paper)

6.1 Developers of embedded generation have been concerned for some time that the information made available to them about connection points and the effect of location on likely connection charges is variable, opaque and inadequate. Comparisons are often made to NGC’s Seven Year Statement (SYS) which developers value as a source of information about generation opportunities. Against the background of the proposed licence condition requiring DNOs to publish a network development statement, the group set out to identify a framework that would identify what information is actually needed by developers, the ways in which that information might be provided without excessive costs and the minimum standards to which all DNOs might be expected to work in future.

6.2 The subgroup identified three important principles as critical. These are discussed in the following paragraphs. Each principle should be developed to ensure symmetry between information in terms of demand and generation customers.

6.3 High level network information needs to be available to meet the proposed licence requirement on DNOs to publish a network development statement :

a) inform the market-place generally ;
b) enable developers to identify potential business opportunities ;
c) provide transparency into the cost of network connections.

Work should commence to identify the distribution network information that should be contained in DNOs’ network development statements. Such statements would provide a link to accessing more detailed project specific information.

[Target date : January 2002]

6.4 There needs to be an appropriate balance between the value of the information provided and the cost of providing it. Although it can be argued that in principle the level of a distribution network development statement should be similar to that of the National Grid SYS in depth and width, this may not be cost effective. Distribution systems are much more extensive in length and voltage levels, the loads and network are more dynamic. Consequently, the exercise outlined above should establish a pragmatic and economic balance between the information that is required to be generally available in the public domain and that which would be available on request. [Target date : January 2002]

6.5 There should be a consistent approach across DNOs to the provision of information and to the connection application process. DNOs, together with other users, should work together to agree a standard format for the presentation of information including bringing forward general connection guidelines for Embedded Generation. The guidelines should clarify the roles of developers and DNOs and help to set standards both for the quality of information submitted by developers but also the quality of the response from DNOs. [Target date : January 2002]

Future Network Design, Management and Business Environment

(See Annex 7 for Rapporteurs’ Paper)

Regulation and Incentives

7.1 The right commercial and regulatory framework has to be in place if the appropriate practical changes are to be made to the way networks are designed and operated. The key issues that arise when considering the implications of introducing embedded generation into distribution networks are :

• Uncertainty about possible future changes in the regulatory process and incentives
• Future treatment of DNO business costs ;
• Lack of incentives to establish a local ‘ancillary’ services market ;
• Treatment of connection charges ;

7.2 The effects of seeking a level playing field through regulation or imposing measures to meet Government targets will be quite different. Pursuing regulatory measures will cause differences to the design and management of distribution networks. But it may not by itself result in targets for embedded generation being met on the timescales that Government presently envisages."

7.3 There is a range of possibilities for creating the right business environment that would encourage change in the approach to embedded generation and load management. At one end of the spectrum is an open market environment - whilst at the other is a more rigid regulatory framework with regulatory requirements to connect additional embedded generation capacity.

7.4 The rapporteurs' paper illustrated one such approach to the open market environment:

• Increasing the certainty of the regulatory process;
• Creation of a local ancillary and security services market;
• Moving towards a more performance based regulatory system;
• Creating opportunities for increasing DNO revenue;
• Changing the generator and load management connection charging mechanism.

7.5 At the other end of the spectrum is an imposed regulatory requirement, which could be adopted to provide the necessary funds. Options considered include :

• a reward for each MW of Renewable or good quality CHP generation connected, and/or
• a reward for each MWh (Renewable or good quality CHP) generated - or indeed each MWh of load consumption saved.

7.6 A practical solution somewhere between these two extremes is likely. One approach would be for DNOs to discuss with Ofgem proposals which would facilitate, and hence pave the way for increased levels of embedded generation.

7.7 In order to meet the Government's targets, embedded generation and demand side management needs to be considered as an integral part of the distribution and transmission network design and operation. It is appropriate to consider a wide range of changes to stakeholder behaviour which might include :

• A move from the present system of DNO incentives which is biased towards capital assets to a system which is neutral towards assets employed or operating costs and where DNOs are rewarded for performance to a higher degree than at present ;
• embedded generators - together with the other stakeholders - designing their plant to be more controllable, provide integrated voltage control and develop commercial arrangements to accommodate constraints, to provide security etc;
• Suppliers developing tariff and metering arrangements to facilitate active load and generation management;
• The operator of the high voltage transmission network adapting its agreements with DNOs so that any impacts on the transmission system from the connection of a new embedded generator can be managed without the need for additional agreements with the operator of the high voltage transmission network. (In this way an embedded generator may benefit from having only a single point of contact with its host network operator.)

Potential Technical and Operational Developments

7.8 The sub-group considered a range of possible technical solutions for future network design and management. Introducing embedded generation into distribution networks has technical implications in four key areas:-

• Fault levels : The presence of generation in urban areas can increase current fault levels above plant capabilities;.
• Voltage control : Generation connected to rural 11kV circuits tends to increase voltages, potentially above statutory limits;.
• Load flows : Inappropriately sized generation connected to the network can cause power flows to exceed plant capabilities and/or affect network losses adversely;.
• Network security : The current methodologies for connecting embedded generation ensure that the security of the overall network is maintained – but at a cost to developers. These methodologies could change if networks were managed differently. Operation of generation in island mode could bring security benefits under outage conditions.

7.9 If given suitable incentives, DNOs could invest in their network to maximise the potential for connection by embedded generators. This might include :

• Strengthening the network to accommodate new generation output while remaining within acceptable fault levels;
• Changing the network’s configuration so as to allow more flexible operation of embedded generation under fault conditions;.
• Introducing new technology such as :
• super conducting fault level limiters,
• energy storage technologies including batteries, super conducting magnetic energy storage, flywheels, and capacitors.
• Utilising technology in the home, including energy efficient lighting and appliances, and PV, fuel cell, Stirling Engine technologies etc
• A much greater use of communications to allow for more accurate balancing of generation and demand over the network at local levels and in real time.

DNOs are best placed to manage both these processes as a business opportunity but the right commercial framework must be in place to facilitate this .

7.10 The sub group recommended that :

• Ofgem ensures that the regulatory regime supports and incentivises DNOs to meet their obligations to facilitate competition in supply and generation. This should focus on those aspects which dominate DNO business :
• a clear framework on regulation and incentives on DNO;s
• generation connection charging principles.
• The industry establish commercial mechanisms to support technical innovation;.
• Government should establish a strategic co-ordinated approach to research and development across all the stakeholders. To that end, a long term issues group should consider how to take forward these recommendations and :
• further investigate the issues;,
• assess their materiality in terms of contribution to the government’s targets and impact on stakeholder businesses;

- with a view to preparing a report in Autumn 2001 making detailed recommendations of how to move the key longer term issues forward. (Implementation would take longer - say over the period up to and beyond 2005. )

7.11 Network operators have indicated they would welcome discussions leading to definite proposals to address these issues. It will be essential that all stakeholders participate openly and fully in this.

7.12 While demand management does not fall within the terms of reference of this group, customers, distributors and suppliers may wish to make use of such measures rather than additional generation in order to achieve energy savings. When taking forward any changes in respect to embedded generation, stakeholders should also consider demand side measures.

Relative Materiality and Possible Timetable

8.1. The detailed recommendations are set out in sections 2 to 7 of this Chapter and in the rapporteurs’ papers. The impact of the recommendations varies - as does the urgency and the possible timescales for implementation. Many changes can be implemented quickly. Others will take longer to achieve, requiring significant planning and further assessment.

8.2. Work needs to start now - before the next distribution price control review, which is due for implementation from 2005. This requires a co-ordinated programme of work to be initiated which will require commitment by all parties. In particular clear statements of intent by Government and Ofgem are essential - both in respect of the programme itself and in respect of the future basis for incentivising DNOs.

8.3. In deciding a definitive timetable, Government and Ofgem will have to balance the practical effects on all parties with the need to get the changes in place so as not to constrain Government targets for renewables and CHP. There may be extra costs involved in implementing changes quickly. The implications of this for companies and customers will have to be balanced against the benefits of embedded generation.

8.4. A provisional distribution development and implementation programme could follow a timetable such as that below:

(1) - unless otherwise indicated the main action lies with OFGEM
(2) - Comment boxes relate to the actions above the box

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