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United Kingdom

Vital market structure changes identified -- First moves to clear the way for distributed generation

The UK will not meet its targets for renewable energy and combined heat and power unless changes are made to the way local distribution networks are run and regulated, warns a working group set up to boost electricity production by small and renewable generators.

A review of regulatory incentives on distribution companies to encourage competition in generation, changes to their charging structure, and a new approach to designing transmission networks are key recommendations of the government appointed Embedded Generation Working Group (EGWG). The group, comprising representatives from government, the electricity regulatory office, embedded generators, network operators and consumers, was set up in March 2000, led by Brian Wharmby from the British energy regulator OFGEM.

In its report published in mid January, the group identifies the problems for small generators in gaining access to regional electricity networks. This is a particularly important issue for renewable and combined heat and power (CHP) plant which need easy low cost access for their projects to be viable. The report warns that without changes the government will not meet its targets for CHP and for 10% of the UK's electricity to come from renewables by 2010. It puts forward a series of initial recommendations and a proposed timetable for the changes. It aims to spark a consultation leading to the group's final recommendations in early spring.

Historical barrier

Many of the obstacles to distributed generation "embedded" in local electricity grids are due to the way the network was developed in the pre-liberalisation era of large centralised generation and to the current regulatory incentives on distribution network operators (DNOs). As a result there is little spare capacity on the network in rural areas. This limits connection of new renewables such as wind, and the network design does not recognise the variable nature of renewable generation or reward embedded generation's contribution to the network.

Furthermore, embedded generators have to shoulder the full costs of grid reinforcement resulting from their connection, while renewable generators are unable to determine the charges beforehand because of a lack of information on the best and worst sites for connecting into the distribution network. Lastly, in the present regulatory structure, DNOs receive no financial or operational benefit from embedded generation.

Change demanded

In the short and medium term, the report calls for OFGEM to change the structure of regulatory incentives on DNOs. In particular, it suggests a new charging regime for connections to networks that will reflect the duty of DNOs to facilitate competition in generation as well as supply. This would mean moving from the current "deep" connection charges, which include the costs of any necessary network reinforcement as far as the local grid supply point, to either "shallow" charges where the generator pays only for the connection as far as the local network, or "shallowish" charges, which also include necessary reinforcement up to one voltage level above that of the connection.

To pay for the reinforcement costs of a shallower charging policy, the DNOs could move to a new regime of use of system charges. The report calls for a new charging policy by January 2003.

It also recommends that DNOs provide more information on the effects of location on connection charges and calls for OFGEM to review incentives on DNOs to reward the contribution of embedded generation to network security and performance. The report advises a simpler connection and payment structure for domestic and micro generation -- possibly involving net metering.

Action now

While some of the report's recommendations can be implemented quickly, others will need considerable planning and further assessment to achieve, says the report. It calls on the government to set up an implementations group to decide how to take forward its recommendations for the longer term. "Work needs to start now -- before the next distribution price control review, which is due for implementation from 2005," states the report.

The response of energy minister Helen Liddell to the report appears positive. "It is vital that we help developers and operators of environmentally friendly embedded plants such as CHP and renewables gain fair access to the distribution network at fair prices. This report makes a significant step on the road to achieving that." She adds she is impressed by the degree of consensus reached by the group, given the wide range of interests involved.

"Consumers are increasingly demanding green sourced electricity. At the same time, cost effectiveness of smaller generation plants is improving all the time," she continues. "Measures to improve electricity production from embedded generators will make a valuable contribution to the government's target of producing 10% of electricity from renewable sources by 2010."

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