Ofgem's Targeted Charging Review will favour gas power over new renewables, according to new research from Aurora
The government could be forced to release more subsidies for onshore wind and solar for years to come if Ofgem's plans to overhaul grid charges go ahead.
That's according to a worrying new study released today by Aurora Energy Research, which has analysed the impacts of Ofgem's proposed changes under the Targeted Charging Review, and concluded they will favour low-efficiency gas generation at the expense of renewables.
The Aurora paper, which at times directly contradicts the findings from Ofgem's own impact assessment, suggests the deployment of subsidy-free renewables schemes could be severely stymied by the changes. The rollout of smart batteries and demand response schemes will also be delayed, it contends.
"Ofgem's latest proposals surrounding network charges could have a very significant impact on the GB power market," warns Weijie Mak, project leader at Aurora Research and co-author of the report. "Our analysis suggests they would negatively impact the deployment of renewables - holding back subsidy-free deployment by two to five years, and undermining the achievement of decarbonisation targets."
Ofgem launched the Targeted Charging Review in 2017, proposing a series of changes to the current system of electricity network charges amid fears the rising costs of running the network were becoming increasingly concentrated among a handful of larger generators.
"The costs of maintaining the network have been increasing over time, but the sub-set of players in the system responsible for paying these network charges has actually decreased," Mak tells BusinessGreen. "And the reason for this is that a lot of the smaller generators have basically put themselves in the distribution network or behind the meter - what that means is that they are no longer required to pay network charges."
"So on the one hand you have higher network costs, but on the other hand you have less people paying it. That means that the people left to pay it have to pay a larger share."
Ofgem announced in November that it is minded to change the current system so charges are spread more evenly across all levels of the electricity network. But these changes will adversely affect clean energy generators, according to Aurora.
Mak explains that while Ofgem concluded in its own assessment of the changes that renewable generators would not be adversely affected, when Aurora considered the proposals in the context of the entire energy system they found it could reduce internal rates of return for onshore wind and solar by up to two per cent over the lifetime of a project.
"What this [Ofgem] review does is that, firstly on the revenue side, it decreases the revenues of renewables because it affects the wholesale market price, and on top of that it also affects the costs for renewables because some of these renewables which are connected to the distribution networks are actually exempt from some network costs today," Mak says. "With the proposed reforms they will now be liable for network costs that they were previously not paying. So you see an increase in network costs for the assets as well."
Facing increased costs to connect to the network, renewables such as onshore wind and solar may well become uneconomical to build without more subsidy from government, Mak warns. The reason this was not factored in to Ofgem analysis, he argues, was because Ofgem assumed the government would step in to ensure renewables deployment continues in line with climate targets.
"Ofgem is basically assuming that if [the review] negatively impacts renewables then the government will step up their subsidy spending to ensure that this is not the case," he says.
This would likely mean re-opening Contracts for Difference auctions to onshore wind and solar - currently the mechanism effectively only provides subsidy for offshore wind renewables projects.
Even offshore wind, with its subsidy framework in place, does not escape unscathed. According to the Aurora research, bids in upcoming CfD auctions will need to be raised by £2 per MWh to offset the cost of the proposals on generators.
Meanwhile, gas generators can offset the extra costs from the changes by bidding into the Capacity Market, which provides extra payments for generators that can provide extra power during times of peak demand on the grid. Such a route is rarely available for renewables because of the intermittency of their generation, while batteries would also struggle to recoup their losses through the Capacity Market due to their low de-rating factor, Aurora says. The Capacity market is currently suspended due to a legal dispute, but the government has stressed it is keen to get it up and running again as soon as possible.
In response to the research Ofgem said it is "considering all responses to the TCR consultation, including the Aurora report, before making a final decision on TCR later this year".
But if it presses ahead with its plans, Mak warns that it could deal a further blow to the renewables and smart energy operators, in the wake of cuts to 'embedded benefits' payments last year and the closure of the feed-in tariff subsidy scheme. Falling technology and deployment costs may offset some of the impact, but that is unlikely to make up the total shortfall, he warns.
If Aurora is right, it seems that if the UK is serious about growing its green grid either Ofgem will need to rethink its plans, or the government will have to stump up more cash.
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