Price Signals from the Electricity Distribution Networks

Miss Rita Shaw, Electricity North West / University of Surrey 

The paper/ poster explores the current regulatory framework around network pricing and discusses the extent to which this is ‘cost-reflective’.

The fourteen electricity Distribution Network Operators (DNOs) provide distribution network services to all the demand and generation customers connected to their networks. Each DNO’s total income is fixed by a price-control regulatory system set by Ofgem. The DNOs set charges for connection and use-of-system in order to recover their allowed income. Their charging methodologies must meet licence obligations to ensure that their charges support development of an efficient distribution system, facilitate competition and, as far as practicable after considering implementation costs, reflect the DNO’s costs. Altogether the charges should provide the right signals to network users about network costs.

The issue of fair and cost-reflective pricing was raised by the Sustainable Development Commission’s in-depth review of Ofgem, published in September 2007. The review suggested changes to the structure of transmission and distribution network charges to favour low-carbon generators. One suggestion was a discount on network charges for low-carbon electricity generators. Another was a change in the balance of distribution network charges between units distributed (kWh) and peak power demand (kW). These were raised in the context of sites using low-carbon generators to reduce their demand for electricity from the network. The paper analyses these recommendations and identifies a danger that the suggested charging structure would neither reflect the cost of providing the network service nor the reduction in external environmental cost from these generators.