would face greater regulatory scrutiny. The
outcomes-based framework of Ofgem’s RIIO
regulatory model sought to address these issues.
Efficient offshore transmission will be vital to
achieve decarbonisation in the UK, with investment
requirements to 2030 estimated at £8-20 billion,
perhaps even exceeding onshore investment needs.
To achieve this, Ofgem developed a new offshore
transmission investment regime. Windfarm developers plan and build offshore transmission assets,
which they are then obliged to divest as part of the
European Union’s unbundling directives. Competitive auctions are then held for the rights to own
and operate these offshore assets, known as offshore transmission licences. Licences are allocated
to offshore transmission owners (OFTOs), who are
required to be independent of both onshore TOs
and offshore wind generation developers. Ofgem’s
decision not to extend National Grid’s onshore
transmission monopoly to offshore assets was
based on a desire to promote competition and
achieve more efficient outcomes. National Grid
subsidiaries may participate in offshore transmission auctions but separated from National Grid’s
existing TSO business to avoid unfair advantages
through its privileged position as system operator.
Interconnections with continental Europe and
Ireland are largely owned by National Grid,
alongside overseas partners. These assets are
mainly governed by European Commission
directives which determine operational and revenue models. As interconnectors are not classified as either demand or generation, they are
exempt from transmission tariffs. This can lead to
suboptimal siting signals and a lack of coordination between interconnection assets and
onshore transmission planning and investment.
(3) Level of locational pricing
Transmission charges, known as transmission
network use of system (TNUoS) tariffs, are set to
provide efficient economic signals to grid users
by reflecting the additional costs TOs incur in
serving them. While electricity in England and
Wales lacks full nodal pricing of the type seen in
PJM and some other regions, TNUoS tariffs have
a locational component which aims to reflect the
difference in cost impacts users have at different
locations in the grid.
The location varying element of TNUoS tariffs aims to capture the investment, maintenance
and operating costs of connecting different
locations in the transmission grid. Tariffs are
derived from the DC load flow investment
cost-related pricing (DCLF ICRP) transport
model. TNUoS tariffs also have a non-location
varying or residual element, to recover the costs
of historical investment.
The TNUoS pricing regime has been criticised
for having a high degree of cost socialisation,
with around 75% of system costs recovered from
the flat residual tariffs. A high degree of cost
socialisation leads to inefficient siting signals, as
the TNUoS tariffs faced by generators do not
adequately reflect the cost of providing them
with transmission services.
(4) Modernising network arrangements
In July 2017, Ofgem published a plan setting out
future actions needed to deliver a smarter, more
flexible energy system. In this plan, Ofgem set
out its intention to facilitate the participation of
both storage and demand response in the electricity system:
• Facilitating the participation of storage. Ofgem
commits to review network charges for electricity storage, which currently incur network and
balancing charges for generators and consumers,
despite its role in reducing the requirement for
new network investments. Ofgem also commits
to define storage in primary legislation and to
clarify its regulatory status within the electricity
system and planning regimes.
• Facilitating the participation of demand
response. Ofgem commits to allow revenue
stacking between the capacity market and
ancillary services market, following concerns
that market rules prevented demand-side
response providers from participating in
both markets; and to reform the balancing
mechanisms (the procurement mechanism for
residual balancing) to allow virtual power
plants to participate directly in energy supply
Special Report 1: A Study of China’s Energy Supply Revolution
115
outcomes-based framework of Ofgem’s RIIO
regulatory model sought to address these issues.
Efficient offshore transmission will be vital to
achieve decarbonisation in the UK, with investment
requirements to 2030 estimated at £8-20 billion,
perhaps even exceeding onshore investment needs.
To achieve this, Ofgem developed a new offshore
transmission investment regime. Windfarm developers plan and build offshore transmission assets,
which they are then obliged to divest as part of the
European Union’s unbundling directives. Competitive auctions are then held for the rights to own
and operate these offshore assets, known as offshore transmission licences. Licences are allocated
to offshore transmission owners (OFTOs), who are
required to be independent of both onshore TOs
and offshore wind generation developers. Ofgem’s
decision not to extend National Grid’s onshore
transmission monopoly to offshore assets was
based on a desire to promote competition and
achieve more efficient outcomes. National Grid
subsidiaries may participate in offshore transmission auctions but separated from National Grid’s
existing TSO business to avoid unfair advantages
through its privileged position as system operator.
Interconnections with continental Europe and
Ireland are largely owned by National Grid,
alongside overseas partners. These assets are
mainly governed by European Commission
directives which determine operational and revenue models. As interconnectors are not classified as either demand or generation, they are
exempt from transmission tariffs. This can lead to
suboptimal siting signals and a lack of coordination between interconnection assets and
onshore transmission planning and investment.
(3) Level of locational pricing
Transmission charges, known as transmission
network use of system (TNUoS) tariffs, are set to
provide efficient economic signals to grid users
by reflecting the additional costs TOs incur in
serving them. While electricity in England and
Wales lacks full nodal pricing of the type seen in
PJM and some other regions, TNUoS tariffs have
a locational component which aims to reflect the
difference in cost impacts users have at different
locations in the grid.
The location varying element of TNUoS tariffs aims to capture the investment, maintenance
and operating costs of connecting different
locations in the transmission grid. Tariffs are
derived from the DC load flow investment
cost-related pricing (DCLF ICRP) transport
model. TNUoS tariffs also have a non-location
varying or residual element, to recover the costs
of historical investment.
The TNUoS pricing regime has been criticised
for having a high degree of cost socialisation,
with around 75% of system costs recovered from
the flat residual tariffs. A high degree of cost
socialisation leads to inefficient siting signals, as
the TNUoS tariffs faced by generators do not
adequately reflect the cost of providing them
with transmission services.
(4) Modernising network arrangements
In July 2017, Ofgem published a plan setting out
future actions needed to deliver a smarter, more
flexible energy system. In this plan, Ofgem set
out its intention to facilitate the participation of
both storage and demand response in the electricity system:
• Facilitating the participation of storage. Ofgem
commits to review network charges for electricity storage, which currently incur network and
balancing charges for generators and consumers,
despite its role in reducing the requirement for
new network investments. Ofgem also commits
to define storage in primary legislation and to
clarify its regulatory status within the electricity
system and planning regimes.
• Facilitating the participation of demand
response. Ofgem commits to allow revenue
stacking between the capacity market and
ancillary services market, following concerns
that market rules prevented demand-side
response providers from participating in
both markets; and to reform the balancing
mechanisms (the procurement mechanism for
residual balancing) to allow virtual power
plants to participate directly in energy supply
Special Report 1: A Study of China’s Energy Supply Revolution
115