The Association for Decentralised Energy (ADE) asked NERA Associate Director Richard Druce and Consultant Dr. Laura-Lucia Richter (in conjunction with London Imperial College) to review an Open Letter published by Ofgem on 23 July 2016 on charging arrangements for embedded generation. Ofgem’s letter seeks views on the case for potential reforms of so-called “embedded benefits,” which are part of the charging arrangements for access to the electricity transmission system in Great Britain.

While Ofgem’s Open Letter discussed a range of different areas of network charging policy, its main concern appears to be potential problems with current Transmission Network Use of System (TNUoS) arrangements, through which the transmission owners recover transmission infrastructure costs. NERA’s report focuses on reviewing the case for reform of TNUoS charges, including the specific reforms currently proposed, which purport to address some of the concerns raised in Ofgem’s Open Letter. The authors conclude that the TNUoS methodology contemplated in Ofgem’s letter—i.e., the notion that the demand TNUoS charge can be split into the locational element of the charge that is cost-reflective and the residual charge that represents a charge to recover the “fixed/sunk” costs of the network—is not only weak but is also entirely unjustified.