The Energy system is continuing to undergo a radical transformation as DNO’s play a huge part in driving decarbonisation and digitalisation to achieve our net zero targets. With the need for increased investment into the electricity network due to the electrification of heat and transport, the current charging arrangements enforced by the DNO’s are no longer effective and, after an extended consultation period, Ofgem are implementing a change to the procedure that electricity network operators follow for calculating connection charges from 1st April 2023.
The Significant Code Review Ofgem have completed confirm that a package of changes are being released to enable competition, innovation and decarbonisation at the lowest costs possible. One of the objectives set by Ofgem was to ‘Reduce the overall connection charge faced by those connecting to the distribution network’, this involves changing how different parties access and pay charges for the electricity network.
How it currently works
There’s a lot of jargon out there so we’ve tried to summarise it into something informative and concise to help you understand what it means for your current and future developments. Generally, connections will either require the installation of new assets to extend the existing network for your developments (‘Extension Assets’) or, the connection will require the DNO to upgrade or expand the capacity of the existing shared network assets to facilitate a new connection (‘Reinforcement’).
Currently, if the DNO require any upgrade works to facilitate the required capacity for your developments, they will include reinforcement costs to the Point of Connection Offer, which, depending on the type of reinforcements required, is either partially or fully payable by the connecting customer. Depending on the size of the development and demand required, these charges can range from thousands of pounds to millions, a continual source of frustration for developers! These reinforcement works are often described as upgrading substations or replacing cables.
So what will change?
The above table shows the new charging boundary’s where reinforcements are required. Extension to assets will and the process of the non-contestable costs associated will continue as they currently are. As you can see, the reinforcement costs under the new arrangement are fully funded by the DNO via DUoS charges (the proportion of our electricity bills that is payable to the DNO’s). Essentially, under the new arrangement, most reinforcement costs will be recovered through the network charges that form part of all electricity bills.
What’s the catch?
This is great news for developers as in most cases it should mean a reduction in electricity connection charges. However, there is a threshold which, when crossed, means an amount of reinforcement costs are to be paid by the developer.
The ‘High-Cost Cap’ has been set by Ofgem at £1,720 per kVA. To break it down, if you applied for 1000kVA then your threshold for reinforcement costs would be £1,720,000.00. If any part of your Point of Connection Offer covers reinforcement costs, providing it is below the threshold, will not be chargeable to you.
Any reinforcement costs that exceed the threshold will be payable by the customer. So, if your threshold was £1,720,000.00 and the reinforcement costs came in at £2,000,000.00 you would pay £280,000 of reinforcement costs.
To help show how the High-Cost Cap works we’ve put some examples below:
*Taken from existing DNO offers as an example
This High-Cost Cap may seem high but was determined from DNO data and is designed to only capture the extreme outliers in terms of cost vs required capacity. Only 5% of offers, for each DNO, in the last 5 years would have been affected by reinforcement costs under this new legislation.
The other scenario where these changes will not apply is when the DNO deems a development as speculative. Under current practices, a development is considered speculative when either:
- The detailed load requirement are not known
- The development is phased and the timing of the phases is unclear
- The capacity required caters for future expansion rather than immediate requirements
Ofgem have asked the DNO’s to provide clearer descriptions of what constitutes a development to be speculative which is still yet to be published however, if you can show your requirements and clear intentions of a build programme, this is usually sufficient enough for the DNO’s to apply reasonable discretion.
We are already seeing some DNO’s asking for landowner details and detailed phasing plans and we anticipate the DNO’s to be asking more up front questions upon receipt of our connection applications. It is worth remembering that the reasoning for no changes to speculative developments is to protect the bill payers DUoS charges – all users of electricity would end up paying costs towards reinforcements for a development that may not materialise!
What does this mean for existing applications and offers?
You may be wondering if it would be beneficial to wait until 1st April to submit any applications where you suspect reinforcements to be required or to let current offers with reinforcements expire and there are both pro’s and con’s for doing this. Ofgem have confirmed existing and in-flight (offers waiting to be quoted) connection applications can be cancelled or left to expire and to reapply after the 1st April should you wish to take advantage of the changes to the reinforcement.
However, you will loose your position in the connection queue, ultimately impacting your required connection dates and you run the risk of loosing your existing point of connection and current solution. If you have offers with reinforcements that are interactive before the 1st April (a process where multiple applications make use of the same part of the network but not all connections can be connected without reinforcement or another commercial solution) and you are unsuccessful in the interactivity process then you can still reapply and retain your queue position but, providing the new application is after 1st April, will be subject to the new terms of the connection agreement.
What happens next?
If you have any questions or are unsure about what this means for your current developments then please contact either your UKPS representative or one of our team at email@example.com who are on hand to assist and advise.
These changes will come into effect from 1st April 2023, we will be monitoring for updates from the DNO’s and attending stakeholder events to ensure we are in the best position to provide the most cost effective solution for you. In the meantime, there are some links to some useful resources listed below: