Structure of Electricity Distribution Charges Welcome and Introduction

1. Structure of Electricity Distribution ChargesWelcome and Introduction Charles Gallacher Deputy Director, Scotland

2. Format and objectives • Main purposes of the workshop: - overview of Ofgem’s June 2003 consultation ‘Structure of electricity distribution charges: Initial conclusions’ - facilitate open debate about the future of the project - opportunity for wider audience to influence the debate • London workshop held 15 July

3. Agenda • 10.40 Structure of electricity distribution charges – Proposals and implementation James Richardson • 11.00 DPCR 4 and incentives for distributed generation Martin Crouch • 11.15 Q&A session • 12.00 Lunch • 12:45 Workgroup session • 15:00 Close

4. Workgroup Session • Connection charging issues • Introducing generator distribution use of system (GDUoS) charges • Change management and co-ordination • Impact of proposals on Scotland • AoB

5. Promoting choice and value for all gas and electricity customers

6. Structure of Electricity Distribution ChargesProposals and Implementation James Richardson Distribution Policy Team

7. Introduction • Background • June 2003 ‘Initial conclusions’ document – key proposals • Links with other work • Implementation

8. Background The structure of charges project has three key aims: • To review the charging principles established by the Electricity Council in the early 1980s; • To establish a transparent and consistent boundary between connection and use of system charges for all network users; and • To establish a robust framework for generator distribution use of system (‘GDUoS’) charges.

9. Background - continued • December 2000 – initial consultation document setting out the main background and key themes • March 2002 – proposals on interim measures for DG • October 2002 – structure of charges update document • February 2003 – industry workshop • June 2003 – ‘Initial conclusions’ document

10. Background - continued • Workshops - 15 July in London - 24 July in Glasgow • Responses to June 2003 document requested by 8 August • Project enters ‘implementation’ stage

11. 15 July London Workshop - key outcomes - Review has delivered sound proposals - Now is the time to move from ‘Review’ to ‘Implementation’ Major challenges: - Designing and implementing GDUoS regime - Timescales: introducing SoC proposals by April 2005

12. ‘Initial conclusions’ document Key themes: • Charging principles • Charging methodologies • Connection boundary • Use of system • Transitional arrangements • Implementation • Regulatory impact assessment

13. ‘Initial conclusions’ document Charging principles • October 2002 document proposed that common charging principles should be recognised and applied across similar networks: - cost reflectivity; - simplicity; - ease of implementation; - transparency; and - predictability • Responses to the document supported these principles

14. ‘Initial conclusions’ document Charging methodologies • June document proposes that DNOs should be required by licence to set out a methodology that: - facilitates competition in the generation, transmission, distribution and supply of electricity; - leads to changes which, as far as reasonably practicable (taking into account implementation costs and the impact on competition) reflect the costs and benefits incurred by DNOs in such a way as to encourage efficient decisions by network users; and - is capable of evolution over time to reflect changing network characteristics and commercial arrangements

15. ‘Initial conclusions’ document Connection Boundary • Previous consultation responses have indicated strong support from industry for: - common boundary applying to all connections - shallower connection charges for DG • Guided by the common principles, the June document proposes: - ‘shallow’ charges for EHV (33kV and above) connections and locationally varying use of system tariffs - ‘shallowish’ charges for HV and LV (less than 33kV) connections – retaining locational signals – and simple use of system tariffs

16. Full cost “Deep” Partial cost “Shallowish” Sole user cost “Shallow” Zero cost Boundary with transmission network Reinforcement General system General system General system HV Transformer Transformer Transformer Reinforcement New assets New assets New assets LV Transformer Boundary with connectee

17. ‘Initial conclusions’ document Connection Boundary – Issues: • Define reinforcement contribution rule for ‘shallowish’ connections - de minimis rule e.g. if connectee does not exceed 25% of existing capacity no reinforcement contribution - when de minimis rule exceeded: - connectee charged for the proportion it uses of marginal increase in capacity? - connectee charged for the proportion it uses of the total capacity? - other? • Need for contribution rules for other impacts e.g. upon fault level? • Abolish Tariff Support Allowance and Capitalised Operation & Maintenance

18. ‘Initial conclusions’ document Use of system • Shallower charges will require the remainder of the connection and O&M charges to be recovered via ongoing use of system charges • June document proposes the introduction of use of system charges for generation (‘GDUoS’) Issues • who pays – suppliers or generators? No change to the balance except where cost reflective • network services – what services should GDUoS recover? • should charges reflect forward or backward looking costs?

19. ‘Initial conclusions’ document Transitional arrangements • Options for a transitional regime - no exemptions after April 2005 - exempt pre-existing generators for a period of time e.g. until 2010 or for 15 years - make pre-existing generators liable for GDUoS from April 2005, but offset the charge with a lump sum or annualised rebate of the reinforcement and capitalised O&M elements of their connection charge - another option?

20. Links with other work • DPCR4 - structure of charges proposals will affect DPCR 4 decisions • Distributed Generation Co-ordination Group - joint Ofgem/DTI group that is aiming to facilitate the achievement of the Government’s targets for renewable generation and CHP

21. Implementation • Important interaction with DPCR4 – structure of charges proposals scheduled to come into effect April 2005 • ‘Implementation Steering Group’ (ISG) to be established in August and to hold first meeting in September • Ofgem’s October 2003 ‘Initial decision’ document will firm up the proposals in the June document, and discuss the issues of GDUoS, transitional arrangements and implementation in detail

22. Implementation Timetable • 8 August – Responses due • August 2003 – ISG formed • September & October 20003 – First and second meetings of ISG • October 2003 – ‘Initial decision’ document published • July 2004 – ‘Implementation update’ document published • April 2005 – new regime implemented

23. Implementation Steering Group • Group to be chaired by Ofgem • Aim of the ISG will be to steer the implementation stage of the project - generating ideas, discussing proposals and making recommendations • ISG will provide a forum for discussion, but will not act as a formal decision making body and will not preclude a full consultation on the issues • Ideally group will consist of approximately 12 individuals (plus Ofgem), representing all industry sectors and representatives of all DNO groups

24. Implementation Steering Group • First meeting of the group in September 2003 • Agenda • Terms of reference • DNOs to set out proposed approach • All parties to discuss requirements of Ofgem • Second meeting in October 2003 • Thereafter group to meet approximately bi-monthly • Possible expert ‘sub-groups’ to support ISG • Draft terms of reference given in June 2003 document

25. Change and Co-ordination • Licence modifications • Introduction of GDUoS agreements? • Revised industry governance arrangements?

26. Implications of the proposals on Scotland • Proposals will facilitate the development of DG in Scotland • Different network characteristics – geographically and voltage level • BETTA

27. Promoting choice and value for all gas and electricity customers