Carolina Escudero, Senior Project Manager, Power Systems, Ramboll
The UK’s current path to net-zero has seen an increased reliance on the electricity system. Projects regarding electrification of heat, power-to-x and electric mobility require large electricity connections to the distribution network to support their processes. Compounded with the needs of other energy intensive industries such as data centres, the electricity distribution grid is under increasing strain. To facilitate the additional capacity needed on the system, significant investment is required on the distribution network.
Although Distribution Network Operators (DNOs) have invested in innovative solutions to these challenges (e.g., flexible connections and active network management), in certain cases a traditional approach is needed, and new capacity needs to be built. Depending on where and how much additional power supply is required, new connections can take anywhere from 8-18 months to potentially 5-10 years where transmission reinforcement is required. Not only are these lengthy timescales on the critical path for decarbonisation projects, but they often come at a high cost.
The cost of a new connection is usually paid for by the customer who is requesting the connection. This customer can be housing developers, data centre owners, district energy developers among others. To obtain the full picture of how much a new connection will cost, the customer requires information from the DNO regarding two key components: non-contestable and contestable works. Non-contestable works can only be done by the DNO as they require specialist skills or relate to work on their existing network. They are primarily composed of the following elements: connection to the network, reinforcement costs and the Electricity Connection Charges Regulation (ECCR). Meanwhile, contestable works relate to all the assets and labour needed from the point of connection to where the new project will be located.
If there is not enough available capacity on the network in the area where the project will be located, the DNO will need to invest in upgrades to create the necessary additional capacity for the customer. In this case, the customer will be liable for either whole or partial costs of the works required to create this capacity. These are called reinforcement costs. Once the non-contestable offer is received, customers may find they are faced with substantial costs to connect (think millions) due to either reinforcement costs or ECCR costs. This “known-unknown” can make or break the project’s electrification business case.
In May 2022, a significant change to these cost arrangements came into force that could save millions of pounds of development budget for electrification customers and potentially accelerate the green transition. So, what has changed, and what does it mean for your electrification project?
What has changed?
In November 2017, Ofgem (the electricity regulator) started reviewing the current connection application process, costs allocation, and assessing if the charging methodologies were fit for purpose for a low-carbon future. In May 2022, Ofgem concluded that the current charging arrangements could hinder the roll-out of electrically-based low carbon technologies. As a result, Ofgem has instructed DNOs to change the way new connections are charged. The proposed changes are planned to be implemented in April 2023[1] .
The main impact of the changes is that instead of a reactive approach, whereby DNOs wait for customers to trigger and pay the reinforcement, the network should be reinforced proactively to create capacity ahead of need. Therefore, reinforcement will not be paid for by the customer connecting to the network.
There will be a difference in approach for large electricity connections as well as generation connections. However, if a demand customer (e.g., housing or district heating developer) requests a connection, the following will change:
- Applications before April 2023: Customer connection offer will include reinforcement costs
- Applications after April 2023: Customer connection offer will not include reinforcement costs (except if a high-cost cap is exceeded)
This means that for most demand projects reinforcement costs that previously could hinder the project’s business case, will not be included in the connection offer from April 2023 onwards.
This change comes as a significant step in ensuring the low carbon transition can be achieved in a cost-effective manner. It will remove a key risk to customers’ and projects’ business cases as well as enabling projects that would otherwise not be feasible due to the high non-contestable cost element. Moreover, the change also enables the DNO to proactively invest in the network to create capacity, instead of waiting for a connection customer to pay for this capacity. This move is expected to result in more capacity being available in the near-future and shortening the time to connect a project. It is hoped that the changes in connection costs will both allow customers to reap the financial savings, and also provide much-needed rocket boosters to the net-zero transition.
For more information, please see links below to the Ofgem website:
[1] Access SCR October 2022 Update – Scottish and Southern Electricity Networks