Impact of demand side response (DSR) arrangements on independent distribution network operators (IDNOs) and independent connection providers (ICPs)
Agendas, minutes and presentations
- Publication date
- Industry sector
- Distribution Network
Background
1.1. Distribution Network Operators (DNOs) currently compete with IDNOs1 and ICPs2 to provide new connections to customers. New connections provided by DNOs, IDNOs or ICPs may require upstream network reinforcement due to constrained capacity on the network. This upstream reinforcement is normally carried out by the DNO and can add to the cost of a new connection. However, DNOs are undertaking a number of activities to manage increases in load on the distribution system without having to undertake network reinforcement. These activities include innovative means such as demand side response (DSR).
1.2. DSR involves the DNO contracting with a network customer to constrain their demand at certain times. DNOs can enter into these types of arrangements to mitigate the cost of upstream reinforcement.
Concern regarding competition in connections
1.3. We were concerned that because ICPs and IDNOs do not have the same visibility of the DNO’s distribution system (particularly the willingness of existing customers to enter into DSR arrangements),this could have an impact on the level of competition they would be able to provide in the provision of new connections to customers. This issue is summarised here:
STEP 1 - Customer goes out to tender for an electricity connection.
STEP 2 - Customer receives offers from DNO,IDNOs and ICPs.
STEP 3 - However, the DNO provides two quotes: one with DSR to the customer and one to the ICP/IDNO. The IDNOs and ICPs would be more expensive when passed to customer.
STEP 4 - Customer ocntacts DNO to deliver network connection because it is the lowest option.
STEP 5 - IDNOs/ICPs lose work because their offers are higher cost.
1.4. The prices DNOs charge for the provision of a connection are controlled or regulated in three ways: the Common Connection Charging Methodology (CCCM); price control incentives; and the Competition Act.
CCCM
1.5. The CCCM sets out the principles on which customers will be charged for connections. It sets out that DNOs must, unless requested otherwise by the customer, charge in accordance with the minimum cost scheme. This is defined as the scheme with the ‘lowest capital cost’ required to provide the connection. Work stream 6 have highlighted that DNOs may want to remove the word ‘capital’ from this definition in order to remove any possibility that it restricts the use of DSR. Notwithstanding this, if DSR is available as an option to provide a lower cost connection, the DNO is bound by the terms of the CCCM to include it in the connection offer.
Price Control Incentives
1.6. In addition to the CCCM DNOs must work within the bounds of the price control settlement. Unless a connection is for sole use assets, the costs of connection are split between the connecting customer (who pays in accordance with the CCCM) and all other customers through the price control settlement. This is known as a ‘shallowish’ connection boundary. In terms of the price control settlement, DNOs are subject to an efficiency incentive. The effect of this means that where a licensee makes a saving against the ex-ante allowance set at the price control review, it gets to keep a proportion (around 50%) of the saving, with the remainder being returned to consumers. Equally, if DNOs overspend against their ex-ante allowance then they must fund a proportion (around 50% themselves) with the remainder being funded by customers. This should encourage DNOs to keep the costs of increasing network capacity down and to use DSR where it is efficient to do so. Consequently, it will always be in the DNOs interest to offer the DSR arrangement to whichever customer requests connection.
Competition Act
1.7. In addition to the above regulations and incentives on costs of connection, under the Competition Act (1998), DNOs are not allowed to treat customers differently if they have decided to use an ICP or an IDNO to provide a connection. Put simply, if a DNO provided a quote to a customer for upstream reinforcement, for a connection it was providing, any quote that it gave to an ICP should be the same. Where the DNO offers a different quote in an attempt to gain a commercial advantage this would be a contravention of the Competition Act.
Conclusions
1.8. We consider that the changes to the CCCM, the price control incentives and legislation in the Competition Act (1998) protect the interests of consumers:
- the CCCM sets out the basis on which customers should be charged and that this should be same for all customers;
- the efficiency incentive within the price control places a strong incentive on DNOs to offer the lowest cost of connection to all customers; and
- the Competition Act (1998) prevents DNOs taking unfair advantage of their dominant position.
1 IDNOs own and operate electricity distribution networks which will predominately be network extensions connected to the existing distribution network, eg to serve new housing developments.
2 An ICP is an accredited company that is entitled to build electricity networks to the specification and quality required for them to be adopted and owned by a DNO.