A new Ofgem review looking at supplier licensing will focus on the financial management of supply companies. It says that “[sic] we are reviewing our approach to supplier licensing, to ensure that appropriate protections are in place against poor customer service and financial instability. This consultation sets out our proposals to strengthen the criteria we use to assess supply licence applications, and amend the process for applying for a licence. We intend to increase ongoing scrutiny and oversight of those already operating in the energy retail markets, and are seeking views on options for achieving this.”
Having worked for many years within the investment banking sector, this sounds like Ofgem have been talking to their counterparts in the Financial Conduct Authority (FCA). In the financial sector ‘capital adequacy’ (also called ‘regulatory capital’) regulations require an institution holds sufficient assets to cover their liabilities. Put simply, you must demonstrate you are able to service the risks you manage, with current regulation requiring capital reserves against market, credit and operational risks.
While a simple and sound principle, the overhead to compliance is considerable. The rules are complicated, and satisfying can require a basket of actions impacting the highest and lowest levels of an organisation. At the highest level, ideas of ownership and oversight must be embedded into the governance framework. Business strategies must be provided, and can be examined in great detail by the Regulator. The practicalities of measuring liabilities (risk) may drive the creation of new processes which must be ’fit for purpose’, all thoroughly documented. New risk measurement methodologies may be required, which have to be designed, tested and implemented. At the lowest level, calculations can involve very large data sets, owned by disparate parts of the institution. Demonstrating data is ’clean’ and fit for use can be an enormous exercise.
It is unlikely that Ofgem would go from a standing start to banking type overhead, but even relatively ‘lightweight’ rules will need be taken very seriously. For new entrants Initial Business strategies will get increased scrutiny, and may need to evidence an increased standard of financial planning. Once operating, standard market risk and credit risk assessments and reporting will be needed perhaps adopting established, standard methodologies from the banking sector. Managing cash is core to solvency, and the interaction between risk, future cashflow expectations and working capital may be a central focus.
But it’s not all downside. Regulatory Requirements should drive improved governance, business planning and risk management. Robust, scalable business strategies should be preferred. Transparent, timely risk measurement and communication supports active risk management, which will in turn support ongoing financial stability. Energy Potential is supportive of these changes. As experts in this area we can help suppliers ensure they have appropriate risk controls in place. If you would like to discuss how Energy Potential can help your business please contact Gary Huish at email@example.com
Ofgem published their consultation on future network charging arrangements on 23 July 2018 (www.ofgem.gov.uk/publications-and-updates/getting-more-out-our-electricity-networks-through-reforming-access-and-forward-looking-charging-arrangements). Within this consultation, Ofgem sets out its intent to consider whether Low and High Voltage generation within Generation Dominated Areas (GDA) should incur a charge rather than always receive a credit, as is currently the case.
To assist embedded generators assess whether they currently connect to a GDA, Energy Potential has compiled an impact analysis. This analysis is based upon data compiled and published by DNOs in 2015 when the issue of GDAs was last considered. Although this data is a number of years out of date, it is probably the best data currently available to provide an indication of whether a primary substation is considered generation dominated and would be captured if Ofgem decide to charge generators in these areas.
The spreadsheet below provides the a list of the primary substations that are considered to be generation dominated. In some cases the MPANs of HV connected generation is also provided. The definition of a Generation Dominated area used is as follows:
I hope this is useful and please contact me directly if you would like any more information on this area: firstname.lastname@example.org
Northern Powergrid has put forward a draft change proposal which will remove the residual charge element of DUoS for the demand side of storage sites connected at low and high voltage. This short paper shows the impact for a 500kW and 1MW storage site by DNO region.
The full paper can be downloaded here:
Energy Potential has put together a thought paper on how the derivation of Distribution Use of System (DUoS) charge could be improved. This paper has been prepared as a submission to the Ofgem led taskforce currently looking at forward looking charges. We highlight a key difference between the methodologies used to set network charges across different voltage levels, and suggest a new probability driven approach that has clear benefits to network users.
The asset cost model used within the Common Distribution Charging Methodology (CDCM) determines the cost of building new network infrastructure, and is the key building block of the methodology. However, the DNO may or may not actually build the new network infrastructure. In the case where the network infrastructure is never built, no cost is incurred, and yet the CDCM model has allocated the majority of this ‘hypothetical’ cost for recovery by network users via unit rates which are avoidable by end users. This is inconsistent with the network charging methodologies used at higher voltage levels where asset costs are recovered weighted by the likelihood that the cost is incurred. Energy Potential believes that incorporating a similar probabilistic assessment around the 500MW model would improve the CDCM with more cost reflective prices that reflect the likelihood that each DNO will incur future capital expenditure.
This new approach could be used to determine the proportion of costs recovered from unit based charges. Unit rates would be higher where there is a greater likelihood of real reinforcement occurring, both across DNOs and by voltage level. Conversely, when reinforcement is deemed unlikely, the benefit to the network company of users changing their consumption pattern is much reduced. The approach would also result in more cost reflective credits to generators which would be higher at voltage levels and/or in DNO areas where reinforcement is more likely to be incurred. Furthermore, the methodology would aid the transition from DNOs to DSOs as it will require Distributors to understand their network reinforcement requirements on a more granular basis.
The full paper can be downloaded here:
From time to time, we post comments on industry change, government policy and other relevant industry issues. Please check back to see our latest updates or enter your email address below to get updates from Energy Potential