1. Distributed generation - Incentivising the distribution network operators
Presentation at REEEP Regulatory Forum, 28 September 2004
Min Zhu, Technical Advisor
Ofgem – GB Gas and Electricity Regulatory Authority

2. Overview Context Challenges for regulation An integrated approach
Way forward

3. GB electricity sector and role of Ofgem
Electricity sector privatised and unbundled since 1989
Generation competitive market
Transmission regulated
Distribution regulated
Supply competitive market
Price control
“RPI-X”
Ofgem’s principle objective:
Protect the interests of present and future customers where appropriate by promoting effective competition

4. Growth in distributed generation
DG capacity
GB government targets
10% renewable energy
10GW of CHP
1990
20 GW ?
10 GW
Uncertainty
Challenges
Risks
Opportunities
1 GW
Year
1993
2004
2010

5. Challenges for regulation
DG growth likely to necessitate significant network investment
Current regulatory arrangements
deep connection charges  potentially inefficient cost barriers
obligations for distribution companies to connect  no incentives for proactive and efficient network reinforcement
Changes required to deliver
efficient & effective locational signal to network users
positive incentive for distribution companies to respond

6. An integrated approach
Structure of distribution charges
moving from deep to shallower connection charges
introducing generator use of system charges
Distribution price control review ( )
incentives for connecting DG
incentives for innovation

7. Developing the incentive mechanism
Objectives of incentives for distribution companies
to encourage proactive and positive response
to incentivise efficient and economical investment
to achieve flexibility in dealing with uncertainty
Criteria for incentive parameters
moderately attractive returns on overall DG-related investment
higher returns for more efficient connection
a safety net covering interest costs for expensive projects

8. The main DG incentive mechanism
Hybrid incentive for DG-related distribution investment
“pass-through” 80% of distribution investment cost
supplementary incentive £/kW/yr for DG capacity connected
cap (2 times cost of capital) and floor (cost of debt) for overall returns on distribution investment
Further incentive for the provision of ongoing network access

9. Beyond the usual connection practice
The future will not be “Business as Usual” for network operators
Analysis & early experience confirms technical challenges
voltage control
fault levels
generator stability
Incentive should promote innovation to find the best value solutions for the development and operation of DG

10. From the network today…
Boundary flow
Load
Load
MWs

11. … to the network of tomorrow
Potentially, two-way boundary flows
Islanding control with auto sync
Voltage & load Control
SVC
Store G
Fault current limiter G G
Load
Load
MWs .
DSM

12. Drivers for change
‘Fit & Forget’ DG connection will soon become impractical and a very inefficient use of investment
Continuing a ‘passive’ system control philosophy will constrain generation connection
Need for networks to become progressively more ‘active’ and ‘intelligent’
Research shows that more generation can be connected to a given network if it is converted to ‘active’ operation
More efficient use of networks will result in better value for money, reduced need for new lines and new substations, and quicker connections

13. Innovation and regulation
“RPI–X” has worked well on core low risk distribution business
but has not provided incentives to innovate
Innovation is acknowledged to carry a different risk profile: the regulatory framework should adapt to recognise this
Need now to develop the regulatory framework to allow DNOs to operate in different risk/reward business environments

14. The innovation process
Risk
Research
Development
Demonstration
Adoption
Time
Multi-stage process to convert ideas to products/solutions

15. The innovation process
Risk
Research
Development
Demonstration
Adoption
Time
RPI–X & Capex Treatment effective

16. The innovation process
Risk
Research
Development
Demonstration
Adoption
Time
Manufacturers and research community lead

17. The innovation process
Risk
Research
Development
Demonstration
Adoption
Time
distribution involvement necessary here:
a distinguishing feature is the requirement for field testing and the inadequacy of laboratory simulations alone

18. The innovation process
Risk
Innovation Funding Incentive
Research
Registered Power Zones
Development
Demonstration
Adoption
Time
IFI & RPZ – Ofgem’s proposed new incentives for GB distribution companies

19. Innovation Funding Incentive
A mechanism to encourage investment in appropriate R&D activities that focus on the technical aspects of network design, operation and maintenance. The principal objective of the IFI is to deliver benefits to consumers by enhancing efficiency in operating costs and capital expenditure.
A ‘% of turnover’ allowance for innovation
Expenditure allowed on a ‘partial pass-through’ and ‘use it or lose it’ basis
Annual, open, reporting of activities to promote best practices

20. Registered Power Zones
A mechanism to encourage development and demonstration of new, more cost effective ways of connecting and operating DG that will deliver specific benefits to new DGs and broader benefits to consumers generally.
Ofgem registers, but does not approve projects
Enhanced financial incentive (3x DG incentive rate), to provide balance to the innovation risks
Open reporting of RPZ projects to promote best practices

21. Example of a Registered Power Zone
Special regulatory treatment
Nursery for innovation, suited to demonstrator projects
Enhanced Quality of Supply
Benefits of “badging” as a form of endorsement
May attract external grant funding
May foster Regional Development joint projects
Signals a generation-friendly network to developers
‘Club Rules’ protect customers and ensure information sharing
Load G
Voltage & load Control
Fault current limiter
DSM
SVC
Store
Islanding control with auto sync
Favourable regulatory treatment offers higher returns to strengthen the risk/reward balance

22. Way forward Consulting on proposals since 2003
Currently developing further details
Finalising proposals in November 2004
Implementation from April 2005
Ongoing review thereafter

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