Withdrawal from DSR arrangements
Agendas, minutes and presentations
- Publication date
- Industry sector
- Distribution Network
Background
Work stream 6 has made some working assumptions to help inform their work on DSR. These are:
- That where existing domestic customers trigger costs through increased load or generation, that these costs are socialised;
- Even if costs are socialised, there will be benefit in DNOs receiving notification of where heat pumps, EVs and micro-generation are installed at domestic properties;
- That a market model for DSR will not develop in time for the start of RIIO ED1
- That DNOs are free to approach any customer, including domestics to sign bilateral arrangements for DSR
- That there will need to be some measures in place to preserve value across the value chain including allowing customers to withdraw from DSR contracts with DNOs if other parties can offer greater value;
- That the methods and techniques for DSR will differ by customer group and whether the customer is new or existing;
- That there will be no compromising current reliability and security standards which the network must meet.
This paper deals with the tension between assumptions 5 and 7.
Customer’s right to opt out of DSR arrangements
In order to protect customers and provide them with some flexibility should their needs change, we consider that it is vital they have the right to exit any DSR contract they strike with a DNO. Further, if we consider that a different market model for DSR may evolve at some point within RIIO ED1, the customer may get more value for their DSR within that market, rather than through a bilateral contract with a DNO. Therefore, they will need the right to exit that bilateral contract. This can pose problems for the DNO and also the customer:
1. DSR may become too risky for DNOs
When load exceeds capacity on an area of the network, the DNO has an investment decision; do they install assets or look to establish a DSR arrangement with a customer. Installing assets provides absolute guarantee of maintaining security and reliability standards (as per our seventh assumption). DSR does not provide this same assurance but could be a far cheaper alternative (benefiting both customers and the DNO through the efficiency incentive). The main costs of implementing DSR are monitoring and communications equipment along with any automation equipment required for direct control.
The DNO may choose to enter into the DSR arrangement, if it provides a lower cost alternative to network reinforcement since it can retain around 50 per cent of the savings under the efficiency incentive. However, if a customer is able to withdraw from the DSR arrangement at any time then it reduces further the assurance that current reliability and security standards will be maintained (assumption 7). There is also a risk that the DNO invests in the equipment required for the DSR arrangement and if the customer withdraws from the arrangement, then it is unable to reclaim the costs of that equipment. In this situation the DNO will bear the extra costs itself and have to fund the reinforcement. This will be more expensive than choosing to reinforce the network in the first instance. Under the efficiency incentive, the DNO will bear around 50 per cent of these higher costs and so could act as a disincentive for DNOs to offer DSR.
2. Too risky for customers
When customers are requesting a connection, they not only want a timely connection at a reasonable price but they also want certainty of costs. If they engage in a DSR arrangement, or are connected as a result of another customer entering into a DSR arrangement, then they can’t be certain as to the costs they will face for connection. This is because DSR payments are typically made on an annual basis as this is how DNOs receive their income .1 Further, the DSR may be viewed by the DNO as a temporary measure until they have greater certainty of the load they need to accommodate on the network. In such circumstances, 2 or 3 years following the agreement of a DSR arrangement with a customer, the DNO may decide that the agreement is no longer required. This provides uncertainty for customers. They may fear having to pay a large connection charge towards future reinforcement, of which they have no control over the timing of payments. Faced with this, they may opt for the greater certainty of paying for a firm connection upfront rather than opt for a DSR arrangement.
Way forward:
Table 1.1 below outlines some proposals on who should pay for reinforcement in four different scenarios when a DSR arrangement is terminated. The scenarios vary depending on whether the DSR arrangement is with a new or existing customers and who terminates the arrangement. Providing this kind of upfront certainty for DSR arrangements can help prevent the situations outlined above.
1) DSR as means to connection
a) Customer terminates
The customer’s connection agreement would specifically refer to the DSR arrangement and would state that the customer is only entitled to capacity so long as it complies with the specific DSR arrangement. Consequently, if the customer no longer provides DSR, they will have broken the terms of the connection agreement. If they wish to move to a firm capacity arrangement, they will need to negotiate a new connection agreement with the DNO. If this requires upstream reinforcement then the customer will pay its proportion in line with the common connection charging methodology.
This ensures that the customer can be certain that they won’t face future costs so long as they abide to the terms DSR arrangement. The DNO will also have certainty that if the customer withdraws from the contract, it will bear any associated costs of reinforcement required to maintain security of supply.
b) DNO terminates
Again, if the connection agreement states that the customer has a right to non firm capacity, the DNO is unable to remove this right. Therefore, if the DNO decides to reinforce the network, it will have to commit to retain the non–firm connection. If the customer would like to move to a firm connection, it will require a new connection agreement and any costs will be calculated in accordance with the connection charging methodology as outlined above.
In practice, this is likely to mean that upgrading to firm capacity is relatively cheap for the customer. This gives them an incentive to sign a DSR arrangement in the first instance and will ensure that the DNO only upgrades the network where it feels it is absolutely necessary to maintain security standards.
2) DSR with an existing customer to accommodate a new connectee
This is an arrangement where a DNO approaches an existing customer who has firm capacity and proposes to make a payment to them in return for restricting their capacity at certain times. This restriction will enable the DNO to accommodate a new customer without the need to reinforce the network.
a) Customer terminates
This scenario relates to where the existing customer, who is providing DSR in return for payments, wishes to cancel the arrangement. This would mean that the there could be costs involved in continuing to provide firm capacity to the new connectee.
The existing customer has already paid for firm capacity so should not be asked to make any further contribution to providing capacity on the network. If they cancel their DSR arrangement, they will simply cancel the revenue stream they are being offered by the DNO.
The new customer will have a connection agreement for firm capacity but this will need to state that it is dependent upon a DSR arrangement with another customer. If the DSR arrangement is cancelled, the customer will have a choice of deciding if they want to retain firm capacity and pay for any reinforcement, or if they are willing to enter into a DSR arrangement themselves.
This arrangement will provide some uncertainty for the customer but they will be in the knowledge that the arrangement they are entering into will always be cheaper than paying for reinforcement. Further, DSR contracts with existing customers could be based on an annual rolling basis. This would provide new connectees with at least a year’s certainty of costs.
b) DNO terminates
In this scenario the DNO decides the cancel the DSR arrangement with the existing customer. It is only likely to do this when it considers it needs to reinforce the network, thus rendering the need for the DSR arrangement. In this circumstance we wouldn’t expect either the existing customer or new connectee to fund the reinforcement. The reinforcement is likely to be triggered by a second new connectee who will pay a share of the reinforcement. The remaining costs could be met by the DNO or by the customer. However, if the customer contributes, it diminishes the incentive on them to enter into a DSR agreement.
This approach provides a good incentive on the new connectee to enter into a DSR arrangement as it knows that it will get firm capacity at a low cost even if the DNO reinforces the network in the future. This places some risk on the DNO but they are only likely to reinforce when other customers wants to connect. They will receive a contribution towards the reinforcement costs from these customers.
1 A DNO has to borrow money to fund the costs of assets upfront. It then recovers this cost, plus a rate of return to cover the cost of borrowing, back over 20 years through use of system charges which are paid by customers, via their supplier bill.