New Use of System Tariffs for Large Energy Users and others: Regulator gives until 1 September 2022 to respond
The Commission for Regulation of Utilities (“CRU”) published a consultation paper on proposed structural changes to Electricity Network Tariffs to apply from 1 October 2022 to 30 September 2023. An unusually short time frame for interested parties to respond has been set, said to be driven by security of supply issues. While generation adequacy is undoubtedly an issue of considerable concern, seeking to pay for it through use of system charges is most irregular. Responses are required by 17:00 on 1 September 2022.
Several factors have contributed to security of supply issues, including the failure to deliver contracted new generation capacity following capacity auctions run by SEMO (a joint venture between EirGrid and SONI), as well as closure of older generation assets.
As a result, the Government enacted the EirGrid, Electricity and Turf (Amendment) Act 2022 which provides for emergency measures that may be taken by the Minister for the Environment, Climate and Communications and EirGrid to ensure security of supply. These provisions aim to support an arrangement whereby EirGrid can proceed to acquire electricity generation plant which it sells to an electricity generation company. As TSO and MO, EirGrid will not operate the plant but rather enter into an agreement with the electricity generation company to operate it. Funds to achieve this would come from Government. The measures taken by EirGrid are to be solely for the benefit of the State and for the purpose of addressing the temporary electricity emergency, and no remuneration is to be obtained by EirGrid or the generators concerned other than reimbursement of reasonable costs incurred, including a reasonable return, as approved by the CRU. The intent to procure temporary emergency generation was outlined in a CRU Information Note along with other measures including extending the operational life of some older units.
The CRU now states in the consultation paper that these actions will require significant expenditure by the network companies in the coming years, reflected in the 2023 allowed transmission revenues. It states that it intends to apportion these costs to customers having the most significant impact on security of supply. It proposes to recover €100m of the total €478m system security related costs included in forthcoming tariffs via a suite of new tariff arrangements.
Three out of the four new tariffs are to be levied on Extra Large Energy Users (“XLEUs”). XLEUs are defined as “Very Large Energy Users: DTS-T and DG10”. DTS-T and DG10 refer to groups of customers, namely Demand Transmission Service – Transmission Connections and Distribution Group 10.
While the policy intention of the CRU in placing the bulk of these charges on large energy users is clear, the proposal to do so through use of system charges is questionable. Use of system charges are approved by the CRU and levied under sections 35 and 36 of the Electricity Regulation Act 1999. They reflect the reasonably incurred costs related to the transmission and distribution systems together with a reasonable rate of return on the capital represented by such costs. However it is clear from the consultation paper that the costs proposed to be recovered are not related to the transmission and distribution systems but rather to securing electricity supply by provision of emergency generation. Under the Electricity Regulation Act 1999, costs associated with securing electricity supply may be recovered under section 39 (Public Service Obligations) and not sections 35 and 36. It is therefore not clear whether it is within the power of the CRU to seek to recover these costs through use of system charges.
The consultation paper sets out the four proposed new tariffs as follows:
- Increasing Block Tariffs to be imposed on XLEUs who significantly increase their demand relative to the previous twelve months. The CRU states that it “is envisaged that this will encourage some XLEUs not to ramp up their demand as rapidly or as significantly in the critical short-term period”;
- a Decarbonisation Tariff to be imposed on XLEUs who consume electricity during periods of low wind (which is proposed to be deemed as periods when SNSP (level of non-synchronous electricity on the grid) is below 25%). The CRU indicates that SNSP in 2021 was less than 25% around a third of the time. The CRU states that it is anticipated that this will encourage large customers to “introduce and/or utilise additional flexible demand … and … focus their demand at times of higher renewable generation”;
- a System Alert Response Tariff to be imposed on XLEUs who consume electricity during system alerts. The CRU states that it “is envisaged that this will encourage these large customers to introduce and/or increase flexible demand”; and
- a Peak or Time of Use Tariff to be imposed on all customers consuming electricity during the peak time of 17:00-19:00 each day.
The proposed tariffs range from €7.77MWh for the Decarbonisation Tariff to €215.40 for the System Alert Response Tariff (for transmission tariffs).
The CRU seeks views on whether these tariffs should be a temporary arrangement or incorporated into the enduring approach being considered through the Network Tariff Structure Review Project.
The CRU also encourages ESB Networks to accelerate the roll out of demand reduction schemes through its National Network, Local Connections Project, which would involve payments to customers who contribute to demand reduction on the distribution level (and ESB Networks has published its evaluation of initiatives in this area). Suppliers will be requested to develop products to encourage customers to reduce demand and/or improve energy efficiency and report to the CRU quarterly on progress.
The CRU depicts the proposal as shown below.
Large energy users in sectors like manufacturing, logistics, data centres, digital technology, and pharmaceuticals will wish to model the impact of the proposals on their costs and the extent to which that impacts plans over the next year (assuming these are temporary measures). Curtailment data, regularly published by EirGrid, will take on a new significance across sectors, as will behind the meter generation solutions and physical CPPAs (assuming the legal/policy barrier to privately owned direct lines is soon ironed out, as hinted at in the Climate Action Plan 2021).
While there is a lot to consider in a short time, in addition to the question of whether the CRU may lawfully recover costs of emergency generation through use of system charges, it is worth remembering that certain legal obligations apply in respect of access to transmission and distribution systems pursuant to the EU Internal Market in Electricity Regulation, which is directly applicable, and the Internal Market in Electricity Directive, which is required to be transposed in Irish law at dates the last of which is the end of 2020. These include that Member States, regulatory authorities, transmission system operators, distribution system operators, and market operators must ensure that electricity markets are operated in accordance with several principles, one of which is that market participants have a right to obtain access to the transmission networks and distribution networks on objective, transparent and non-discriminatory terms.