EDF proposals for electricity distribution structure of charges

EDF Energy Networks proposals (73 pages, PDF, plus some other documents) for the introduction of a "power flow/LRIC based methodology" on its SPN network. This follows from an industry consultation process.

The proposals acknowledge some criticisms of the "LRIC" calculation method on which they are based (see e.g. this Reckon paper), and addresses the issue as follows:

8.1. A criticism of the LRIC method is that under certain circumstances potentially excessive or erroneous charges will be produced as a consequence of the calculations applicable to low growth rates and high utilisation. It can be observed that as the power flow exceeds 60% utilisation then the level of cost rises exponentially from what would be expected. Similarly it can be seen that the cost behaviour is as expected below 60% utilisation. This is demonstrated in the chart shown below (Figure 5 [page 24]). We believe that this issue is addressed in our model. Notably in our marginal cost calculations we scale all of the demands evenly across all time bands so that the highest utilisation is not greater than 60% of the asset.

8.2. We originally scaled here to solve the problem of high costs having to be scaled in the yardstick model. We now understand that the scaling that we were applying evenly across all demands was actually solving the underlying issue that was creating the high cost. It is also noted that due to this demand scaling being used the yardstick revenues calculated are nearer to the expected level of reinforcement costs compared to allowed revenue and that the revenue scaling that is then carried out in the yardstick model results in a positive adder, whereas prior to this a negative adder was required.

Nine zonal growth rates ranging from 0.5 per cent to 2.1 per cent a year are proposed for the SPN network.

The documents are dated 19 May 2008, as is the entry in Ofgem's list of modification proposals (PDF). The Ofgem website notice is dated 2 June 2008, and was added to this Ofgem list on 4 June 2008. Ofgem probably has 28 days from one of these dates to make a decision or initiate a consultation process.

For further information or advice please contact Franck Latrémolière.

Filed under Electricity, Ofgem.

Reckon LLP is an economics consultancy with expertise in data analysis, economic regulation and competition law.

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