On-site generation only works if you get good value for the energy you produce. For example, the viability of CHP (and the resulting cost of heat) depends on the price you get for the electricity you generate.
So what are your options? You could export to the grid under an offtake contract with a licensed electricity supplier. But as a small generator your electricity is almost worthless to them so they won’t pay much for it: maybe 2 or 3p. So unless you’re able to negotiate a particularly sweet contract, this is usually a non-starter.
The obvious route should be to sell energy directly to people on the site where the energy is generated. That’s supposed to be the point of distributed energy, right?
Traditionally there’s only been one option for selling direct on site: private wire. I’ve written about private wire quite a bit elsewhere so won’t rehash it here. In summary, while it can be a good solution on sites that fall below the license exemption thresholds, it can also bring disproportionate admin burden and maintenance cost.
If you’re over the threshold or simply don’t want to deal with private wire, your choices are frustratingly limited. In fact this has been a major sticking point for local generation (perhaps the major sticking point) and OFGEM has been very keen to find a solution.
The problem is this: in order to get power from the plant room to your customers, you have to cross wires that belong to the distribution network operators (DNOs). As soon as you touch those wires, you’re on the hook for their use of system charges (DUoS). And here’s the kicker: it doesn’t matter if you’re taveling 50 miles or 50 feet across those wires – the charges are the same.
That doesn’t make sense does it? The DUoS charges should reflect the cost to the DNO shouldn’t it? And given that I only want to move electricity from my plant room to users on my site, the impact on DNO infrastructure should be pretty small. It’s common sense.
That’s our view and was OFGEM’s view as well. The key to unlocking this barrier was to bring in a short haul tariff and cost reflective pricing for local generation. Back in 2008, OFGEM pursued this line with the DNOs, who played along for a while. Then they took their ball and went home – and OFGEM stood there and watched them leave.
OFGEM’s fallback strategy is something called license light. This is effectively a way for an on-site generator to operate under the licensed regime while avoiding the millions in cost that are associated with getting and keeping a distribution or supply license. Under license light the licensee doesn’t need to comply with the industry codes themselves, provided that they’re quarterbacked by a licensed supplier. Theoretically it should work, provided the on-site generator can sign a suitable agreement with a supplier at reasonable cost. If you fancy a geek-out, we wrote a white paper on it back in 2009. And three years down the line, not much has changed.
There are still huge questions around license light. How will a small generator afford the legal costs for putting together an agreement? How can a site afford the credit they’ll need? What level of IT integration will be required with the licensed player?
But the woolly mammoth in the room is: why the heck would a licensed supplier enter into this kind of contract in the first place? OFGEM isn’t going to force anyone to the table. And while a 500 home development might be big from a distributed energy perspective, it’s a dust mote to the suppliers, who rely on standardisation and automation to achieve their profits. Why would they customise their systems and processes for a dust mote?
I put this question to a DECC representative at the ZCH energy working group at the end of last year and he basically said: we haven’t tested this with the suppliers. The subtext was: we’re just going to hit and hope. Or maybe: we asked and they’re not interested but we’re hoping we can change their minds. Not a lot of reassurance there.
Nevertheless, DECC and the GLA have been pressing ahead, securing funding to put together a set of contracts that small generators can use and thereby avoid the bulk of the legal fees. The GLA’s ultimate aim, as I understand it, is to put together a license light toolkit by the end of March.
The plan is for a number of London Boroughs to then go to market to seek a licensed supplier partner. And we’ll see how the suppliers respond.
So will license light boost local generation? I hope so but given this was always a “make-do” option, I’m not optimistic. The best thing to do at this point is to let the GLA and LBs try to blaze a trail and see if the market develops. In this case there doesn’t appear to be any advantage in being an early mover.