What are securities and cancellation liabilities?
Works on the transmission system triggered by connecting customers, need to be financially underwritten by the customers causing the work. This is so that the transmission owners (TOs) aren’t left out of pocket if a customer terminates their connection after the TO has started the work. Cancellation liabilities are the cost of works that customers are underwriting, and securities are a partial down payment against those liabilities.
Article by Pete Aston
Pete joined Roadnight Taylor from WPD (National Grid Electricity Distribution), the UK’s largest DNO, where he was Primary System Design Manager. He led a team of sixty responsible for all connections and reinforcement of the extra high voltage network, and had oversight of the relationship and interactions with National Grid Electricity System Operator (NGESO) at the Transmission/Distribution (T/D) boundary.
23 October 2024
What are cancellation liabilities?
Cancellation liabilities are when a transmission customer underwrites the work on the transmission system their connection triggers. From any time after accepting a connection offer, when a customer cancels their connection, they are at risk of paying a cancellation charge. However, if a customer connects their scheme, then no cancellation charge would be paid. This is why it is a liability rather than an actual connection charge.
Cancellation liabilities will increase from acceptance of the connection offer through to the year of connection. Sometimes there is zero liability at the point of accepting the offer, if no works have yet started. Alternatively, there can be a high liability from the date of acceptance, if works have already been started.
What are securities?
Securities are a down payment of all or part of the cancellation liability. There are different ways of putting up the security, such as cash, parent company guarantee, a bond, etc. If a scheme is cancelled and cancellation liabilities are due, then the system operator will invoice the company for the cancellation liability minus the securities that have been paid.
Why are they needed?
The cancellation liabilities protect the TOs from investments they have made in building infrastructure to connect customers, if those customers terminate their connection offers and don’t proceed with the connection (and therefore don’t pay Transmission Network Use of System Charge to fund the works). It also puts an onus on the connecting customers to only proceed if they are actually serious about and confident in their project.
It’s worth noting that customers connecting into distribution networks don’t pay cancellation liabilities associated with the distribution works. The logic for this is likely that distribution works are typically of lower value and take less time to build than transmission works. With more individual customers on the distribution network, there is also a good chance that assets installed for a terminated project could be used by another customer. Distribution Network Operators also tend to invoice for any works in line with expenditure, so are not usually left out of pocket.
How does it work for generation connections?
Generators connecting into the transmission network follow the rules of Connection and Use of System Code (CUSC) Section 15, which says that generators only pay a proportion of the full cancellation liability. All Connection Asset works are included in the calculation, along with part of the reinforcement works.
Transmission reinforcement works are split between Attributable Works, which are included to make up the total cancellation charge, and Non-Attributable Works, which are not included. In addition, all schemes pay a Wider Works cancellation charge, which reflects all works being undertaken on the transmission system. This is calculated via a zonal £/MW charge.
How does it work for demand connections?
Demand customers connecting into the transmission network follow an approach called Final Sums, whereby they are liable for the full cost of all works triggered by their connection. This typically means that demand customers have a much higher cancellation liability than generators.
CUSC Modification Proposal CMP417 has been triggered to align demand customers with Section 15 of CUSC, such that demand and generation customers are treated on an equitable basis, reducing the liabilities for demand customers. This is not likely to come into force until towards the end of 2025.
What about embedded connections?
Whilst customers connecting into a distribution network do not pay cancellation liabilities towards distribution works, they will incur liabilities towards relevant transmission works. If a generation scheme has to go through a Project Progression, or a demand scheme has to go through a Modification Application, then the scheme will pick up transmission network cancellation liabilities. This is administered by the DNO, rather than the embedded customers directly contacting National Energy System Operator (NESO) – previously National Grid Electricity System Operator.
Where can I find more information?
NESO publishes useful information on cancellation liabilities and securities. This link is NESO’s more detailed introduction to the subject.
How can Roadnight Taylor help?
We can help to explain the cancellation liabilities on a project, to check if they have been applied correctly, and to challenge NESO if mistakes have been made.
To find out more call us on 01993 830571 or send us a message via our contact form.
