Podcast: Reform Update, Part 2: Demand Reform and Code Mods

00:01:18 – 00:02:46 – Pete Aston

Hello, and welcome to another Connectology® podcast from Roadnight Taylor. I’m Pete Aston, and I’m joined by my colleagues Nikki Pillinger and Alex Ikonic, and welcome everyone, nice to have you along.

This is the second of two updates we’re giving on various subjects – this one is on Demand Reform and various Code Mods; and the one before was on sort of just a general Connections Reform update, so make sure you go and listen to that one as well. But we’re going to dig in to start with, in relation to Demand Reforms. So, Demand Reform, I guess, has been going since about sort of October, November last year when sort of Ofgem, NESO first started really talking about Demand Reform due to the huge queue of demand projects, mostly from data centres.

So, there’s been various different bits that have happened, various sort of documents produced and so on. But the most recent one, Alex, is one you’ve been involved with, which is to do with the sort of connect pillar.

So Ofgem has recently produced a document that’s sort of given a couple of weeks ago, has given an update on their connect pillar, and the connect pillar came out of one of their previous documents a bit earlier this year, where there was Curate, Plan, and Connect, I think? In terms of how they’re going to push forward Demand Reform. So, do you want to just talk us through this document that they sort of published recently and what it’s all about?

00:02:47 – 00:03:41 – Alex Ikonic

Yeah. So, this is basically a summary of what the connect task and finish group have kind of been doing to date, so that was set up early in the year to kind of dig into the detail of all things kind of connect related, and to kind of think of kind of next steps.

So Ofgem and DESNZ have been leading on that, and the task and finish group kind of holds, you know, a variety of different developers and network companies. So, we sit on that as well. So, the kind of key takeaways from that document is the, that there was support for, there’s definitely strong industry support for alternative arrangements for HV asset ownership. So, the current rules of either getting a transmission license or a transmission license exemption kind of aren’t seen as enough, and there’s support for having either a class exemption or, and an ITO license route to kind of enable greater ownership of HV assets.

00:03:42 – 00:03:47 – Pete Aston

Yeah. And when we talk about HV, we’re not talking about 11 kV, we’re talking about like transmission level voltages.

00:03:48 – 00:03:49 – Alex Ikonic

Yeah.

00:03:50 – 00:04:00 – Pete Aston

Because it’s always confusing in these documents when they talk about HV, isn’t it? Like, yeah. So, talking transmission-level ownership for demand-projects, which currently is either not allowed or is a little bit woolly as to whether it is allowed or not.

00:04:01 – 00:04:52 – Alex Ikonic

Definitely a little bit woolly. So, we’ve seen kind of quite different treatment between different TOs and in how they kind of go about such connections. So, we know that some TOs kind of will allow, you know, offers with HV connections, but they’ll have caveats to say, you know, the legal risk is on the developer if they can own or not own those assets. But NGET in particular have said, you know, we’re not offering these kinds of connections until there is kind of certainty of ownership, which is actually, there’s been a bit of a softening on that position, I would say. So as part of the connect task and finish group NGET have kind of decided to investigate that in a bit more detail. So, they recently launched a call for input, so they were asking demand customers whether they would be interested in owning HV connection assets, and that might be included in some Gate 2 offers sort of Phase 2.

00:04:53 – 00:04:54 – Pete Aston

And they only did that for Phase 2, didn’t they?

00:04:54 – 00:05:03 – Alex Ikonic

Yes. Which makes sense because I think for Phase 1, you know, those projects are going to be quite progressed anyway. So, to meet those connection dates, it probably wouldn’t make sense to switch the asset ownership now.

00:05:04 – 00:05:15 – Pete Aston

Yeah, so, what’s the, any particular takeaways from this report? Are they, is Ofgem favouring sort of one approach over another, or is everything still being taken forward?

00:05:16 – 00:06:05 – Alex Ikonic

So, I think there’s still quite a few things that are being taken forward. I think they are definitely prioritizing work on the ITO license. So right now, they’re seeking feedback from industry about, you know, what people think of this, how it would work, and if there are any kind of opportunities or risks and, and what the ITO license really kind of should achieve – so that’s definitely been kind of prioritised for now.

But they acknowledge that it’s not sort of one or the other, and there might be some instances where something like a class exemption is much more appropriate. So they very helpfully come up with these project archetypes, so different kind of setups of projects, and they’re considering kind of whether one or the other might be better or worse for different kind of project setups. So yeah, then definitely feed into to that consultation, if you have projects that will be affected by it.

00:06:06 – 00:06:30 – Pete Aston

Yeah, that’s interesting, isn’t it? Because, I think it was, it’s Eclipse, wasn’t it, that was looking to, that had applied for an ITO license, quite some years ago now. So, it’ll be interesting that that’s sort of, going to maybe come to fruition at some point, with an ITO. But it seems to make sense to me that that offering should be there, because we have the IDNO option for many years and, you know, why not ITO?

00:06:31 – 00:06:32 – Alex Ikonic

And it’s worked quite well, so.

00:06:32 – 00:06:42 – Pete Aston

Yeah, okay, that’s really interesting. So, is there anything for developers to be feeding into now as a result of that? Is there, like, further consultation on that particular bit?

00:06:43 – 00:07:15 – Alex Ikonic

So, there will be a further consultation, so in Autumn, at some point in autumn we expect that Ofgem will publish a consultation that will cover the ITO license proposals in a bit more detail; and they’ll also cover kind of a couple of other things as well. So, they’re going to consider kind of connection arrangements that exist in the current framework, so, kind of alternative connection options such as, like, phase connections for demand, or kind of non-firm, so that kind of N-1 scenario, and then there might be kind of additional steps after that – so yeah, one to look out for.

00:07:16 – 00:07:31 – Pete Aston

Okay, yeah. And I guess a lot of this is timing, isn’t it? Because by the time an ITO license has come in, all the phase two offers I assume will have been issued by that point, so will they be able to then switch from whatever they’ve got now to an ITO.

00:07:32 – 00:08:12 – Alex Ikonic

And I think that’s a really important point as well because I think, you know, if NGET do give HV connections, and other Scottish TOs have also given HV connections, I think it’s very important for those projects to have certainty on kind of, do they know that what they’re accepting is, is kind of valid or is there a risk that they’re going to then have to change, you know, Mod App and change their connections? And I think especially in the kind of current, you know, the way that the queue is set up, actually asking for a change to a different connection voltage might impact your queue position and probably your connection date. So it’s probably quite a high risk if you don’t know you’re actually allowed to own those assets.

00:10:17 – 00:10:27 – [BREAK FOR MIDDLE SECTION]

Yeah. Yeah, it’s really, really big. The other bit on Demand Reform that’s been going on is in relate to the relation to the CURATE pillar. So, I’ve been sitting on Ofgem’s CURATE advisory group, CURAG, and there’s maybe one or two more meetings for that to happen. So, we’re expecting a consultation to come out from Ofgem maybe in a month or so, on some of these points. But that’s, this pillar’s really looking at the queue as it is, and potentially how that can sort of be thinned out a little bit and only have the projects in that are really viable to move forward.

00:08:13 – 00:10:16 – Pete Aston

So I think the two, the two main things within that, that have been looked at are the, a financial mechanism; so, there’s been sort of three options looked at that, are sort of, you know, just, just an upfront deposit that’s then refundable at the end or some sort of like a project commitment fee style, ramping up of a sort of cancellation liability and securities over the time of the project, and a few others. So, it’d be interesting to see what Ofgem actually comes out with in terms of that and, and I guess the million-dollar question is whether it will have any impact on the data centers particularly.

And the other thing they’re looking at with that is potentially some new milestones that might specifically impact sort of data centers, potentially something like end customer in place, end user of data center. But that’s quite difficult to know at what point a data center developer would actually have such an end user in place; definitely not at the point you apply for a connection, but, like, probably more than a month before you’re going to energize. So, you know, so where in the process do you put that, so it’s got the most effect for keeping viable projects in the queue? So yeah, lot, lots of conversation around that sort of thing.

00:10:28 – 00:10:36 – Alex Ikonic

And would we expect those to still go through the Code Mod process, or is that something that you think Ofgem might look to kind of, you know, expedite through, like, PIA powers?

00:10:37 – 00:11:25 – Pete Aston

Yeah, I think the conversation is, like, as much would be expedited as possible through the planning infrastructure powers, so but we’ll have to wait and see exactly what they suggest in that consultation, because I guess that will come out in the wash there.

We’re going to move into Code Mods now, but the Code Mod I want to pick up on first is CMP417, which is the application of the user commitment cancellation securities approach to demand customers. So that’s the approach that’s currently used for generation projects – so it’s going to significantly decrease securities and cancellation liabilities for demand projects, at the same time that Ofgem are wanting to introduce a fee, a sort of financial mechanism to make it harder for data centres to stay in the queue. So, so there’s a slight…

00:11:25 – 00:11:26 – Alex Ikonic

Bit of mixed messaging.

00:11:27 – 00:12:11 – Pete Aston

Yeah, slight conflict. I think it’s the right thing to introduce user commitment securities, because it sort of avoids some of that, you know, over-securing issue and puts everyone on the same playing field. But it does mean that the sort of financial mechanism that’s introduced for data centres maybe has to be even higher to, to sort of compensate, because if the net position for data centres is less cancellation liabilities than they have now, then it’s not really done anything.

So yeah, it’ll be interesting to see what happens, sort of with that. But the CMP417 final reports I think imminently due to go to Ofgem, so we’d expect a decision from Ofgem on that within or by the end of the summer probably.

00:12:12 – 00:12:58 – Nikki Pillinger

I think it’s definitely the right answer, you know, this is something that should’ve been looked at quite a long time ago for demand, is actually making sure that massive over-securitization wasn’t happening. Obviously, we’re now sort of seeing, you know, kind of similar issues with the demand queue that we were with the generation queue, but there are other mechanisms with that. And also, like, you know, Ofgem and NESO and DESNZ have to get now get familiar with what the demand queue looks like and that diversity within the demand queue because, you know, they’re not all data centers; you know, there’s lots of other massive demand users that are going to be coming online, and they, you know, they’re not generation; they follow a very different process, so it’s going to have to be a bit of a steep learning curve for them in terms of appreciating how these projects actually function.

00:12:59 – 00:13:06 – Pete Aston

Yeah. And we are expecting the demand queue to be published sometime this year, aren’t we? Was it this?

00:13:07 – Alex Ikonic

Or is it next year? I think maybe early next year.

00:13:07 – 00:13:08 – Pete Aston

Okay, early next.

00:13:09 – 00:13:17 – Alex Ikonic

So, the demand capacity register. So, I think that’s still kind of being worked on, but there is the expectation that it should be in place by early next year. But that’s, yeah, very positive stuff.

00:13:18 – 00:13:22 – Pete Aston

And that’ll be a demand capacity register both from both NESO and the DNOs?

00:13:23 – 00:13:23 – Alex Ikonic

Yes, that’s my understanding.

00:13:24 — 00:13:39 – Pete Aston

Okay. Okay. Yeah, I think that’s really going to help with trying to, for everyone to gain a picture, like for what this actually looks like.

Okay, moving on to some other Code Mods. Do you want to talk us through CMP470? Like what it is, and then where we’re up to with it.

00:13:40 – 00:14:18 – Alex Ikonic

Yes. So that’s something we’ve covered in some of our earlier podcasts. So yeah, for those of you who aren’t familiar, it’s introducing a project commitment fee, so it’s primarily focused on batteries, but in theory would apply to any oversubscribed technology that meets these criteria. So, if the queue is, I think more than 50% oversubscribed, then there would be this new fee which kind of ramps up depending on how much the oversubscription falls or doesn’t fall over the next kind of six-month period. So, at the maximum it could be a 25K per megawatt security.

00:14:18 – 00:14:18 – Pete Aston

Wow.

00:14:19 – 00:14:20 – Alex Ikonic

For these projects.

00:14:20 – 00:14:21 – Pete Aston

So that’s really quite big.

00:14:22 – 00:14:39 – Alex Ikonic

Yeah, it can be quite hefty. So, the Code Admin Consultation is out now, and it’s due to be finished by the 30th of June – so please submit your responses to that if there’s time, because yeah, it could have quite a big impact on battery projects in the queue, or those who are expecting their Gate 2 offers.

00:14:40 – 00:14:52 – Pete Aston

So, in terms of that timing, that consultation closes 30th of June. So, then there’ll be a final report pulled together over the next month or two.

00:14:53 – 00:14:55 – Alex Ikonic

So, yeah, and sent to Ofgem.

00:14:56 – 00:14:59 – Pete Aston

So, sent to Ofgem. So, when is Ofgem likely to get that final report?

00:15:00 – 00:15:12 – Alex Ikonic

So, I think the assumption is that they would do it in summer, maybe by the end of this summer, and then it would be implemented kind of from, you know, it would start kind of trickling through to security statements by next year.

00:15:13 – 00:15:47 – Pete Aston

Okay, yeah, well, that, that could be a, a really significant one again because like almost everything we do is like, this is really significant, maybe we need to have levels of significant. Okay, thank you for that one, Alex.

Come over to yourself now, Nikki. So, there’s a couple of sort of, a pair of Mods that relate to SGT charging basically. Do you want to just talk us through what they are and where we’ve got to with them? Yeah, because I know you’re sitting on one of the groups but not the other.

00:15:48 – 00:16:46 – Nikki Pillinger

Yes. So, there’s CMP460, which is essentially the kind of transmission level of charging. So that’s deciding whether SGTs or transmission assets would actually be charged for, or whether they would be socialized, as they are with all infrastructure GSPs. So, it’s deciding whether on a sort of a broad scale those costs would actually be socialized. That consultation, so we kind of had that, and it’s now kind of it’s progressing behind the scenes, but we have, I believe, but we haven’t heard anything about it for a little while.

We’ve got DCP461, which is kind of the step level down, so kind of distribution charging. So, in theory, CMP460 could kind of solve the issue, or it very well may not. So, we’ve got DCP461, which kind of sits underneath.

00:16:47 – 00:17:01 – Pete Aston

So, if CMP460 said we’re going to completely socialize SGT charging, all the work you’ve done on DCP461 would be not required because, there’s nothing then to?

00:17:02 – 00:17:44 – Nikki Pillinger

Yeah, pretty much, which for me is fine because I like having backup plans; the fact that, you know, if CMP460 doesn’t do that, then we need something at distribution that is agreed and that is consistent for distribution projects, and at the moment we don’t. And I think the, so I’ve got the results from the, like, the second consultation voting in front of me, and I think this really, it highlights how difficult it is to reach a consensus on this because we had nine options, and there’s not really anything that clear that’s come out.

00:17:45 – 00:17:47 – Pete Aston

And some of those options were, like, combinations of different options as well?

00:17:48 – 00:18:21 – Nikki Pillinger

They are, yes. So the main options are kind of option one is effectively socialization, option two is CAF, option three is do nothing, or option three is, like, have a consistent approach across all the DNOs. And then there’s kind of variations on that sort of, you know, socialization or CAF. So, the one that kind of seems the most popular is the point 2 version of this. So, like, 1.2 and 2.2, both got seven votes and ten votes.

00:18:22 – 00:18:24 – Pete Aston

So, what would that do for us if we had 1.1 and 1.2 or whatever?

00:18:25 – 00:18:51 – Nikki Pillinger

So, the kind of point two element of this, like the kind of set option but, you know, with another kind of thing added into it, is where you’ve got a GSP and it’s only for one customer, you would then not have this applicable, and that would be paid for by that customer, and that seems to be the most common kind of additional answer.

So yeah, like I said, there’s no real clear…

00:18:52 – Pete Aston

And that sort of makes sense to me. Like, if you’re connecting into an existing GSP and you’re relatively small, but there’s a SGT trigger, you pay a CAF for it, if you’re 240 megawatts and you need your own dedicated super grid transformer. Yeah well, I suppose even if you paid a CAF on that, it’s still 100%.

00:19:12 – 00:19:16 – Nikki Pillinger

So, it’s, yeah, whether, what, you know, it’s the kind of point that you wouldn’t socialize, it’s just for one customer.

00:19:17 – 00:19:19 – Pete Aston

Yeah, makes sense.

00:19:20 – 00:20:18 – Nikki Pillinger

But yeah, so the voting across this, you know, there’s, you know, 1.2 got seven, and then, you know, 2.2 got 10, but then 2.1 got seven, and yeah, so there’s, there’s not, there’s no consensus really, to be honest.

So, this kind of has to go to Ofgem for them to decide what is palatable for them. Personally, you know, I’ve always, I’ve like I said, it may be fixed by, you know, socializing everything. Obviously, we’ve got infrastructure sites which is a little bit of a challenge because you do have the GSPs that will be socialized. But in terms of, like, customer interest, which is what Ofgem should, you know, have at the forefront of their thinking, having a CAF would potentially be the most, the most palatable option for them. And even though, you know, it’s still going to be a significant amounts of money for developers, it does at the very least provide consistency across all the DNOs about how those transmission assets are charged for.

00:20:19 – 00:20:25 – Pete Aston

Yeah, okay. So maybe again, towards the end of the summer we might get, a bit more of a steer from Ofgem?

00:20:26 – 00:20:46 – Nikki Pillinger

I’m not sure on this. We’ve, like I said, we’ve had two consultations, the work group meetings are starting again next week. It would’ve been really nice to get this done, like, a year ago, so that we actually kind of had it before Gate 2 happened but hasn’t happened. So yeah, I’m not sure when either of those are going to be concluded.

00:20:47 – 00:20:48 – Pete Aston

Okay, watch this space.

00:20:49 – 00:20:53 – Alex Ikonic

Yeah, that might actually affect kind of whether people are able to accept their Gate 2 offers or not as well, so…

00:20:54 – 00:21:33 – Nikki Pillinger

Yes. This is another one for me, is that we’ve got this kind of, we’ve still got this uncertainty hanging over projects. And, you know, it’s still not a final answer for people because you could still get a Gate 2 offer; it could still have SGT asset contributions in it, but you’re like, “Oh, okay. So, you know, this actually still might change in the future, so I’ll accept this Gate 2 and I’ll carry on with it,” and it’s like the technical limit’s thing, you know offers are going to come out and, you know, or we’ll put in an EOI for technical limits, so we’ll accept this and we’ll see if that works out. So, it’s still not a final answer for developers this, you know, there’s still things that are a bit up in the air.

00:21:34 – 00:21:51 – Pete Aston

Yeah. Just a couple more to go through, and we’ve got to do it quickly because Abi, who’s filming this, wants to get out this room because it’s stinking hot because we’re in a heatwave.

So, there’s one more that you wanted to go through Nikki, DCP475. This is a new one.

00:21:52 – 00:22:39 – Nikki Pillinger

Yeah. So, this is an interesting one. It’s one that I sort of saw flag up the other day. The general concept behind it is that distribution customers get compensated for, like, faults and outages and curtailment events in the same way that transmission customers do, which is, you know, in a way it’s a, you it’s a perfectly reasonable ask. But it would, they’re quite lacking on detail at the moment – I can’t find, find that much about it, but it would presumably then mean retrospectively applying kind of compensation to all distribution connected customers, despite them signing up for a single circuit non-firm connection. So yeah, we’ll have to kind of see where that goes, trying to find a little bit more information about it at the moment. But yeah, could be interesting.

00:22:40 – 00:23:30 – Pete Aston

Yeah, that’d be very interesting, and the very last one we just wanted to touch on, CMP447, which is the removal of designated strategic works from cancellation charges. So, I guess the overall impact of this will be reducing cancellation charges so that projects that are strategic, are just going to be happening anyway in the background and won’t get put into customers’ sort of statements, cancellation charge statements, this was actually agreed to back in January, I think, and we understand that Ofgem is pulling together a list of sort of accepted works, that are not going to be then included in cancellation charges, but we don’t think that this has yet, yet been approved. So yeah, wait and see. We’ll give more of an update on that once we have it, but at this stage we don’t.

00:23:31 – 00:23:33 – Alex Ikonic

So it is, but we do expect them to publish it at some point?

00:23:34 – 00:23:40 – Pete Aston

Yes, okay. That is expected at some point, but not quite sure when, or what it will include.

00:23:41 – 00:23:46 – Alex Ikonic

And do we know if that will be done kind of in time for Gate 2 offers or some Gate 2 offers? No?

00:23:47 – 00:23:46 – Pete Aston

No idea.

00:23:47 – 00:23:48 – Alex Ikonic

Wait and see.

00:23:48 – 00:24:27 – Pete Aston

Wait and see.

Oh, and there was one other very last one. This is the last, last one, CMP471, which was a Mod that was put in to do interim contract variation process ahead of the new window, so allowing customers to put some sort of Mod App in prior to the new transmission application windows to do some sort of, I guess, small changes to, to schemes; it’s possible that, possible this is going to be superseded by NESO who’s just recently announced, Mod App scoping exercise, but we’re not quite sure?

00:24:28 – 00:24:47 – Alex Ikonic

Yeah, I mean they definitely interact in some way, because I think they’ll, it depends whether NESO can run a sort of mini–Mod App window or, or whether they can sort of incorporate those changes into the Gate 2 process; because I suppose if they can’t, then this Mod is still needed. But yeah, it’s definitely one to kind of watch out for.

00:24:48 – 00:25:03 – Pete Aston

Yeah, brilliant. Well, that’s it for now. Thank you, Alex. Thank you, Nikki. Thank you everyone for listening, and we will be back, no doubt, fairly shortly with another update, because everything changes so quickly. But for now, goodbye.