The UK’s energy sector is undergoing a major transformation as it strives to meet the growing demand for electricity and the ambitious net-zero targets. However, connecting new developments to the electricity network is not always easy or affordable. That’s why Ofgem, the regulator of gas and electricity markets, is introducing a set of reforms to improve access and pricing for electricity connections. These reforms are part of the Access and Forward-Looking Charges Significant Code Review (Access SCR), which is expected to be implemented in April 2024. In this blog post, we will explain what the Access SCR is, why it matters, and how it will affect different types of developments, such as data centers.

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Current Challenges

The surge in demand, coupled with the push for low-carbon solutions and net-zero targets, creates a formidable challenge. In many areas of the UK, developments are hindered by the lack of available capacity with inevitable cost increases driven by longer distances between the sites and available points of connection. For example, a recent report by the Renewable Energy Association (REA) found that some renewable energy projects face connection costs of up to £25 million, which can make them unviable.

Previous Connection Process

Previously, connecting to the electricity network involved assessing the work required by the Distribution Network Operator (DNO). DNOs are the companies that own and operate the local electricity distribution networks. New assets, such as cables and switches, are often required, along with potential upgrades to existing shared network assets (reinforcement). The costs for reinforcement were previously shouldered by the connecting customer, making some developments financially impractical.

Why it was a Problem

Connecting customers were asked to fund the full connection costs together with the majority of reinforcement costs. This created a number of issues, such as:

  • Unfairness: Customers who connected earlier had to pay more than those who connected later and benefited from the network upgrades.
  • Inefficiency: Customers had to pay for assets that they did not use or need, and that could be shared by other users.
  • Uncertainty: Customers faced long delays and high costs due to the complex and unpredictable connection process.
  • Disincentive: Customers were discouraged from connecting to the network or adopting low-carbon technologies, such as electric vehicles or heat pumps.

Ofgem identified a need for change to align with broader UK energy reforms

The Access SCR is part of Ofgem’s wider programme to enable a smarter, more flexible, and more decarbonised energy system. The Access SCR aims to ensure that electricity networks are used efficiently and flexibly, reflecting users’ needs and allowing consumers to benefit from new technologies and services while avoiding unnecessary costs on energy bills in general.

Access SCR Decision – Coming Soon

With the Access SCR Decision, connecting development sites might become more cost-effective. The decision introduces a ‘fully shallow’ connection charging boundary, potentially reducing costs for extension assets. Extension assets are the assets that connect a customer to the existing network, such as cables or transformers. Under the ‘fully shallow’ approach, customers will only pay for the assets that are solely used by them, and not for any reinforcement costs. However, certain variables and mitigations may influence the final outcome. For example, Ofgem will introduce a ‘residual charge’ to recover the costs of existing network assets from all network users, based on their consumption or generation. Ofgem will also introduce a ‘locational charge’ to reflect the differences in network costs across different regions, and a ‘forward-looking charge’ to signal the impact of users’ behaviour on future network costs. These charges may vary depending on the time of day, the season, or the level of network congestion.

Impact on Development (e.g., Data Centers)

For instance, in data center development, the reforms aim to remove expensive upfront reinforcement costs. This could streamline connection charges, making developments more feasible. Data centers are facilities that store and process large amounts of data, and they consume a lot of electricity. According to a report by the Uptime Institute, the average power usage effectiveness (PUE) of data centers in the UK is 1.59, which means that for every 1 kWh of IT load, 0.59 kWh of power is used for cooling, lighting, and other overheads. Data centers also need to ensure high reliability and resilience, which may require backup generators or batteries. The Access SCR could provide more opportunities for data centers to connect to the network, reduce their operational costs, and improve their environmental performance. For example, data centers could:

  • Benefit from lower connection charges and faster connection times, as they will not have to pay for or wait for network reinforcement.
  • Access cheaper and greener electricity from renewable sources, such as wind or solar, which may be located in remote areas with low network capacity.
  • Participate in demand-side response (DSR) schemes, where they can adjust their electricity consumption or generation in response to network signals, and earn rewards or avoid penalties.
  • Adopt energy storage solutions, such as batteries or flywheels, to store excess electricity when it is cheap or abundant, and use it when it is expensive or scarce.
  • Improve their PUE by using waste heat recovery systems, such as heat pumps or district heating networks, to reuse the heat generated by their servers for heating or cooling purposes.

How Reforms Alleviate Bottlenecks

The reforms aim to eliminate costly upfront reinforcement, reduce overall connection charges, and encourage a more holistic approach by DNOs. This could level the playing field among energy service providers, providing more flexible and quicker connections in congested areas. The Access SCR could also stimulate innovation and competition in the energy sector, as new entrants and alternative business models could emerge. For example, the reforms could enable:

  • Community energy projects, where local groups of consumers and producers can collaborate to generate, store, and share renewable energy, and benefit from lower network charges and higher social value.
  • Smart grid solutions, where advanced technologies, such as smart meters, sensors, or artificial intelligence, can monitor and manage the network flows, and optimise the balance between supply and demand.
  • Electric vehicle (EV) charging infrastructure, where EV owners or operators can access convenient and affordable charging points, and contribute to network stability and decarbonisation by providing DSR or energy storage services.

Futureproofing

This recent change helps alleviate cost constraints but as capacity is at a premium, this may not be enough to alleviate the current housing crisis in many large UK cities. The UK needs to build more homes to meet the growing population and demand, but the availability and affordability of land and electricity connections are major barriers. The Access SCR could help to unlock more sites for development, especially in urban areas where the network is congested or constrained. However, more investment and innovation are needed to ensure that the new homes are energy-efficient, low-carbon, and smart. This could include:

  • Building to higher energy performance standards, such as the Future Homes Standard, which aims to ensure that new homes have low carbon heating and high levels of insulation by 2025.
  • Incorporating renewable energy generation, such as solar panels or heat pumps, into the design and construction of new homes, and enabling them to export surplus electricity to the grid or to other consumers.
  • Integrating smart home devices, such as thermostats, lighting, or appliances, that can communicate with the network and the market, and adjust their settings to save energy and money.

Conclusion

The Access SCR is a significant change for the UK’s energy sector, and it will have implications for various types of developments, such as data centers or housing. The reforms aim to make electricity connections more accessible, affordable, and efficient, and to support the transition to a smarter, more flexible, and more decarbonised energy system. However, the Access SCR is not a silver bullet, and it will require careful implementation and coordination among all stakeholders, including Ofgem, DNOs, developers, and consumers. The Access SCR is also not the end of the journey, and it will need to evolve and adapt to the changing needs and opportunities of the energy sector and the society.

Sources:

  1. Access and Forward-Looking Charges Significant Code Review Decision and Direction
  2. Electricity Network Access and Forward-looking Charging Review
  3. Renewable Energy Developers Face Connection Costs of up to £25m
  4. Access and Forward-Looking Charges Significant Code Review: Working Paper
  5. Enabling a Smart, Flexible, Low Carbon Future
  6. Access and Forward-Looking Charges Significant Code Review: Working Paper