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Home/Proposed Network Charging Reforms Could Set Back Subsidy-Free Renewables by up to 5 years

Proposed Network Charging Reforms Could Set Back Subsidy-Free Renewables by up to 5 years

  • Ofgem’s Targeted Charging Review proposes an overhaul of network charges for all asset types across the GB power system
  • Analysis by Aurora Energy Research shows that the changes will favour low-efficiency gas CCGTs at the expense of new renewables schemes such as onshore wind and solar PV – with subsidy free renewables delayed by 2-5 years as a result
  • This finding is contrary to Ofgem’s assessment, which did not assess the impact on renewables deployment, and concluded that gas CCGTs would be negatively affected
  • The proposed changes represent the latest in a series of regulatory blows to smart solutions such as battery storage and demand response, which have seen their profitability eroded – despite Government’s strategy to support the rollout of these technologies

A new public report released today by Aurora Energy Research suggests that regulatory changes proposed under Ofgem’s Targeted Charging review could have significant effects on the GB power market, altering the economics of all forms of generation. The report will be discussed at a webinar on the 22nd May. Click here to register.

In its role as GB power market regulator, Ofgem has proposed a series of changes to the prevailing system of electricity network charges – releasing its ‘minded to’ position on preferred changes in November last year. The proposals aim to level the playing field between different forms of generation – removing a perceived imbalance in network charging which in recent years has led to a proliferation of small generation plants connected at the distribution level (as opposed to large, transmission connected plants). Specifically the proposals would change the method of allocating sunk network costs to demand side users of power; remove so-called ‘embedded benefits’ for smaller power generators connected to the distribution system; and remove a credit currently paid to all transmission-level generators.

Aurora has analysed these proposals in detail – identifying not only the first order effects, but the second and third order effects to fully understand the impacts across the power market. This has led to some stark conclusions, which in many cases directly contradict Ofgem’s own Impact Assessment.

Aurora’s analysis suggests that implementing the TCR proposals in full would have the following effects:

1 – Hold back renewables deployment:

The combined effect of the TCR proposals would damage the economics of distribution-connected renewables such as onshore wind and solar PV. This is partly due to the fact that these assets would see an embedded benefit removed, as well as new balancing charges imposed on them. It is also partly due to the fact that TCR would lead to slightly lower wholesale power prices, reducing the market revenues achieved by renewables schemes.

All else held equal, the changes would push back the deployment of subsidy-free renewables by 2-5 years, undermining the Government’s push towards renewables and decarbonisation. Deployment of solar PV would be 5GW lower by 2035 as a result of the changes, whilst onshore wind deployment would decrease by 1GW.

By contrast, Ofgem’s impact assessment assumed that renewables deployment would remain unchanged due to renewables receiving higher CfD subsidy payments as a result. But in reality onshore wind and solar PV are not eligible to receive these subsidies.

Although the impacts of the TCR are negative for renewables, this effect may be partially offset by other factors, such as the continual decline in the cost of solar and more efficient onshore wind turbines – meaning that the best renewables schemes could still be deployed without subsidies in the coming years.

2 – Hold back deployment of smart solutions such as batteries and demand response:

The Government and Ofgem have set a clear strategy to encourage the development of smart solutions to balancing the power system, such as battery storage and demand response. However, Aurora’s analysis finds that the TCR changes, taken in isolation, undermine the economics of both of these technologies. Embedded battery storage projects would see higher network charges under the proposals; whilst demand response and Behind the Meter schemes would see a significant source of value removed. Batteries would be unable to make these revenues up in the Capacity Market due to their low de-rating factor. Since batteries are often deployed alongside renewables, battery economics would be further affected due to the fact that the TCR will hold back the rollout of renewables.

3 – Benefit gas CCGTs:

Aurora’s analysis finds that the TCR proposals would benefit gas CCGT power stations at the expense of renewables and battery storage. The changes would result in older, less efficient CCGTs staying in the market for longer than would otherwise have been the case. Although CCGTs would see an increase in network charges under the TCR, they would be able to recover most of these costs through the Capacity Market (assuming it is reinstated, following its suspension late last year by the European Courts). By contrast, renewables schemes are unable to recoup the additional network charges as they do not receive capacity payments.[1] Again this finding is contrary to Ofgem, whose Impact Assessment suggested CCGTs would be negatively impacted by the proposals.

Weijie Mak, Project Leader at Aurora Energy Research and co-author of the report commented:

“Ofgem’s latest proposals surrounding network charges could have a very significant impact on the GB power market. Our analysis suggests they would negatively impact the deployment of renewables – holding back subsidy-free deployment by 2-5 years, and undermining the achievement of decarbonisation targets. On the other hand it appears the proposals would favour gas CCGTs over smart solutions such as battery storage and demand response. These changes would have a significant impact on the returns for power utilities across a wide spectrum of asset classes. We understand the need for Ofgem to ensure network efficiency and consumer protection, however there is a risk that pursuing too narrow a focus on these objectives could undermine the transition towards cleaner and smarter forms of power generation, as well as undermining investor confidence.”

View Public Report

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