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Do private wire arrangements work for District Energy schemes

This article was originally written for the UK District Energy Journal, June/July 2015

With criticism of the apparent ‘Big 6’ oligopoly rife, and the emissions targets looming, the use of private wire networks is becoming increasingly popular throughout the UK. Private wire networks are typically small scale energy schemes which generate energy close to the location they are ultimately supplying, reducing waste energy and introducing competition in the market, which is encouraged by the UK Government.

A private wire network creates a direct connection between generator and consumer, cutting out the middleman and there-by reducing energy costs for the ultimate consumer. Electricity supplied usually happens on a licence exempt basis (see further below). Unless there is a constant demand for electricity, small scale generators will nor-mally also require access to the electricity grid to export any surplus energy to generate further revenues.

Common in the market are so called sleeving or third party netting arrangements, linking generators directly to consumers through direct power purchase agreements (PPAs). These arrangements are beneficial to cus-tomers with a large energy demand, although putting in place compatible supply arrangements can be com-plicated. Licensed electricity suppliers tend to avoid sleeving arrangements with domestic customers due to the amount of administration involved, hence such arrangements are not suitable for smaller customers. More and more companies and public authorities are therefore looking for ways to offer community energy with added value to smaller business customers and consumers. District Energy schemes with private wire arrangements may offer a solution.

Exemptions from Licences
Under the Electricity Act 1989 it is a criminal offence to generate, transmit, distribute or supply electricity with-out either a licence or an exemption to hold such a licence. The implementation of District Energy schemes with private wire networks can benefit from a variety of licence exemptions, depending on the size and struc-ture of the project. Class exemptions are available for electricity generation, distribution and supply under the Electricity (Class Exemptions from the Requirement for a Licence) Order 2001.

For example, with respect to distribution, Class A creates an exemption for “small distributors” who supply to domestic consumers. Distributors providing less than 2.5MW at any time, in aggregate, across mixed use properties are exempt from the requirement for a licence. Whether or not a District Energy scheme can bene-fit from such exemptions under a private wire arrangement depends very much on the structure and the size of the project.

Overcoming the “Citiworks” Challenge
Historically licence exempt electricity providers were exempt from the requirement to provide third party access to their private wire systems. However, the implications of the ‘Citiworks’ case of 2008 means is now clear that the requirement to enable third party supply applies in respect of all distribution systems. Accordingly, electricity generators and distributors owning a private wire network (whether they supply to domestic or commercial consumers, and are licence exempt or otherwise) must allow third party access to their network. This is however subject to certain exceptions including an increase of capacity in certain circumstances. The requirement is now set out in Article 32 of the Gas and Electricity Directives, which forms part of the EU‘s Third Energy Package of legislation.

Subject to the exceptions, this removes the private wire network owner’s right to make exclusive supplies to those connected to its network, thereby preventing its customers from switching to other electricity suppliers. Private wire network operators will have to open their network when the consumer requests third party access. The private wire network operator as exempt distributor will however be able to charge the appropriate use of system charges (as approved by Ofgem) to a new supplier coming onto the network. Thus, if District Energy network operators are offering competitive rates, there is little reason for consumers to look for alternative electricity supplies. DECC has published some useful guidance on this subject entitled Guidance: Provision of Third Party Access to Licence Exempt Electricity and Gas Networks of February 2012 

Licence Lite
Where a provider does not fall under an exemption, or perhaps aspires to supply or distribute an increased amount of energy, OfGEM’s proposed Licence Lite steps in to ease potential barriers.

This form of junior licence allows companies to partner with an existing supplier who takes responsibility for the more costly and technically challenging parts of a supply licence. Suppliers are still required to comply with the rights and obligations of a licensed supplier, but without the more onerous, time consuming and costly provisions of the supply licence.

CornwallEnergy have partnered with the Greater London Authority, which has recently applied for a Licence Lite in order to be able to buy electricity from the London Boroughs and other decentralised public bodies and sell it directly to consumers at market rates. The GLA is the first to apply for the Licence Lite and the business model shows feasibility, designed around passing costs and liabilities to the generators, along with a true commitment to localised District Energy. Licence Lite provides a beacon of hope for providers and investors alike, following what some saw as a damning judgement from the Citiworks case.

Conclusion
With numerous feasible exemption options at the District Energy suppliers’ disposal, and the apparent uptake of Licence Lite, District Energy schemes with a private wire arrangement are becoming a viable, profitable and low carbon solution. Whilst Licence Lite is still in the early stages of conception, OfGEM’s pragmatic response to the Citiworks challenge proves that the decision is not the end for private wire networks.

In fact, there are companies who already successfully operate such private wire networks for their District Energy schemes. To avoid pitfalls in the changing regulatory environment it is important to obtain robust legal advice on the contractual structure and the specific regulatory requirements of your private wire District Energy scheme.

This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

Christian Hellmund

Director for Energy & Renewables