Part 2 - Rule changes affecting licence exempt supplies of electricity: Exempt supplies via the grid

In part 1 of this series, we revisited some of the issues relevant to projects which involve a generator supplying electricity on a "licence exempt" basis to an end-customer as part of an on-site/private wire connection arrangement. In this second article, we consider the potential for making licence exempt supplies of electricity via the grid. 

As described in our previous article, the expression "licence exempt" refers in this context to an exemption from the requirement to hold an electricity supply licence.

The essence of an on-site/private wire project is the existence of a direct physical connection between the generating plant and the end-customer's premises. Whilst the customer will very likely retain its own connection to the public, DNO operated grid to source electricity which cannot be provided by the directly connected generating plant, the only "supply" by the generator to the end-customer will be of electricity which is delivered by way of the direct physical connection and not via any part of the DNO grid. It follows that on a project of this kind the generator will potentially fall within the scope of two different exemptions from the requirement to hold an electricity supply licence:-

• the "Class A, small supplier" exemption BUT only if, together with any companies the generator is "associated" with, it does not supply a total of more than 5MW of electricity or, in the case of supplies to domestic customers, not more than 2.5MW of electricity;
• the "Class C, "on-site supply" exemption. This exemption is potentially available for projects which are larger than 5MW, but only where there is a direct physical connection to the end-customer and supplies are not made via any part of the local DNO network.

Exempt supplies via the grid

Recent publications issued by Elexon, the body responsible for administering one of the main electricity industry code documents (the Balancing & Settlement Code), touch on the interesting possibility that, for generators who fall within the Class A exemption, there may be scope for establishing a project in which the generator does not have any direct physical connection with an end-customer – and so physically exports all generation onto the grid – but nonetheless has a direct "supply" relationship with an end-customer.

Some of the key features and potential value in establishing a project of this kind would be as follows:-

• the total amount of electricity supplied by the generator (and so likely the total size of the relevant generating assets) would be inside the 5MW or (for supplies to domestic customer) 2.5MW threshold set by the Class A exemption rules;
• there would be a direct contractual relationship between the generator and one or more end-customers, under which the generator agrees to sell certain amounts of electricity to the customer;
• the generator would have a relationship with a licensed electricity supplier to facilitate the supply of electricity over the grid, including the registration of relevant grid export and import meters in the name of the licensed supplier. However, unlike a "sleeved" PPA arrangement, this would ostensibly be on the basis that the licensed supplier does not itself purchase any of the exported electricity from the generator, so enabling the generator notionally to supply the electricity directly to the end-customer itself. The relevant agreement with the licensed supplier would need to describe how the total amount of electricity taken by a particular customer from the grid during a particular period was then apportioned between, on the one hand, electricity notionally supplied directly by the generator and, on the other, electricity supplied by the licensed electricity supplier under its normal customer supply terms to meet the balance of the customer's demand;
• there would not be any obvious scope under current rules for avoiding applicable network charges, as the supply by the generator would be made using the grid, not a private connection arrangement. However, on the basis that the generator is acting as a licence exempt supplier, it would not be subject to final consumption levies. As such, some of the "savings" value discussed in our previous articles in the context of private wire projects– in terms of avoided consumption levies – would apply, such that there would be scope potentially for the generator to achieve a higher price than under a normal grid export PPA and/or (depending on the commercial context for the project) the customer paying a lower price than under a normal grid supply contract.

In the future (potentially from as early as next year) the regulatory mechanisms for giving effect to a project of this could be those mooted by Elexon in its white paper of April last year on "Enabling customers to buy power from multiple providers".

In the meantime, as described in more detail in a separate Elexon consultation paper from October of last year, as long as relevant customers stay with the licensed supplier with whom the generator has a supply "facilitation" relationship, there may be scope for an application to be made to the BSC Panel which governs the operation of the Balancing and Settlement Code (BSC) to enable relevant customer consumption, as notionally supplied by the licence exempt generator, to be treated as non-chargeable for final consumption levy purposes.

As Elexon notes, this kind of model may be of particular interest to community groups who would like to establish "local" supply arrangements. A community led scheme may well involve one or more generation projects of a size which fits within the constraints of the Class A exemption rules. However, for commercial developers who have an appetite to partner with community groups on schemes of this kind, there may be scope for the developer to take at least a partial equity interest in the project, structured in such a way that the specific generator entity continues to be able to benefit from the Class A, small supplier exemption.

Final thoughts

As with many aspects of regulation relating to energy projects, rules relating to issues covered in this series of articles on licence exempt supplies are in a state of flux. Over the course of the next year or two though, we should have an increasingly clear picture of how network charges are likely to be set during the 2020s. It also seems likely that we will see some further developments around the process for end-customers being able to buy power, via the same grid meter point, from multiple suppliers – potentially including certain licence exempt suppliers as well regular licensed electricity suppliers. As so often for articles such as this one, the key message is watch this space!

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2019. Specific advice should be sought for specific cases. For more information see our terms & conditions.