Policy Impacts

Ofgem TCR reforms to impact fixed contracts

Posted on 18 March 2020
By Simon Mitchell
Simon Mitchell
Deal Support & Contracts Manager

Simon Mitchell leads the Deal Support & Contract Management team within npower Business Solutions, which is responsible for bespoke pricing, contracts and bid management for large energy consumers. He has 24 years energy industry experience, with specialist expertise in industry costs and risks, and has previously led costing, pricing and demand forecasting teams.

New ways of calculating the main energy transmission and distribution charges will start to impact electricity prices from April 2021 – and for most business consumers, this will mean higher costs.

These changes are being introduced as a result of Ofgem’s Targeted Charging Review (TCR), which will make the main (residual) element of Transmission Network Use of System (TNUoS) and Distribution Use of System (DUoS) charges more expensive for Half-Hourly (HH) supply.

Capacity to replace volume

Rather than basing these charges on the net volume of power consumed, they will instead be recouped via fixed charging bands based on a consumer’s location, voltage and capacity level.

Ofgem has already published indicative capacity bandings – and we expect confirmation of the final bandings in Quarter 4 (Q4) of this year.

The new charging methodology will then take effect from April 2021 for TNUoS charges and from April 2022 for DUoS.

Extra £15/MWh

Current calculations are that these changes could add as much as £15/MWh to a business’s electricity invoice. But calculating exact costs per site/consumer is complex.

Fortunately, our Forecasting Team has developed a bespoke tool – in conjunction with expertise and modeling from our Non-Commodity Costs Team – that allows us to factor in the impact of these changes to future prices.

Prioritising visibility now

So for customers and consultants looking for quotes for fixed-price electricity contracts post-April 2021, we can now incorporate a tailored forecast of the new charges into the capacity element of the rates we offer. (Rates will be updated once final bandings are confirmed by Ofgem.)

As a result, our fixed-price contracts post April 2021 will have higher capacity charges (£/kVA). But as the majority of TNUoS and DUoS charges will no longer be incorporated in unit rates, these will be lower than current rates.

We understand that many other suppliers are struggling to make the new charges tangible. This means most, if not all, are currently choosing to omit TNUoS and DUoS increases for now, instead relying on ‘change of law’ contract clauses to add on the additional costs once they are introduced in April 2021/22.

Clear, transparent pricing

However, as we already know the vast majority of detail about these cost increases, this approach doesn’t provide consumers with true market-reflective rates.

Wherever possible, our aim at npower Business Solutions (nBS) is to offer prices that are clear and transparent.

That’s why we are introducing them now.

For any existing Fixed Certainty contracts that run post-April 2021, we will not be adding any additional costs where TNUoS and DUoS costs are currently fixed.

New Fixed Certainty contracts will also guarantee no rate increases to reflect forthcoming increases in TNUoS and DUoS costs.

Check the detail to compare like with like

We appreciate these changes may be confusing, especially where other suppliers aren’t reflecting the new TNUoS and DUoS price rises yet.

So to help you accurately compare the rates for future fixed deals you are being offered, we suggest the following:

  1. Check the total price – capacity charges may be higher, but if so, unit rates should be lower. Look at the overall cost.

  2. If the rates being offered post-April 2021 don’t show any increase in cost, check the terms and conditions and ask for clarity. Be clear on the supplier’s stance on the impact of Ofgem’s TCR.

  3. Clarify what guarantee a supplier is offering you with regards to future price rises.

  4. You may want to look at options to fix the electricity unit cost but take the non-commodity elements (including TNUoS and DUoS) on a pass-through basis.

Access bespoke intelligence now

For more information on how these changes might impact you, contact your Client Lead or Account Manager (for existing customers). Or email us via nBS@npower.com.

We also offer a service to provide a specific impact assessment of how the introduction of these TCR changes will financially impact individual businesses (and overall portfolios for consultants).

This report will not just outline changes on a site-by-site basis, but also bespoke energy solutions to help mitigate price increases and/or generate additional revenue. Contact technicalservices&analysis@npower.com to find out more.

Finally, please be aware that there will be further changes to non-commodity charges once Ofgem completes its current Access and Forward Looking Charging review. We will be updating you as soon as more detail allows us to model likely cost implications.

Comments

Your email address will not be published.