Policy Impacts

Radical changes to network charging confirmed by Ofgem

Posted on 26 November 2019
By Daniel Hickman
Daniel Hickman
Non-Commodity Forecast and Regulatory Lead

Daniel has more than 13 years’ experience in the energy industry, and has been working at npower Business Solutions for just over a decade. With an impressive 8 years’ experience in network charge forecasting and regulation, he is an expert in his field and uses his solid understanding of dataflow management, non-commodity settlements and revenue leakage to excel in his current role as Non-Commodity Forecast and Regulatory Lead.

Ofgem has at last published its long-awaited decision on changes to the way in which consumers pay for the residual element of transmission and distribution charges, plus revisions to the embedded benefits small generators receive.

While Ofgem’s aim is the make charges fairer to all consumers, the news is not so positive for forward-thinking consumers who’ve invested in on-site generation, battery storage and/or consumption flexibility.

Instead of charges being calculated based on the net volume of power consumed, new methodology will instead introduce fixed charges to both business and domestic consumers.

 

Free webinar to look at impact to business consumers

We will be exploring exactly how these changes are likely to impact large business consumers in our forthcoming Targeted Charging Review (TCR) Explained webinar on 3 December (more details below).

The introduction of these new charges will be staggered, with fixed transmission charges introduced in April 2021, and then fixed distribution charges a year later.

This means that after next winter, if National Grid’s current locational tariff (i.e. the forward-looking element of the bill) stays the same, there will only be very limited Triad-linked incentives for businesses based in the south and east. And in other areas – particularly Scotland and the north – there will be a negative impact for reducing consumption during times of peak national demand.

Fixed charges for TNUoS and DUoS residual

Instead, business consumers will pay:

  • A single set of fixed transmission residual charges for Transmission Network Use of System (TNUoS) payments, and
  • A set of fixed distribution residual charges for Distribution Use of System (DUoS) payments that will vary according to each of the 14 distribution licensed areas

Voltage level to determine cost to consumers

These charges will be calculated according to charging bands defined by a consumer’s voltage level.

An example of how this would work is given below, which Ofgem has provided to illustrate its proposed new charging structure for the North East region.

As I’ve mentioned, we’ll be looking in detail about how these charges will be calculated – and the impact to what you will then pay – in our forthcoming Targeted Charging Review (TCR) Explained webinar on Tuesday 3 December at 11am. You can sign up here

One fixed fee for all domestic consumers

For domestic consumers, there will be:

  • A single fixed transmission residual charge, and
  • A single fixed distribution residual charge (although this will be different in each of the 14 Distribution Network Operator regions)

For either charge, there will be no variation based on consumption level or the presence of any on-site generation or battery storage.

Shake up to embedded benefits

As part of its wider Targeted Charging Review, Ofgem has also revised the ‘non-locational’ embedded benefits that small generators can receive.

The changes include:

  • A stop to payments from suppliers to sub-100MW generators for reducing their so-called Transmission Demand Residual payments.
  • Charging balancing services charges for demand on the basis of gross – rather than net – demand at the Grid Supply Point. This means suppliers cannot reduce their liability for balancing services charges by contracting with Smaller Distributed Generators (and exporting on-site generation).

Ofgem’s original proposal was also looking to end the exemptions that sub-100MW generators have from paying generation balancing services charges.

But instead, the regulator has asked National Grid to launch a second Balancing Services Charges Taskforce with the aim of determining who should pay for the charges. This taskforce is due to report its findings early next year.

Forward-looking charges also under review

As you may be aware, Ofgem is also reviewing the forward-looking element of transmission and distribution charges – but this is very much still in the planning stages.

Ofgem’s timeline indicates we can expect further details and a consultation in Summer 2020, and implementation from April 2023. So we will keep you informed.

Recap on residual and forward-looking charges

Finally, in case you want to get clear on how exactly residual and forward-looking charges work, here’s a quick recap:

  • Forward-looking charges reflect how users contribute to future network costs by using networks at a particular time or in a particular location.
  • Residual charges are determined once the forward-looking charges have been calculated, to recover the remaining ‘allowed revenue’ set under price controls agreed by Ofgem to cover the costs of investing in and operating the networks. These residual or ‘top-up’ charges currently account for around 10-15% of a typical electricity bill, but can vary more widely for larger consumers.

If you have any queries about any of Ofgem’s new charging structures, please contact your Client Lead (for existing customers) or drop us an email to nBS@npower.com.

Don’t forget to also sign up to our Targeted Charging Review (TCR) Explained webinar on 3 December here.

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