Ofgem’s Targeted Charging Review for a Changing Energy Market

As we head full steam (or rather – electric or renewable!) into the Fourth Industrial Revolution, the electricity network is undergoing significant decentralisation and other changes. For example, the UK Government has set ambitious targets to get more electric vehicles on the road and decarbonising the energy supply chain. With the increasing volume of renewable generation, the nature of the UK’s energy supply is changing at a rapid pace.

Key players in the industry, such as Ofgem and the National Grid, are aware that they need to act soon to adapt the legacy energy system to cope with the rapidly changing environment. In response to these required reforms, Ofgem has launched a Targeted Charging Review (TCR) to future-fit the way the customers pay for and consume their energy.

In this article, we’ll help you decipher the details in “plain speak” so that you can have an idea of what the TCR could mean for your business.

Why are network charges changing?

Ofgem has been undertaking a review of the charging methodology for Balancing Services Use of System (BSUoS), Distribution Use of System (DUoS) and Transmission Network Use of System (TNUoS) charges for the supply of electricity (this occurs every five to eight years). This will mainly impact half-hourly (HH) customers who load shift (move consumption out of peak times) to reduce their costs.

In the past, most electricity generation was connected to the high-voltage transmission system. Today, smaller energy generators have the ability to connect directly to low-voltage distribution networks, allowing them to avoid paying some transmission network charges.

This combined with customers moving their electricity usage outside of peak hours (commonly 4 pm – 6 pm on winter weekdays), and the evolution of technology such as battery storage, is reducing the revenue streams required to maintain the network.

Industry participants will require changes to their pricing methodologies to reflect an increasingly distributed network and to ensure that everyone is paying their fair share.

Tim Sealy-Fisher, Head of Mid-Market Solutions at Smarter Business says: “Although the TCR is still in review, fundamental changes to network use of system charges will need to occur to allow for the changes in UK energy demand profiles.

Historically, the National Grid transmission system has recouped its costs through charging suppliers (and therefore customers) for their contribution to UK demand peaks.

With these peaks smoothing out by way of technology or customer process change, their methodology will need to adapt to ensure sufficient funds re-raised to maintain and develop the network. Triad avoidance has been successful for customers by moving their peak load, meaning the national grid collect less money than expected.

Ofgem has agreed to move to a fixed cost method from April 2021 (TNUoS) which will see customers charged a fixed charge for a greater portion of their charges, and reduce the benefit of load shifting (i.e customers won’t be able to continue to save as much money through changing the times that they use electricity).  Furthermore, BSUoS charges will move to gross demand rather than net demand, removing the benefits that small generators have been receiving for balancing the load on the networks. Distribution Network Operators (DNOs) currently charge suppliers a residual charge (for the difference between expected revenue and actual revenue), which suppliers build into their prices.  This will be changed and made more transparent as a fixed DUoS charge.”

How will charges be changing?

Half-hourly (HH) customers will notice the change, but non-half-hourly (NHH) customers won’t notice the difference in their invoicing as the changes will be bundled into their contracts.

At this stage, it’s too early for suppliers to comment on whether this will impact existing contracts in place, or if they will apply the changes on future contracts only.

Under the TCR, Ofgem will be considering:

• Residual charges – used to recover the sunk costs of the existing network
• Forward-looking Distribution use of System (DUoS) charges – which pay for network upgrades and grid access arrangements

Residual charges – TNUoS and BSUoS

• Amount to about £4 billion annually
• Make up 10-15% of a typical user’s bill

Current model for residual charges

• Residual charges are concentrated into peak-use periods with higher kWh costs.
• This incentivises high energy users to shift consumption, thus taking the strain off the network.

Reform for residual charges

• Residual charges will be collected based on your final energy use.
• Shifting energy use times will no longer be an effective strategy for reducing energy costs.

BSUoS

Moves to gross demand from April 2021 reducing BSUoS charges for Smarter Business customers (slightly).  With the number of embedded generators within networks, billing suppliers on a net basis was reducing the income for the DNOs.

Impact

Embedded generators will no longer receive a balancing payment (this is different from receiving payment for exporting energy) for generating back on the network to help balance the frequency.  The BSUoS charge to end customers should reduce slightly.

Challenges/Opportunities

None for Smarter Business clients.

TNUoS

From April 2021, a majority of these charges will move from the peak demand methodology (kW) to a fixed price per year based on demand bands (their average of the last 24 months) and the voltage of their connection.

Impact

Customers who actively reduce their electricity, typically between 5 pm-6 pm weekdays (Nov-Feb) will no longer be able to avoid/reduce these charges.  The ROI for battery storage changes (as this was the opportune time for battery use).

Forward-thinking charges

• Ofgem will consider the definition and choice of access rights for smaller users and DUoS charges.
• Once electric vehicles become more commonplace, Ofgem may incentivise customers to charge them during off-peak periods.

DUoS

An increase in fixed charges will apply from April 2022, with a potential reduction in Red Amber Green charges.  The DNO currently bills energy suppliers for residual energy, which is the difference between what they expect to earn over the year and what they do earn.  The residual element will be converted into a fixed amount instead of the variable amount to increase transparency.

Impact

Unknown at this stage until the DUoS use of system charges are published, however likely to have little impact on customers.

 When will these changes take place?

• Fixed charging is planned to start in April 2021 (either in full or in a staggered approach through 2023).
• Implementation of Smart Export Guarantee (suppliers requirement to provide export generation prices), will commence on 01 January 2020 through suppliers.

What could this mean for businesses?

Triad periods

A key part of Ofgem’s review will include transmissions network use of system (TNUoS) charges. The TCR will likely mean changes to Tnuos charges between 2021/2023.

Current model for Triad charges

Currently, a majority of high energy users are able to avoid Triad charges through load management. The result of this is that the entities using the most energy are able to circumvent Triad charges, while those who are unable to do so are left picking up the costs.

Reform for Triad charges

Under the TCR, Ofgem aims to make charges fairer for those businesses that are unable to avoid network charges.

Opening up onsite generation

The onsite energy generation market is gaining a lot of tracking with

Sealy-Fisher says “With battery storage becoming cost-effective, it will become more common to generate electricity through solar (as an example) into a battery which is used in peak times. Even more so when bio-directional EV batteries are available and people potentially plug their cars in to generate back into the grid in peak times.”

What does all this mean for your business?

The outcomes of Ofgem’s TCR remain to be seen, but preparation is key nevertheless. With plans to implement TCR from 2021, you have around two years to rethink your business’ energy strategy.

While the changes confirmed by Ofgem provide better revenue certainty for The National Grid and DNOs, they do reduce the return on investment for new technologies that help creates a more flexible energy network – such as battery storage and embedded generation, which have previously helped manage and reduce national peak demands.

Our recommendations

• Ensure that you have an accurate idea of the capacity that you need now and in the future.
• If appropriate, accommodate for incorporating EV charging points by building the additional capacity requirements into your planning.
• Continuous improvements in energy efficiency should remain a priority.
• Having a well-designed energy strategy could help you cut costs, build long-term resilience, and lower your carbon footprint.

Expert advice

Our energy consultants will work with you to determine your current and future energy needs and will create an energy strategy that works for your business amid a changing energy landscape.

Get in touch to find out more about our business energy services. 

Read More: Targeted charging review: minded to decision and draft impact assessment.

A high-level explanation of DUOS and TNUOS charges can be found here: https://www.stark.co.uk/resources/news/quick-guide-to-duos-and-tnuos/