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?
In the past, all 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 Key Accounts at Smarter Business days: “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.”
How will charges be changing?
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
- 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.
- 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.
When will these changes take place?
- Fixed charging is planned to start in 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?
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.
Network operator costs
Distribution network operators (DNOs) are under pressure to curb their costs. Ofgem is expected to help reduce costs to consumers by challenging the rate of return DNOs pay shareholders.
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.
- 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.
- Tap into demand-side balancing services to access £1 billion worth of annual incentives.
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.