Ofgem to overhaul the Electricity Network Charging Regime

Context – the next regulated Price Control period is approaching

Ofgem is in the process of defining RIIO-2, the next price control for the network companies running the gas and electricity transmission and distribution networks. The RIIO-2 period of 8 years starts from 2021 and determines the allowed revenue for network companies. Ofgem wants to set the rate of return for network companies at 4%, about 50% lower than previous price controls, saving the average domestic consumer around £30 per year. Ofgem said "In essence, we are reducing the amount of money firms can earn for transporting electricity and gas to your home."

This should  encourage network charges to lower, which is good news, but there are significant changes planned regarding how network charges are recovered while the system is radically overhauled. This will lead to increases for some consumers and a reduction for others and make forward pricing of network charges very difficult for suppliers.

Targeted Charging Review (TCR) Significant Code Review (SCR) for recovery of electricity network charges

Ofgem have reached a preferred position relating to changing  the way “residual” electricity network charges are recovered. Forward-looking charges vary according to consumption patterns. They include connection charges and the elements of the DUoS charges that users can influence with their consumption behavior (TRIAD for transmission charges and Red Amber Green for distribution).  “Residual” charges recover the remainder of the networks costs after the forward-looking charges have been levied, effectively making them sunk network costs.  The TCR is shaped around three core questions on how a residual charge should be designed:

  1. Who should pay? Generation, end consumers or a combination of both?
  2. What mechanism should be used to collect charges? Volumes used or other means such as fixed or capacity charge?
  3. How should charges be implemented? By voltage level, type of customer or ability to respond to signals?

Summary of the main impacts:

  • Ofgem plans to scrap the current Triad system within the next few years. The preferred option is to introduce fixed charges that create a level playing field between flexible users that are able to reduce consumption during peak periods and those with a lack of flexibility who are currently left paying a higher price.
  • Proposes to remove perceived cross subsidies  from Embedded Benefits to other less flexible customers (Ofgem claims that these increase costs for other consumers and affect competition)
  • TNUoS charges are currently shared between consumers & generators (with the majority paid by consumers). Ofgem proposes that 100% of these charges will be paid by consumers.
  • Consumers will therefore see an increase in TNUoS charges, but there should be lower wholesale electricity costs as the proposal will reduce the cost of generating electricity.
  • Proposed implementation date is April 2021 but could be later.

What does it mean for customers?

The changes to network charges will have different effects on different types of consumer. Rebalancing the allocation of these charges means some people will pay more and some people will pay less.

Ofgem’s impact assessment concluded that:

  • The majority of domestic customers will benefit from the rebalancing of charges.
  • However, some domestic and microbusinesses who use the least electricity could face a typical annual increase of between £2 and £22 a year.
  • The effect on businesses varies considerably. Some firms may pay more, particularly if they have benefited from reduced contributions because of investing in on-site generation, reducing their contribution to the existing system. Those that haven’t taken such action pay less. Within the small non-domestic segment, the lowest consuming users will pay more, but many of those facing an initial increase will benefit from the longer-term savings from Ofgem’s proposed changes.

More information about the TCR can be found here: 

https://www.ofgem.gov.uk/electricity/transmission-networks/charging/targeted-charging-review-significant-code-review

Network Access and Forward Looking Charges SCR (electricity)

In addition to the TCR SCR, Ofgem have another programme looking at Network Access and Forward Looking Charges. This sets out the objective of ensuring that electricity networks are used efficiently and flexibly, reflecting users’ needs and allowing consumers to benefit from new technologies and services while avoiding unnecessary costs on energy bills in general.

  • A review of the definition and choice of how customers access networks for transmission and distribution.
  • A wide-ranging review of distribution network (DUoS) charges. A review of the distribution connection charging boundary
  • A focused review of transmission network charges

This programme of work is at an earlier stage than the TCR SCR and therefore the impacts on customers are not yet defined. There will be a series of consultations and ultimately modifications to the Network Access code to implement change.

More information about this programme can be found at:

https://www.ofgem.gov.uk/publications-and-updates/electricity-network-access-and-forward-looking-charging-review-significant-code-review-launch-and-wider-decision

Comment: “These are significant programmes of work that will have huge impacts on how electricity network charges are passed on to suppliers. Total Gas & Power will stay close to the evolution of these proposals and be actively involved in the development of the changes to protect the interests of non-domestic consumers wherever possible.”

Andrew Green, Head of Regulation at Total Gas & Power