On 21 November 2019, Ofgem published its final decision on the Targeted Charging Review (TCR). The TCR is part of Ofgem’s ongoing work to update the way that consumers pay for their use of the electricity network infrastructure.
Ofgem’s final decision was that ‘Final Demand’ users should pay the Demand Residual component of the Use of System (UoS) charges at a fixed rate on a pence-per-site-per-day basis. What that means in clearer terms is broken down and set out below.
The current charges
The electricity network costs money to build, operate, and maintain. Network operators can charge consumers each year to cover their costs. These charges are regulated and capped by Ofgem.
The networks recover their costs via UoS charges, which comprise roughly a quarter of the cost of an annual electricity bill.
UoS charges are made up of a forward-looking component and a residual component.
The forward-looking component can comprise a locational component, intended to reflect the relative cost of having electricity supplied to you over the network in different parts of the country. There may also be a time-of-use component, intended to encourage consumption at or away from various times of the day.
The residual component makes up the remainder of the costs the network companies can recover after setting their forward-looking pricing signals.
This residual component is the part of the UoS charges that half-hourly metered customers have been able to avoid paying by reducing consumption over the three ‘Triad’ periods each year.
The changes being made
Ofgem’s current TCR decision affects only the residual components of UoS charges.
The residual component of the Transmission UoS charge will be changed to a fixed-charge-per-day-per-site system from April 2021, and the residual component of the Distribution UoS charge will be similarly changed from April 2022.
The forward-looking components of the UoS charges will be addressed through Ofgem’s ongoing Significant Code Review (SCR). The work of the SCR is expected to be implemented by 2023.
Ofgem has decided to split out the residual component of the Use of System fees. These differ for each type of consumer in each region.
The forward-looking components will not be charged in this fashion until the SCR establishes their new regime for 2023.
The following steps show how we understand the Transmission UoS charge will be allocated from April 2021. A similar process will happen for the Distribution UoS charge.
Each year Ofgem will agree an amount that National Grid, the Transmission System Operator (TSO), is permitted to raise from electricity consumers.
Over 2020/21 this will amount to £2.84 billion and over 2021/22 this is projected to go up to £3.08 billion. Each Distribution Network Operator (DNO) similarly arranges an amount that they can raise from consumers.
The Transmission sums are divided up across the 14 Distribution Service Areas (DSAs) via the existing industry CDCM/EDCM methodologies. Within each DSA there will therefore be a fixed amount to raise. This also applies to the Distribution sums as well.
Consumers within each DSA will be allocated a charging band. The total amount to be raised within each DSA will be allocated between six general categories depending on the point of the network the consumer is connected to.
The Transmission charging categories will be split up as follows:
- Domestic consumers
- Low Voltage (LV) connected consumers with no Maximum Import Capacity (MIC) – split over 4 sub-bands
- LV connected consumers with an agreed MIC – split over 4 sub-bands
- High Voltage (HV) connected consumers – split over 4 sub-bands
- Extra High Voltage (EHV) connected consumers – split over 4 sub-bands
- Transmission Connected consumers
How this will work for different customers
Within each DSA a portion of the amount to be raised will be allocated to Domestic consumers. Ofgem have decided that a flat fee per consumer per year will be applied, regardless of the size of the property.
All Transmission Connected demand within each DSA will also be allocated a share of the total amount to be raised. The same fixed fee per site will apply to all Transmission connected sites within each DSA.
All half-hourly metered Distribution Connected Consumers will be allocated to charging bands first by the level of their connection voltage (LV, HF, or EHV). Then by the size of their MIC, as agreed with their relevant DNO.
The current plan from Ofgem is that all HV and EHV customers will be allocated by their MIC, but LV consumers who do not have an agreed MIC in place will be allocated to a band based on their average annual consumption over the last 24 months.
Where such data does not exist, processes will be put in place to estimate 24 months of annual consumption. Consumers will be put into a charging band based on this estimated data, and a reassessment may be done once 24 months’ worth of data becomes available.
The next steps
The work has yet to be done to put actual numbers on the distribution bands and sub-bands. National Grid, along with the DNOs, are working to gather the necessary data to catalogue and assess every connected customer in order to allocate them to the appropriate bands.
It is expected that National Grid will produce the first version of the charging bands for non-domestic consumers by mid 2020. The indication given is that the charging bands will be reassessed for every five-year Transmission price control period.
There are no procedures planned for consumers to move between charging bands (for example, by adjusting their average consumption or agreeing a change to their MIC). The only time this is likely to be reviewed is at the beginning of each five-year Transmission charging price review. However, if this is addressed then we will report any new procedures as soon as possible.