Energy Strategy Focus: Ofgem Targeted Charging Review

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Energy Strategy Focus is a series of articles and other content that we produce to help you with your energy strategy with particular attention to energy procurement. The aim here is to let you know how forthcoming changes in the industry and market are likely to affect you and your business. In this instalment, we focus on Ofgem’s Targeted Charging Review (TCR).

What is the Ofgem Targeted Charging Review?

Ofgem, the government regulator for gas and electricity markets in Great Britain, has recently confirmed that they will press on with reform to residual charges under the Targeted Charging Review.

This is a move positioned as an effort to modernise the electricity network, as well as spreading costs more fairly between businesses and consumers.

It’s important that you’re aware of this, as it can form an essential part of your overall energy strategy.

What’s the purpose of the targeted charging review?

National Grid say it will ultimately save as much as £300 million per year from 2021 onwards. However, it means that those businesses that already have effective Triad-avoidance techniques in place will likely see costs increase.

Embedded generators will also see further reductions in embedded benefits, which are currently earned by spilling electricity to the local distribution network.

The full impact of the changes will likely not be clear until National Grid clarify individual bands and tariffs, possibly early next year. However, the findings of the review do set out a number of changes that will impact on individual businesses.

What exactly are the changes and how do they affect your energy strategy?

The existing Triad system will be replaced with a fixed charge methodology from 2021. This comes earlier than many large energy users had hoped.

Ofgem had come under a lot of pressure to delay any changes until 2023, to align with a significant code review for DUoS charges and the start of RIIO2 for distribution companies. But they ultimately decided that they had a legal duty to implement any cost savings at the earliest possible opportunity.

This means that  consumers, who currently reduce imported electricity consumption during Triad periods will no-longer be able to avoid paying Transmission Network Use of System (TNUoS) charges from 2021 onwards.

Again, all these points should be factored into your energy strategy, which is why we are bringing them to your attention here.

How else is it likely to affect your business?

The changes will also see the end of embedded benefits for those organisations with on-site generation capacity that had previously used it to export during Triad periods.

These benefits are already being withdrawn and for embedded generators and in Northern England and Scotland will either be zero or very small before this date. The main losers will be exporters in the South.

For metered supply with no agreed capacity, charging bands will be based on net volumes of consumption. For half-hourly metering, charges will vary depending on agreed capacity and voltage level. Rates will vary for different regions.

Changes to distribution residual charges will follow in 2022, while Ofgem continues to review further changes to Distribution Use of System (DUoS) and Balancing Use of System (BSUoS) charges, which are expected to be introduced in 2023.

How much is this likely to affect your business and its energy strategy?

Energy-intensive businesses drawing high baseload with high voltage connections and no current Triad avoidance measures will expect to see a cost reduction. In some cases, securing an agreed capacity reduction or voltage reclassification will be beneficial.

The biggest impact will likely be on those businesses that are already employing Triad-avoidance measures, such as switching to back-up generation or reducing demand during Triad periods, as this will no longer provide the cost reduction impact it did under the previous scheme.

Any organisations currently exporting energy during Triad periods will see a further reduction in embedded benefits. This will particularly impact those utilising wind or CHP, while solar will be less impacted as Triad periods invariably fall during hours of darkness when solar PV is not generating.

The precise impact on each consumer will not be clear until National Grid produce their first tariff forecasts for 2021/22, which will hopefully be early next year. However, the new charging methodology will create winners and losers with the potential of using creative ideas to reduce these costs.

Want more help with this?

If you would like some help understanding how this fits your energy strategy and in particular the procurement aspect of this, then why not book a free consultation with us and we can discuss this with you?

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