Targeted Charging Review (TCR) - getting to grips
Hello.
My name is Binoy Dharsi. I’m a network charging expert here at EDF and I want to take you through some of the network charge reforms that are currently underway and some that are being planned for the future.
What are network charges?
When I’m talking about network charges, I’m talking about:
Collectively this accounts for almost a third of your electricity bill.
Over the next 3-5 years that pot of money is going to increase (due to some of the reasons below), and essentially the whole pot of money is there to be collected for the network operators to reliably provide your connection and to make sure that the system is maintained in the way it should be.
Why is the network charging reform important?
Essentially there are a few reasons:
Let’s go through the two charging reviews that have been underway for 3-4 years now, which are trying to deliver a little bit more fairness in the way that the distribution transmission companies collect revenue from all customers and users.
Let’s start with the Targeted Charging Review – what’s it trying to achieve?
Principally it had a really clear purpose - if you are connected to the network, you should pay a fair contribution for its upkeep.
In reality, what’s been happening (and not through any fault of customers) is that the actual charging signals that the network companies were sending were asking people to rightfully reduce their usage at peak periods, so they wouldn’t have to be investing in more cables. But that signal became increasingly higher and higher. And when the network companies needed money to build up the network, those signals became even higher. It became so high that the cost that was being avoided was running into hundreds and hundreds of millions of pounds. In the future, it could have got to billions of pounds. The issue with that is all Network charges are a zero-sum game – so if a certain community didn’t pay for that cost, other uses would have done.
The Targeted Charging Review was simply a way to introduce a sort of a fixed cost to say “if you're connected to the network, you pay a proportion for the upkeep”.
How and when is the Targeted Charging Review going to happen?
This reform is now being implemented in two stages.
- You've got the DUoS for the distribution charges. And from April 2022, the charges become more fixed. So as a portion of your bill, you'll see more and more collected through a standing charge than you would through the unit rate.
- And then from April 2023 (this is still to be fully decided by Ofgem, but we're expecting their decision imminently), the same thing will happen with transmission (TNUoS). So, we're talking almost 90% of the transmission bill would now be a fixed component.
The secondary review is called the Access and Forward Looking charge
Essentially this is the forward-looking signal where I explained there's a certain size cable and the network companies would like users to try to use more of it during the day.
Ofgem have come up with an initial view of how they think this will play out. At the moment, because of so much reform, we don’t know have much clarity over how this will be implemented in the future. What we do know is Ofgem are looking to publish more information between January and March 2022.
What we expect them to do is potentially make more distribution tariffs – so give people a different signal to say “If you are able to use the network during these particular points of time, you would pay this...”. And there would clearly be incentives if people were able to shift some of their demand.
As I said, the information isn't currently available, and we don't expect any of this to be implemented until post-2024, so we've got some time to understand this. In the next update that we provide, I’m sure we’ll have some more information to share.
In addition, as part of the network charging reform, are the changes to the BSUoS charges or balancing charges.
Just to remind you – BSUoS is a pot of money that the National Grid electricity system operator spends to transfer power across the entire network.
For example,
Imagine a very windy day in Scotland and all the wind farms are generating and producing power down through the cables. On this day, this energy needs to reach the demand areas in Manchester Leeds, Birmingham and London. With so much generation, there are only a certain amount of cables built to transport a certain amount of capacity. And once you reach that capacity, you cannot transport any more electricity through them.
So what National Grid would do is say to some of the generators of these wind turbines to stop generating, therefore alleviating the constraint on that cable. What they'll then do is contract with another generator south of the border to say “we still need this energy. We can't actually procure it from north of Scotland because the cables are at capacity.” So they would then have to pay some generators in order to be able to consume.
Equally what they could do, if it's much more cost-effective, is ask larger demand users to reduce their consumption to help the grid meet the power demand.
As you can see, all these incremental actions cost money. And this is generally the most effective and cost-effective way of balancing the system. You could build more cables, but if BSUoS is a few billion pounds, building several cables to transmit all of the energy from certain areas down into to demand areas could end up costing several billion pounds.
So, there is a balance to be made in terms of:
- how much gets paid through localised charges through BSUoS
- and how much gets levied through increased investment in the transmission network.
As part of the BSUoS reform, a group of industry experts concluded that BSUoS wasn't really a cost signal - you couldn’t really react to it given, that is dependent on lots of variables. So, what Ofgem have decided is that they want BSUoS to be fixed and forit to be collected solely from demand customers (so businesses and domestic customers).
At present:
From April 2023, it’s expected that all of the BSUoS cost will be levied directly onto customers (so essentially your BSUoS bill will double in rate). However, as generators will no longer need to recover that cost themselves, they'll reduce their cost of wholesale energy. This should create a parity where there should be no overall increase for customers – the wholesale price will go down matching the increase in their BSUoS contribution.
As part of the review, Ofgem have also said not only should it be fixed,it should also be forecastable. This would mean it is fixed for a period of time so you can have some certainty as to what that cost will be.
Industry experts are currently looking at the right option as to how long they want to fix these costs and for what notice period? We're expecting a decision on that, probably sometime in mid-April 2022.
Some key takeaways to leave you with…
- Network charging needs to keep reforming to keep up to pace with the way people generate and consume electricity. We're going to have many more electric vehicles on our system in the future, so the system needs to be capable of supporting that infrastructure. Whilst this review moves us a step forward, there's likely to be more reform happening in the future to ensure that we meet these targets.
- These costs are not insignificant – they can add up and at some point may reach about a third of the total energy costs. So the message that Ofgem and the network operators are trying to send is that it's a large cost and they want to make those costs fair and proportionate to all users (whereas previously a select group of customers could avoid a large proportion of the bills by changing their behaviour). Now, you need to pay a base cost to connect to a reliable network. However, they’ll still incentivise you to a more appropriate level if you're able to shift your demand elsewhere.
- And finally – network charging is a zero-sum game. It's an amount of revenue that these network companies collect through price controls that are set by Ofgem. There’s a budget that’s set. So, if they don't collect it for one community of customers (for example, large industrial customers), they will have to collect it from smaller users or domestic users and vice versa. There's no point in actually trying to get one community to pay more than other needlessly. You just need to make sure everyone pays their fair share.
We can't be certain what's around the corner in terms of what technologies are going to be developed. We've got batteries entering the system which can store energy, we've got plans for hydrogen, and lots of different ways of consuming and generating energy in the future. So we can't be sure that this reform is ending at any point in time.
However, what I can say is this reform should make charges a little more stable. So, whilst you will see changes on your transmission and distribution bills, there is hopefully going to be some stability for the next few years.
If you want to delve deeper into the exact impacts then please contact your account manager and we'll be happy to take you through this.
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