The Targeted Charging Review was launched last year, as part of Ofgem's ongoing assessment of whether the way users of the electricity network are charged is fair. It will affect you as an electricity user


Ofgem, the UK energy regulator, have published their minded to decision and draft impact assessment on the Targeted Charging Review, which will impact households, businesses and small generators.

We have reported on previous developments in our articles, Ofgem minded to cut embedded benefits and Ofgem to cut embedded benefits from April 2018.

Forward looking charges

There are two elements to the charges that users of the electricity network pay. The first is forward looking charges that vary depending on where a user connects to the network and when and how much electricity they use at a given time. This can encourage users to be flexible in their use in order to reduce their own electricity bills and reduce network costs overall for the benefit of all users. Ofgem have issued a separate consultation on forward looking charges earlier this year which we reported on in our article Getting more out of our electricity networks.

Residual charges

The second element is residual charges. These are designed to ensure that network costs not recovered from the forward-looking charges are fully recovered. However, they are not designed to cope with the way our use of the electricity networks is changing.

As we highlighted in our recent Energy Disruption report, we are seeing more and more businesses and households with their own generation, whether that be solar panels, wind turbines or back-up generators. More small-scale generators are connecting to the lower-voltage electricity distribution network, leaving the few that are left on the transmission network having to pay the lion's share of the cost of its upkeep. National Grid’s Future Energy Scenarios (FES) suggest the total installed capacity of generation on the system could more than double in the period up to 2040, and the level of microgeneration, which includes on-site generation and household solar PV, could increase more than tenfold. Even if only a proportion of this increase in on-site generation were to arise, there would be significant impacts from these users not contributing in the same way to residual charges.

Residual charges are recovered from smaller users, such as households and small businesses, via consumption charges per unit, and for larger users by a mix of consumption charges per unit for distribution and peak demand charges for transmission, determined through a mechanism known as “Triad”. The Triad system measures the consumption of electricity at three winter peak half-hour periods of use that are only worked out after the event. This approach strongly incentivises users to reduce their consumption of electricity from the networks during likely Triad periods and to use on-site generation and storage instead. This encourages users who can afford to invest in on-site generation, Demand Side Response or storage to reduce their exposure to residual charges.

Ofgem's decision on residual charges and embedded benefits

Ofgem are concerned that this is distorting the market, which is why they launched the Targeted Charging Review. They have now reached a 'minded to' decision and want views on:

  • the best way of setting transmission and distribution residual charges, which are currently based on how much electricity consumers take from the grid
  • whether to remove some of the remaining embedded benefits

Both these issues are covered by a Significant Code Review which was launched in August 2017

Setting residual charges

Ofgem's preferred option is to impose a fixed charge on each class of electricity user, rather than base the charges on how much electricity they use – so like fixed telephone line rental. This would make sure that everyone makes a fair contribution.

An alternative could be an agreed capacity charge, either set at a specified agreed capacity for larger users, or based on assumed levels for smaller users.

Changing to a fixed charge would mean that some households who use the least electricity will see their network charges increase from between £2 to £22 annually, although most households will benefit. Businesses that have invested in on-site generation will pay more than they do now, as they will not be able to offset any charges by running their generator at specific times.

Embedded benefits

Embedded benefits is the generic term for the ability of generators connected to the distribution, rather than the transmission, network to avoid certain charges, and even to be paid by electricity suppliers for generating at a specific time. The Triad avoidance payment (transmission demand residual charge) has already been reduced significantly – see our article Ofgem to cut embedded benefits from April 2018. Ofgem is now proposing to remove some of the remaining embedded benefits.

Ofgem are also proposing that embedded generators pay towards the costs of balancing the electricity system, like other generators including large renewable plant. Currently embedded generators do not have to make these payments.

There are three embedded benefits that Ofgem want to remove:

Transmission generation residual charge

The current methodology for charging transmission residuals to generation currently results in larger generators (those over 100MW) receiving a fixed rebate (i.e. a negative charge) for being connected to the system. This is because the EU has set a cap on the average level of transmission network charges which generators should pay. Smaller embedded generators do not receive this rebate (negative charge), and are now at a disadvantage to larger generators. In the past, this different treatment resulted in a benefit to smaller embedded generators.

Ofgem are consider the option of setting the Transmission Generation Residual to zero.

BSUoS charges: payments from suppliers

Suppliers have to pay a Balancing Use of System charge to National Grid. It is based on a supplier's net consumption from the transmission system, so smaller embedded generation can offset this demand and be paid by suppliers for reducing their BSUoS charges. Suppliers end up recovering the cost of these payments from consumers.

Ofgem want to remove this.

BSUoS charges: avoided charges

Smaller embedded generators currently do not pay generation BSUoS charges, but all other generators connected to the transmission or distribution networks do.

Ofgem are considering whether to make smaller embedded generators pay BSUoS charges as well as removing their ability to receive BSUoS payments for suppliers ('full BSUoS reform'), or just remove their ability to receive BSUoS payments and not make them pay BSUoS charges as well ('partial BSUoS reform').

Alongside this consultation, Ofgem have asked National Grid to launch a BSUoS task force to look at how BSUoS charges are structured generally.

Effect on generators

Ofgem have produced a helpful table, in Annex 5 of the consultation  and reproduced below, showing how the various generators will be affected by removing these embedded benefit.

Generation type

TGR set to zero

Smaller embedded generation does not receive BSUoS payments

Smaller embedded generation charged BSUoS

Larger generation, CM eligible

Loss from increased transmission charges. Likely to lead to increased CM bid prices and therefore offset by CM prices

Becomes more competitive relative to smaller embedded generation, and relative to interconnectors

Becomes more competitive relative to smaller embedded generation, and relative to interconnectors

Larger renewables (CfD)

Loss from increased transmission charges. For CfD generation with agreed contracts, not offset by other effects.

For new CfD generation, expect Strike Prices to increase

No net impact (assuming Balancing Cost adjuster term in CfD for larger generation)

No net impact (assuming Balancing Cost adjuster term in CfD)

Larger renewables (RO)

Loss from increased transmission charges. No offsetting effect.

Becomes more competitive relative to smaller embedded generation, and relative to interconnectors

Becomes more competitive relative to smaller embedded generation, and relative to interconnectors

Smaller embedded generation, CM eligible

Increases relative competitiveness in CM auction

Decreases relative competitiveness in CM auction and in wholesale market

Decreases relative competitiveness in CM auction and in wholesale market

Smaller embedded renewables (CfD)

Become more competitive in CfD allocation relative to larger CfD projects (new only). No direct impact for existing.

For existing generation, loss of value of BSUoS (assuming no change to the CfD).

New – expect Strike Prices to increase

For existing generation, loss of value of BSUoS (assuming no change to the CfD).

New – expect Strike Prices to increase

Smaller embedded renewables (RO)

No direct impact, since these generators do not compete in CM auction

Loss of value of BSUoS (loss of payments from suppliers)

Loss of value of BSUoS (charged BSUoS)

On-site generation (unspecified)

May benefit from higher CM prices or higher Capacity Market Supplier Charge

Lower BSUoS unit charge (due to larger charging base) reduces on-site generation benefit. Lose BSUoS benefit on any export

Lower BSUoS unit charge (due to larger charging base) reduces on-site generation benefit. May make BSUoS payments on any export

Timeframe

Ofgem are asking industry whether the change to a fixed charge or capacity charge for residual charges should be implemented in 2021 or phased in between 2021 and 2023. They are proposing to remove the embedded benefits in either April 2020 or April 2021.

This consultation closes 4 February 2019 and Ofgem will publish the industry's responses on 30 April 2019. They aim to make a decision in June 2019.

Comment

The proposals have not gone down well with renewables and decentralised energy. The Association for Distributed Energy asked, how will flexibility be rewarded? "The ADE supports Ofgem’s commitment to ensuring charges are fair but removing benefits today on a vague promise of jam tomorrow isn’t fair and could end up costing all energy users more in the long-term."

We can understand Ofgem's view that although those using on-site generation, DSR and storage are reducing their own costs, they are not reducing the total network costs and others, who are less able to reduce their demand, end up footing the bill. However, Ofgem do not seem to be taking into account the value of the flexibility services that on-site generation, DSR and storage provide. They are able to smooth out the peaks and troughs of demand, meaning the networks need less reinforcement. Hopefully Ofgem will recognise this when they set the next round of price controls in RIIO-2 and we will see flexibility services rewarded then.

In the meantime though, existing generation plants and those in the pipeline will need to look carefully at their revenue streams and take this minded to decision into account.

Key contacts

Richard Goodfellow

Richard Goodfellow

Partner, Head of Infrastructure, Projects & Energy Group
United Kingdom

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Paul Dight

Paul Dight

Partner, Energy and Utilities
United Kingdom

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Benjamin Feather

Benjamin Feather

Legal Director, Infrastructure, Projects & Energy
Leeds

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