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What will Ofgem’s Targeted Charging Review mean for business customers?

As we know, the UK Government has ambitious targets to electrify our heating system and get more electric vehicles on the road – in fact, Theresa May pledged a further £106m in funding to the research and development of zero-emission vehicles this week. Combined with an ever-rising volume of renewable generation on the Grid, the nature of supply and demand in the UK is evolving rapidly.

This means that key players in the industry, such as National Grid and Ofgem, need to act now to ensure that our energy system can cope with these changes. Facilitating a smarter energy system will not only require careful planning to ensure that we have flexible and responsive supply to meet our growing demand, but we’re likely to see new rules and regulations put in place to accommodate for the new challenges and opportunities the smart energy system will bring.

Ofgem has already anticipated that reforms will be needed, and so they have launched a Targeted Charging Review (TCR), to ensure that residual and forward-looking charges meet the interests of customers now and in the future.

What will be reviewed?

Under the TCR, Ofgem is considering two pressing issues: residual charges, which are used to recover the sunk costs of the existing network, and forward-looking charges, which pay for network upgrades and grid access arrangements.

They have already announced their intentions to launch a Significant Code Review (SCR) this autumn, with the aim of implementing ‘wide-ranging and holistic change’ to the energy system from 2022. However, they are still deciding on what should be included in the review, as they have proposed a number of different scope options.

If they decide to take a narrow approach, Ofgem will consider the definition and choice of access rights for smaller users and forward-looking distribution use of system (DUoS) charges. While DUoS charges have only recently changed with the implementation of DCP228 in April 2018, we could see them change once again. As there’s likely to be an increasing need to encourage consumers to shift their energy consumption to off-peak times once EVs become commonplace, it’s possible that costs during green band periods are reduced significantly to motivate customers to charge them during off-peak periods.

They will also review transmissions network use of system (TNUoS) charges, which could see Triads being replaced with a banding system similar to those used for DUoS charges. The extent to which network costs are paid by charges for new connections – the distribution connection charge – will also be subject to evaluation.

If Ofgem chooses to take a moderate approach, they will carry out a review of all of the above and also look at the definition and choice of access rights for larger users. A comprehensive approach will go even further by including a review of the allocation of network access rights.

What could this mean for businesses?

  • Triads

A key driver behind the review is the issue that has arisen around Triad periods, which the majority of large energy users are now able to avoid through load management. This means that those using the most energy (and putting the most strain on the Grid) are able to circumvent the cost penalties associated with operating during Triad periods, while those users that aren’t able to shift their consumption are left to pick up the costs.

In reviewing the rules around how energy customers access and pay for the grid, Ofgem aim to make charges fairer for those businesses that cannot or do not avoid network charges. However, large businesses may not see it this way – by shifting their consumption away from Triad periods, they may end up paying lower capacity charges the following year, but they are also helping the grid by reducing the strain on the system during peak periods and avoiding the need to buy additional capacity at inflated prices to meet demand.

  • Network operator costs

Regardless of the outcome of Ofgem’s charging reviews, we know that distribution network operators are under greater pressure to curb their costs. RIIO2, the process by which the next price control framework is determined, is now underway and Ofgem are expected to challenge the rate of return DNOs pay shareholders to help reduce the cost to consumers.

Ofgem is already attempting to stymie the rise in these costs by curbing investment projects within the current framework – the anticipated 10% increase in TNUoS costs this year was avoided and we know that charges for winter 2018/19 are almost unchanged for most regions.  These savings have been driven by the cancellation of some investment projects and also by the reduction in embedded benefits for some generators.  The longer 5-year forecast in prices that was expected in August 2018 has yet to be published.

Preparation is key

While the outcomes of Ofgem’s network charges review remain to be seen, one of the key actions that businesses can take today is to ensure that they have an accurate idea of the capacity that they need now and in the future. If you’re considering incorporating EV charging points on-site in the next few years, for example, you should ensure that you have built the additional capacity this will require into your forecasts as changing to charging methodologies and estimated strain on the Grid will almost certainly impact future capacity costs.

One of the best ways to free up capacity for EV charging is to reduce consumption in other parts of the site, so continuous improvements in energy efficiency should remain a priority.

This is where Inenco’s energy expertise is invaluable – we can work with you to determine your current and future energy needs and create an energy strategy that’s right for your business. Give us a call today on 08451 46 36 26 or send us an email.