Ofgem’s reforms to GB’s network charges shift to April 2022
Our Regulatory Insight and Engagement team has been working with Ofgem as it undertakes reforms to GB’s network charging regime. The reforms are intended to make network charges fairer for all, with charges to be recovered on a fixed basis, rather than a consumption basis.
As a leader in providing energy solutions and services for organisations across GB, Centrica Business Solutions has decades of experience working collaboratively with the energy regulator, Ofgem.
Recently, our Regulatory Insight and Engagement team has been working with Ofgem as it undertakes a series of reforms to make changes to GB’s network charging regime. The reforms are intended to make network charges fairer for all energy-consumers and means that network charges will increasingly be recovered on a fixed basis, rather than a consumption basis. The result of these changes is that it may be more challenging to deploy on-site generation to reduce the network charges paid by a business or public sector organisation.
What are Network Charges?
Network charges are recovered from users of the electricity systems such as businesses and public sector organisations; and includes both generators and demand users.
Charges are recouped from customers on a mixture of capacity based, i.e. size of your connection to the network, and consumption, or the amount of energy used over a certain time period.
Historically, this has meant that embedded generation, distributed energy solution, and in particular, on-site generation like CHP can be deployed to reduce the network charges paid liable for consumption-based elements.
There are three categories of Network charges:
- Transmission Network Use of System (TNUoS) charges – this charge covers the costs of building and maintaining high voltage network infrastructure. This charge is recovered from transmission-connected generation and end-consumers (final demand).
- Distribution Use of System (DUoS) charges – this charge covers the costs of the network infrastructure that carries electricity from the transmission grid to end consumers (domestic and non-domestic). This charge is recovered from distribution-connected generation and end-consumers (final demand).
- Balancing Services Use of System (BSUoS) charges – this charge covers the cost of balancing the electricity system. This charge is recovered from transmission-connected generation and end-consumers (final demand).
Together, for end users of energy, these chargers can represent as much as 20-25% of your energy spend.
Network charges (TNUoS and DUoS) are themselves made up of two elements:
- Forward Looking Charges (this covers the associated costs of connecting future generation and demand)
- Residual charges (this cover the remainder of network charges and includes historic network infrastructure spend).
Learn about 5 ways your business can reduce its energy spend with distributed energy solutions.
What are Ofgem’s reforms?
Ofgem has split its reforms in to two parts. Firstly, the Targeted Charging Review which is focussed on tackling the recovery of residual charges for final demand users – more information below.
Secondly, the Access and Forward Looking Charges reform, which will focus on how to structure the Forward Looking charges for final demand users and is out of scope of this article, although we are working closely on the design of these. Centrica want this reform, along with the development of local flexibility markets to appropriate incentivise the flexible technologies that the energy system will needs to meet the net zero challenge.
In November 2019, Ofgem confirmed its Targeted Charging Review decision, and that it would change the methodology for recovering residual charges from final demand users.
Ofgem decision means that both the TNUoS and DUoS residual charges should be recovered on a fixed basis, rather than the mixture of consumption and capacity-based charges that we see currently. Different bandings of these fixed charges and will be allocated to end-consumers depending on their size.
BSUoS will continue to be recovered on a consumption basis (£/MWh), but on-site generation will no longer receive this as an ‘embedded benefit’. The recovery of this charge will be explored further in future reforms.
Centrica opposed Ofgem’s proposed implementation timelines for the reforms, and in March 2020, Ofgem agreed that they were too challenging and therefore have delayed the implementation of some of the reforms.
The updated timings for the Targeted Charging Review are now:
- TNUoS residual reform – from April 2022
- DUoS residual reform – from April 2022
- BSUoS changes – from April 2021
Centrica has welcomed this extension of the implementation period, which will enable better preparation of our customers for this change. We will continue to engage with Ofgem on developing their bandings for the fixed network charges and continue to promote the need for early visibility for our customers.
In parallel, we are working with Ofgem to ensure that other reforms (such as the ‘Access and Forward-looking charges reform) are well-designed and continue to provide appropriate value to consumers when they are flexible. Government and Ofgem agree that increased energy flexibility is needed to reach net zero cost-effectively.
The impact of these reforms also raises the importance of flexibility in our energy system, whereby the business case for on-site generation can be enhanced by inclusion in programmes such as Demand Side Response. These types of activities can help businesses unlock new sources of revenue from on-site generation – while also having the added effect for enabling a more end-user focussed energy system. We continue to engage with Government and the Regulator on the importance of flexibility.