Network charging reforms finalised

On 21 November 2019, Ofgem published its final decision on its Targeted Charging Review (“TCR”) (the “Decision”). This follows Ofgem’s “minded to” consultation of the same issued on 28 November 2018, our analysis of which can be found here. This decision is part of a series of reforms by Ofgem aimed at ensuring network costs are allocated fairly between system users and do not distort the energy market.

Background to the TCR

The TCR focused on the reform of:

1. the “residual” aspect of network charging and how these charges can be recovered more fairly in order to reduce distortions in the current charging framework; and
2. specific non-locational Embedded Benefits.

Ofgem’s principles of the TCR were to avoid harmful distortions, deliver fairness in the allocation of residual network charges and treatment of generators, and to reach a decision that is proportionate to the distortions caused yet practical so as to not impose complex financial or administrative burden on the industry.

Residual reforms

Residual charges are not intended to provide an incentive to use the network in a particular way. However, there have been indications that system users were distorting the market by altering their behaviour to reduce their exposure to residual charges – e.g. by investing in and strategically deploying (potentially inefficient) on-site generation or storage.

In the Decision Ofgem confirmed that:

1. residual charges will be levied on final demand users only; and
2. such charges will be calculated by reference to specific bands. These fixed bands will include a single fixed charging band for domestic consumers and a series of fixed charging bands for non-domestic customers, which will be defined by a consumer’s voltage level and, where further segmentation is required, agreed capacity data or net consumption volume.

Embedded Benefit reforms

Further, the Decision confirms that Ofgem will be taking action to reform two of the Embedded Benefits identified in its minded-to consultation:

1. Firstly, the Transmission Generation Residual will be set to zero, meaning that it can no longer be negative and therefore be a benefit for larger generation. This is subject to the continued requirement to comply with the EU cap and floor requirements pursuant to Regulation 838/2010.
2. Secondly, balancing services (known as BSUoS) will be recovered on a gross consumption basis, not a net consumption basis. This removes this embedded benefit for small distributed generators as previously they could receive payments from suppliers for helping them to reduce their liability for BSUoS.

In relation to the third embedded benefit, namely that small distributed generators do not currently pay generation BSUoS, Ofgem will be launching a second Balancing Services Charges Taskforce to apply TCR principles to the recovery, and reform of, these charges.

Comment

The Decision reaffirms that Ofgem is of the view that all final demand users who benefit from the network should contribute to its upkeep, in order to ensure the system works efficiently and in the interests of all consumers. Ofgem states that these reforms are expected to save consumers £3.8bn to £5.3bn and have system benefits of between £0.8bn to £2.9bn over the period to 2040.

What next?

Ofgem has made clear in the Decision that it expects licensees to work together to:

• ensure consistency of the resulting code modifications and arrangements across the relevant industry codes;
• present a detailed plan to ensure modifications reach Ofgem in good time to make a decision; and
• take steps to ensure potential issues which could prevent implementation are raised in a timely manner with Ofgem.

The TCR reforms set out in the Decision will be implemented in stages in order to mitigate the distributional impacts. The embedded benefits changes will be introduced in 2021, whilst the reforms to the transmission residual charges and distribution residual charges will occur in 2021 and 2022 respectively.

Ofgem is separately undertaking a Significant Code Review in respect of forward looking network charges and network access, the details of which are summarised here.