Non-commodity charges make up a large share of the overall cost of power – as much as 60% for some large consumers.
But if proposed changes to the way in which key distribution and transmission charges are calculated go ahead, many businesses could see this share increase.
Earlier this month, Ofgem published a consultation setting out its latest plans for the way the residual element of Distribution Use of System (DUoS) and Transmission Network Use of System (TNUoS) charges are recovered.
These changes form part of Ofgem’s wider Targeted Charging Review (TCR).
DUoS and TNUoS to move to fixed charge
Under the latest proposals, Ofgem is considering recovering the residual element of DUoS and TNUoS as a fixed charge.
For non-domestic customers, the suggestion is that:
- All low-voltage connected customers would pay a fixed charge which is calculated based on the consumption band that they are in.
- All high-voltage (HV) and extra-high-voltage (EHV) connected customers would pay a fixed charge which is calculated based on the capacity band that they are in.
- These bands would be allocated at a single point in time and will only be updated periodically in line with price control periods (i.e. every five years plus).
Ofgem’s aim is to reduce what it perceives to be “harmful distortions in the market” whereby current charging arrangements “create incentives for some network users to take actions that reduce their residual charges”.
The issue is that this “can increase the overall network system costs”, making it less fair for those users not able to change their consumption behaviour.
New banding system could promote behaviour change
However, Oftem’s latest proposal could encourage some consumers to take action to reduce charges.
For example, a consumer on the capacity boundary could lower their capacity to fall into a cheaper banding, which would then be charged for the next five or more years. This would therefore result in additional cost to those who cannot reduce their capacity.
The latest proposal also makes no allowance to reflect any genuine changes in site use and/or consumption – for example, due to a change of occupier or a change in business operations.
No incentive to free up unused capacity
In these cases, there is therefore no incentive for consumers to relinquish any unused capacity that would allow the network operator to re-allocate it to new connections, thereby reducing the need for costly network reinforcement.
In practical terms, the proposed charging arrangements are likely to create huge disparity between consumers with similar size sites but connected at a different voltage level due to the large cost differentiation in charging bands.
Similar customers could pay ££££s more
For example, using the illustrative numbers in the Ofgem consultation, an HV customer with an Agreed Supply Capacity (ASC) of 1390kVA would be charged £37,334 in residual charges per year – whereas a similar HV customer with an ASC of just 20kVA more (at 1410kVA) would be charged £80,643 per year.
A similar EHV customer with an ASC of 1410kVA would then pay less – £59,564 per year in residual charges.
In another example, an EHV customer with an ASC of 11,500kVA would be charged £174,092 per year in residual charges, whereas a slightly larger EHV customer with an ASC of 12,500kVA would be charged £846,545 per year. That’s £672,453 more!
You can see the full proposed charging bands in the consultation document here.
Complexity to create industry challenges
This Ofgem proposal, as it stands, is much more complex than the original ‘minded to’ position that was published back in November.
If adopted, it’s likely to result in major industry changes that will require:
- New data items.
- New industry process to manage these data items.
- New data flows between market participants.
It’s fair to assume that this would require major costly industry system changes – and these would ultimately have to be paid for by consumers.
We are currently in the process of responding to this consultation and expect a decision from Ofgem in November.
In terms of implementing these changes, Ofgem has previously indicated that it is considering April 2023, alongside April 2021 or phasing between 2021 and 2023.
We will, of course, keep you updated of any new developments as they come to light.
In the meantime, if you have any concerns or questions about Ofgem’s proposals, please contact your Client Lead (for existing customers) – or drop us an email to firstname.lastname@example.org or call 0800 193 6866.