Ofgem publish update to Targeted Charging Review proposals

In the meantime, the regulator has released a letter detailing guidelines on residual charging proposals and renewables modelling.

Residual charging proposals

In the ‘minded-to’ consultation, published in November 2018, Ofgem proposed two leading options for reform for residual electricity network charges. The options were; a fixed charge, or an agreed capacity charge. Ofgem indicated that they preferred a fixed residual charge.

Most respondents to the consultation also expressed support for the fixed charge. However, there was some disagreement with the structure of the proposal, predominantly with user segments associated with this pricing option.

Some respondents expressed that the fixed charges should take more account of the diversity of non-domestic users, pointing out that individual bands could contain a wide range of different user sizes. It was also highlighted that Ofgem’s proposed basis for segments could be seen as arbitrary.

In light of this feedback, Ofgem’s refined proposal for non-domestic customer segmentation is that:

  • total allowed residual revenue would first be apportioned between voltage levels, on the basis of net volumes, as set out in the November 2018 minded-to consultation;
  • non-domestic segment boundaries would be set in terms of agreed capacity levels for users at higher voltages where this data is widely available, and net volume levels at Low Voltage (LV). This is in place of segmenting these users on the basis of the line-loss factor classes (as set out in the November minded-to consultation).

Ofgem has identified five national level charging bands for Low Voltage non-domestic users and five each for High Voltage (HV) / Extra High Voltage (EHV) non-domestic users. The banding is the same for HV and EHV customers, but their share of the residual charges is calculated at voltage level resulting in fifteen charges in total.

The refined band thresholds would be applied on a consistent basis across the country. Users would be allocated on a historic basis and updated in line with price controls. Incentives are expected to be reduced in a bid to change behaviour in response to residual changes.

The option for agreed capacity has been left open by Ofgem. The regulator has stated that where more users collect agreed capacity data there could be the opportunity to transition charges to an agreed capacity or more appropriate basis.

The Targeted Charging Review

EIC has a more detailed breakdown of the Targeted Charging Review that can be read here.

Domestic energy price cap proposal announced by Ofgem

The proposal follows the passing of the Government’s Domestic Gas and Electricity (Tariff Cap) Act, which became law on 19 July. This legislation was passed by Parliament to provide a temporary price cap for domestic customers on Standard Variable Tariffs (SVTs) and default tariffs, assigning Ofgem with the duty to ensure a fair price.

Ofgem has currently opened a statutory consultation on the announcements, allowing suppliers and stakeholders to comment on the proposals before 6 October. The regulator is working towards having the cap in place by the end of 2018.

 

The impact on customers

The introduction of the price cap will see a requirement for suppliers to cut their prices to the level of, or below, the cap. This is proposed to be £1,136 per year for a typical dual fuel customer paying by direct debit and £1,219 per year for a customer paying by standard credit.

Exact savings for each household will be dependent on the cost of their current deal, how much energy they use, and whether they use both gas and electricity. On average it’s been estimated that the typical customer, on a dual fuel deal of gas and electricity, will save around £75 a year. Ofgem believes the price cap would save consumers a total of around £1 billion.

 

The price cap moving forwards

Ofgem plan to update the level of the cap in April and October every year in order to account for the latest costs of supplying gas and electricity.

The price cap is a temporary measure, to be in place until 2023 at the latest. This is designed to allow Ofgem time to implement further reforms to make the energy market more competitive, enabling it to work more effectively for all consumers.

 

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