Targeted Charging Review (TCR) Guide

The Targeted Charging Review (TCR) changes will soon come into effect, starting with distribution charges in April 2022 and followed by transmission charges in April 2023.

We look at how these changes will impact consumers and how we can help businesses to prepare.

What does the review include?

Changes to DUoS and TNUoS

Distribution Use of System (DUoS) and Transmission Network Use of System (TNUoS) charges cover the costs of maintaining the electricity networks that supply your energy. Ofgem is implementing changes to these charges to ensure that costs are distributed fairly across all consumers.

Subject to Ofgem consultation, from April 2022 for DUoS and April 2023 for TNUoS a proportion of your DUoS and TNUoS charges will be based on a series of fixed charging bands.

The band you are placed into will depend on your average annual consumption for non-half hourly (NHH) sites or average capacity for half-hourly (HH) sites, calculated over the two year period from October 2018 to September 2020.

TNUoS charges for non-domestic consumers will be based on a series of fixed charging bands set for the whole country, as seen in the table below.

For DUoS charges, domestic consumers will pay a single residual charge set for each distribution area. Non-domestic consumers will be charged based on the same set of fixed bands as TNUoS but with charges varying for each distribution area. Ofgem will review and may revise these charging bands and their boundaries so that they can be implemented alongside new electricity price controls, with the next (RIIO-3) starting in April 2026.

TCR Fixed Charging Bands with latest TNUoS forecast
Table 1. TCR Fixed Charging Bands with latest TNUoS forecast (National Grid, May 2021)

Changes to Triads

The largest component of Triad charges is called the Transmission Demand Residual (TDR), and this is the charge that will change from April 2023, becoming a fixed charge rather than being determined through Triads. Triad charges will continue to apply to the forward-looking components of TNUoS charges, which are known as the Transmission Demand Locational charges, although these represent less than 10% of the total TNUoS charge.

Triad periods are the three highest winter peak periods. They are retrospectively calculated in March each year and form the basis of the transmission network component (TNUoS) of large companies’ energy bills. By reducing consumption or switching to onsite generation during forecast Triad periods, some firms can save large amounts of money on their bills.

The removal of the TDR leaves two full Triad seasons to take place over Winter 2021/22 and 2022/23. Beyond that, the incentive for Triad avoidance will be greatly reduced. And companies that are taking action to reduce costs during Triad periods could see an increase in their electricity bills.

What impact will this have on consumers?

The TCR changes are set to benefit larger consumers with half-hourly (HH) meters, whilst domestic and NHH sites will see a small rise in costs. Consumers outside of London are expected to experience a rise in DUoS fixed costs. This will be partially offset by a decrease in DUoS unit costs. Most HH sites will also benefit from a drop in TNUoS costs. Whereas domestic and NHH sites face a potential rise in TNUoS costs.

Average TCR change for a HH customer

The graph below shows that southern areas are more likely to see a larger decrease in costs than northern areas. HH sites in London, for example, will see TNUoS and DUoS costs decrease by an average of 36%. Whereas HH sites in Scotland will only see an average decrease of 7%. Incidentally, London is also the only area where domestic and NHH sites will see a net benefit from the TCR changes.

Consumers currently taking Triad avoidance action will not see the cost reductions shown below, as that benefit ends in April 2023. Similarly, sites that have a capacity level which is set too high are likely to face an increase in costs, as they could be placed into a higher charging band. Extra-high voltage sites are not included in the graph below, as they are subject to site-specific tariffs and need more detailed analysis.

Average % change in costs due to TCR

How EIC can help

The figures calculated above are based on an average consumer in each charging band. The analysis covers a wide range of consumers with varying demand profiles and cannot easily be applied to individual consumer costs.

The best way to determine exactly how the TCR will affect your business is with our Long Term Forecast Report. This provides your business with a specific breakdown of electricity costs over a 5, 10, 15 or 20 year period. This valuable report will allow you to confidently plan your long-term budget and avoid any nasty surprises.

To learn more read about our Long Term Forecast Report service or contact us today.

Gas and power prices surge – take action

The Winter 18 gas and power contracts are up by 52% and 50% respectively in the last year. The following seasons have also risen, however not by as much. Winter 19 gas and power contracts are 34% and 38% higher year-on-year.

If you’re on a fixed contract, all is not yet lost, though we’re urging you to act quickly.

 

A clear impact of the price rises is that gas and power for next year are much more expensive than a year ago. However, next year’s prices, and the year after that, for gas and power are still at a discount.

The market remains in a heavy period of backwardation. This is when contracts for a commodity are cheaper in the future than they are for periods closer to delivery. This isn’t because the market expects prices to be lower in the future, but largely due to the market pricing for current supply shortage levels.

Gas remains in high demand, partly because of the cold winter and the earlier effects of the ‘Beast from the East’ depleting storage reserves. Injections this year have been strong but may not be enough to reach the highs from last year.

Another factor at play is that gas prices elsewhere in the world are much higher. This is encouraging those with the ability to move gas to higher price destinations. The recent market rises have been substantial, but have only returned prices back to where they were trading four years ago.

 

Furthermore, it’s only the front seasonal contracts that have risen to this elevated range. The front Winter gas contract is holding between 65p/th and 75p/th, with the Summer market range between 56p/th and 66p/th. If you haven’t fixed your October 18 start contracts yet, don’t delay any further.

 

What’s the risk to your energy bills?

Even if the market only moves to the middle of the above stated ranges the wholesale element could still increase significantly.

If the above curve flattens in line with the longer-dated contracts moving up to the range that prices were at just four years ago, you could be hit with a further 20% price increase. The below table outlines how your annual electricity spend would increase if your business were hit by this rise:

 

 

Current annual electricity spend

Contract start date

£10,000

£100,000

£1,000,000

1 April 2018

£10,057£100,573£1,005,725
30 August 2018

£11,412

£114,122

£1,141,219

Further 20% rise

£12,483£124,826

£1,248,258

 

The shortage now is partly due to the low storage levels seen at the end of winter, which has prompted substantial injections. However, structural problems remain, particularly in regard to a lack of UK storage capacity. Dutch gas production will continue to decline, as will supply from the North Sea. The ongoing worldwide transition from coal to gas will also support demand. As a result competition for gas is here to stay, encouraging higher gas prices for the UK to attract sufficient supply.

Wholesale costs for suppliers have risen significantly in the last two years. Many gas and power contracts are at record highs, after prices accelerated their move higher earlier this year, and again during August. These increased costs will be passed on to consumers in the form of higher bills, with suppliers paying more for their energy at a wholesale level.

 

It’s time to take action

EIC can help you manage these price rises. Back in April, our energy experts advised businesses to fix their October 2018 contract starts immediately for 24 months. Those that followed our advice at the time saved themselves 42% on their wholesale gas cost and 34% on their wholesale electricity cost, compared to what they’d be paying now.

 

How we can help you with energy procurement

Here at EIC, we pride ourselves on our market knowledge and giving timely advice to our clients. We can help businesses of all sizes to find the right energy contracts for their needs.

If you’re a larger energy user, we can help you with fixed price energy procurement to help you secure prices and provide budget certainty. We’re also on hand to help you with flexible energy procurement, should you find fixed contracts too restrictive; we can help you take advantage of a volatile energy market and make sure you capitalise on market rises and falls. Our aim is to maximise contract flexibility whilst minimising your costs.

We can also help you budget effectively for your energy costs by providing year-on-year price projections for the next five years with our Long-Term Price Forecast Report.

To find out more about our energy procurement services, and how we can help you find the right contract for your business needs, call us on 01527 511 757 or email info@eic.co.uk.