Targeted Charging Review (TCR) Guide

The Targeted Charging Review (TCR) was launched by Ofgem in 2017 to reduce distortion across the network. We look at how these changes will impact consumers and how we can help businesses 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 will be implementing changes to these charges to ensure that costs are distributed fairly.

This means that from April 2022 a proportion of your DUoS and TNUoS charges will depend on a series of voltage-based bands.

Transmission charges (TNUoS) for non-domestic consumers will be based on a series of fixed charging bands set for the whole country. For distribution charges (DUoS) domestic consumers will pay a single residual charge set for each distribution area. Non-domestic consumers will be charged based on a set of fixed charging bands also set for each distribution area.

Bands for non-domestic customers will be determined by a consumer’s voltage level during the 24-month period ending in 2020. Some consumers may need further segmentation. For larger consumers, these boundaries can be defined based on the agreed capacity. And for smaller consumers, these can be based on net consumption volume.

The series of fixed charging bands will be published at a national level and set for each Distribution Network Area. Ofgem will review and may revise these charging bands and their boundaries so that they can be implemented alongside new electricity price controls.

Changes to Triads

The review will also remove the Transmission Generation Residual embedded benefit (Triads) from April 2022.

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 suspected Triad periods, some firms can save large amounts of money on their bills.

Ofgem believes that removing Triads is an appropriate compromise between addressing the largest distortions in the market and reducing the distributional impacts on consumers.

This leaves one final Triad season to take place over winter 21/22. Beyond that, there will no longer be any incentive for Triad avoidance. And companies that were 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. These will be partially offset by a decrease in DUoS unit costs. Most HH sites may also benefit from a drop in TNUoS costs. Whereas domestic and NHH sites face a potential rise in TNUoS costs.

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 40%. 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 are likely to face an increase in TNUoS costs from April 2022 as that benefit ends. Likewise, sites that have a higher capacity level will not see the cost reductions shown below as they could be placed in 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.

tcr graph

DUoS and TNUoS costs make up around a quarter of the average electricity bill so the % change in total costs is shown on the right-hand axis.

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 simply 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 or contact us today.

Targeted Charging Review decision

Ofgem has published its decision on the Targeted Charging Review.

Background

Ofgem has two main projects that serve as a review of transmission, distribution and balancing charges to facilitate a transition to a more effective network. These are:

  • The Access and Forward-looking charges review is looking at the ‘forward-looking charges’. This sends signals to users about the effect of their behaviour and encourages them to use the networks in a particular way; and
  • The Targeted Charging Review (TCR). This examines the ‘residual charges’ which recover the fixed costs of providing existing pylons and cables, and the differences in charges faced by smaller distributed generators and larger generators (known as Embedded Benefits).

Specifically, the TCR has evaluated two elements of network charges within the Significant Code Review (SCR) process. These are reforms to how residual charges are set and the non-locational Embedded benefits.

Decision on Residual Charges

Ofgem has decided to implement a fixed residual charge for final demand consumers. These will be levied for transmission charges in 2021 and distribution charges in 2022. These are characterised as a series of fixed bands, including a single fixed charging band for domestic consumers and a range of fixed charging bands for non-domestic customers.

For transmission charges, charges for non-domestic consumers will use a series of fixed charging bands set for all of the country.

Changes to distribution charges will see domestic consumers pay a single residual charge set for each licensed area. Non-domestic consumers will be charged on the basis of a set of fixed charging bands also set for each distribution area.

Bands for non-domestic customers will be determined by a consumer’s voltage level. Where further segmentation is required, further boundaries can be defined based on agreed capacity for larger consumers with readily available data, and net consumption volume for smaller consumers.

The series of fixed charging bands will be published at a national level and will then be set for each Distribution Network Area. Ofgem will review and revise these charging bands and their boundaries as appropriate so that the outcome of such reviews can be implemented alongside of new electricity price controls.

Ofgem believes this to be the strongest option of those considered, as it is the least avoidable leading to minimised harmful distortions. The regulator received feedback from stakeholders supporting its view that the option would help achieve a positive balance across the charging segments.

Decision on ‘non-locational’ Embedded Benefits

The key purpose of the review of Embedded Benefits was to reduce harmful distortions which impact competition and the efficiency of the electricity market. In order to meet this objective, Ofgem has outlined a three-step process to achieve a full reform:

  1. The implementation of partial reform in 2021, to deliver the benefits to consumers by removing the two Embedded Benefits (the Transmission Generation Residual which will be set to zero and the offsetting of suppliers’ balancing services charges by reducing the Suppliers net imports at the Grid Supply Point) which cause harmful distortions.
  2. The launch of a second taskforce to consider the application of the TCR principles to balancing services charges.
  3. The second taskforce’s work and resulting modifications should deliver reforms to balancing services charges.

Implications for Triad

Ofgem has decided that the reform to transmission residual charges should be implemented in 2021 and distribution residual charges in 2022. The regulator believes that this is an appropriate compromise between addressing the largest distortions within the market to deliver consumer benefits, while reducing the distributional impacts on consumers.

A preferred implementation option of April 2021 for transmission residual charge reforms will eliminate the incentive for Triad avoidance in the following winter periods. This leaves one final Triad season to take place over Winter 20/21.

How this may affect consumers

Through the TCR residual charging reforms, Ofgem aims to reduce the distortions caused by the current system. This encourages network users to take measures to lower their contributions to residual charges.

Where residual charges incentivise behaviour – such as load reduction which reduces the share of charges paid for by that user – this results in an increase in the share to be paid by other network users. This in turn increases the incentive for other users – who then pay an increased proportion of the residual charge – to take action to reduce their charges.

It is Ofgem’s view that all final demand users who benefit from the electricity network should pay towards its upkeep in a fair manner.

Under the final TCR decision, Ofgem expects the cost of maintaining the electricity grid to be spread more fairly. As a result, the regulator says that consumers will save £300m yearly, from 2021, with £4bn-£5bn in cumulative consumer savings up to 2040.

STAY INFORMED WITH EIC INSIGHTS

Our Market Intelligence team keep a close eye on the energy markets and industry updates. For the timeliest updates you can find us on Twitter and LinkedIn.