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.

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Be prepared for Triad season

A crucial time in the UK energy calendar, Triad season, begins in just a matter of weeks. The Triad season runs from 1 November to the end of February. Three half hour periods during this phase are used to calculate transmission charges for the entire year by National Grid. This is part of the Transmission Network Use of System (TNUoS) scheme. If your electricity contract allows it, reducing your demand at these specific points will result in lower transmission charges. However, knowing when Triads occur is a complex business.

To help our clients, EIC provides a Triad Alert service. We have successfully forecast each of the three Triad periods for the last 7 years. By predicting Triads each winter, EIC has saved customers millions of pounds in transmission charges.

WHAT ARE TRIADS?

Triads are three half-hour periods with the highest electricity demand between 1 November and 28 February. Each Triad must be separated by at least 10 clear days. This means consecutive days of high demand won’t result in multiple Triads.

A NEW LOW?

The 2018/19 Triad season saw electricity demand fall to a new all-time low. Peak electricity demand for the three half hour periods averaged 45.6 GW, with the third Triad occurring as demand was just 45.0 GW.

By comparison in 2017/18 average demand for the Triads was 47.5 GW. Maximum Triad demand has fallen by over 11 GW (~20%) in the last ten years. This reflects an overall trend towards lower electricity consumption. Major advances in technology and energy efficiency for appliances, as well as a move to smarter lighting are contributing to sustained year-on-year demand reduction.

EIC historic Triad demand graph

This trend provides an opportunity for an even lower Triad figure this year. Weekly peak power demand during 2019 has so far been lower than its equivalent week from 2018 on two-thirds of occasions.

EIC power demand Triad graph

Greater role for wind

Another factor contributing to the decline in demand is the increase in installed wind capacity over the past decade and the increasing share of the fuel mix secured by renewable generation. The latest BEIS figures from Q2 2019 showed renewables capacity rising 8% year-on-year, with its share of the fuel mix reaching new highs of 35.5%.

Most of this capacity is connected to the Grid so does not impact demand. However, around 6 GW (~30%) of wind capacity is embedded – it is connected to local distribution networks. As a result, it can influence outturn demand. Each MW of embedded wind generation is a MW of demand which otherwise would need to be provided by the transmission network. Therefore on days of high wind generation there may be a reduction in demand, triggered by the extra embedded wind levels. Average embedded wind output has increased by more than 1 GW over the past 10 years, contributing to the steady trend in demand reduction.

Last year the level of embedded wind generation varied by 3 GW, depending on nationwide wind conditions. This led to a demand swing of the same amount. This is having a growing influence on Triad forecasting as the increasing demand swing reduces the risk of a Triad occurring on days with high wind output. As a consequence, Triads are more likely to occur on days of very low wind generation. This was the case last year when each Triad occurred on a day with less than 1 GW of embedded wind generation.

HOW MANY MORE TRIADS?

The success of Triad avoidance in reducing costs for the end user has forced regulator Ofgem to undertake a change to the charging methodology for distribution costs. A consultation launched in December 2018 proposed changes which could remove the incentive for Triad Avoidance.

The Targeted Charging Review aims to introduce a charge that Ofgem considers is fair to all consumers and not just those able to reduce consumption during peak periods. Under current proposals, Triads would change to a fixed or agreed capacity, eliminating the need for avoidance in the future. Ofgem originally nominated a deadline for the reforms for April 2020. However, a recently released updated timeline has indicated that the regulator is now aiming for an implementation date of April 2023. As a result, it is possible that there will be a maximum of four winters remaining available for Triad forecasting, including the upcoming season. The removal of the Triad scheme will increase costs for business that currently benefit from Triad avoidance.

EIC TRACK RECORD OF SUCCESS

EIC has an in-house model which has successfully forecast every triad period for the last seven years. We provide clients with comprehensive alerts advising when a Triad is forecast, so they can reduce consumption accordingly.

Our Triad Alert Service forecasts the likelihood of any particular day being a Triad and sends alerts before 10am. This allows businesses to take informed action to avoid high usage during these half-hour periods. It also minimises disruption to their everyday activity. We monitor the market throughout the day and in the event of significant change will send out another alert in the afternoon. The daily report includes foresight of the next 14 days alongside a long-term winter outlook allowing clients to plan ahead.

Calling an alert every weekday would generate a 100% success rate, however we recognise the negative impact this could have on our clients. Organisations would incur major damage to revenues if required to turn down their production each day for 4 months ‘just in case”. At EIC our aim is to provide as few alerts as possible.

Last year we successfully predicted all three half-hour periods. The only tracked TPI or supplier which issued fewer alerts than EIC failed to predict all of the Triad periods.

HOW WE CAN HELP

We have helped hundreds of clients avoid these transmission costs by providing them with the tools needed, giving EIC an enviable track record in Triad prediction.

For those that took action last year, demand was cut by an average of 41% compared to standard winter peak-period half-hour consumption.

This resulted in significant cost savings, with clients who responded to our Triad Alerts saving on average £180,000. The best result last winter saw a client saving just shy of £1 million in TNUoS charges.

The Triad season begins on 1 November. To find out more about our Triad Alert service click here or call 01527 511 757.

The Energy Awards Shortlist Success

Category 1 – Energy Buying Team of the Year

We’re here to simplify the process of buying and managing energy. We match clients with the right contract for their business. The Energy Awards recognised our success in this field and have shortlisted EIC for Energy Buying Team of the Year for our flexible procurement offering.

Flexible Procurement

Our flexible purchasing solutions begin with a strategy development workshop with our clients. We conduct a detailed discussion of the client’s business objectives and appetite for risk, seeking to identify their key priorities for the contract. We also review their current situation and any upcoming projects that could affect their portfolio or consumption.

Public Sector Portfolio

Our Public Sector Portfolio is an OJEU compliant group flexible purchasing solution. It adds value by removing the administrative burden faced by public sector organisations when procuring contracts, and reduces the timeframes when securing their supply agreement. This has proven a real hit with universities, councils and NHS Trusts.

A team effort

There are multiple teams working collaboratively to make the flexible procurement service a success. Our clients are fully supported throughout the procurement process with a dedicated Account Management team. Traders work within the parameters of a client’s strategy making decisions based on insight from our Market Intelligence team.

Trading success

In just one week our flexible procurement traders locked in a massive £343,000 for our flexible procurement clients. In fact in a single month – March 2019 – savings topped £771,000. What’s more, calendar year savings have exceeded a staggering £2.1million for the period January – August.

Category 2 – Energy Data Collection and Analysis

Our shortlist for the Energy Data Collection and Analysis award focuses on our 360 Strategic Energy Review along with our Triad model and alerts.

360 Strategic Review

Our 360 Strategic Review is a powerful data tool created to unearth hidden savings potential for our clients. We take half-hourly data and analyse it on a site-by-site basis. We focus on where reductions in usage can be made and the associated cost savings. It looks at shifting consumption to avoid the peak Distribution Use of System (DUoS) charges, reducing consumption in the winter to mitigate Transmission Network Use of System (TNUoS) charges, and assessing usage against operational hours to identify out of hours wastage. On average we’ve identified savings of £130,639 per customer so far.

Triad model and alerts

National Grid identifies three Triads each year in order to calculate the Transmission Network Use of System (TNUoS) charges an organisation will incur. Such transmission costs can be reduced if demand is decreased when a Triad is expected. Our Triad model and alerts help clients plan their electricity usage around these dates in order to lower their energy bills.

Our model used from 1 November to the end of February,  identifies which days and what time periods on those days could be a Triad. We then inform our clients using our alert service whether they need to take action to reduce demand and avoid a Triad. We have issued an alert on all three Triad dates for the past 7 years. Last year we issued 24 alerts compared to suppliers who had similar results issuing on average 29 alerts. It’s vitally important for us to issue as few alerts as possible to avoid any unnecessary client interventions.

Awards Ceremony

Our teams work really hard every day to ensure our clients get the right solutions for their businesses. It’s great to have been recognised for our efforts. We’re looking forward to the awards ceremony which take place on Thursday 21 November at the London Hilton on Park Lane. We’ll keep you posted on our success.

 

Ofgem update Targeted Charging Review timeline

Ofgem has published a letter to stakeholders to provide an update on timing and next steps on Future Charging and Access reforms. The regulator has three ongoing projects that serve as a review of transmission, distribution and balancing charging to help facilitate a transition to a more effective network. These are:

  • Electricity Network Access and Forward-looking Charging reform (Access reform)
    • A Significant Code Review (SCR) designed to develop improved access and forward-looking charging arrangements
    • A wide-ranging review of Distribution Use of System (DUoS) charges
    • A focused review of Transmission Network Use of System (TNUoS) charges
  • Targeted Charging Review (TCR)
    • A review of residual network charges, as well as some of the remaining Embedded Benefits to explore how costs may be more fairly shared amongst users
  • Balancing Services Charges Task Force
    • Designed to operate in parallel to the SCR and TCR, Ofgem have established an industry-led task force to evaluate Balancing Services Use of System (BSUoS) charges
    • The Task Force are evaluating how cost reflective and effective current BSUoS charges are

The new timeline

Ofgem have updated the timelines for the TCR and Access reform, providing clarity on dates in their original consultations.

The TCR consultation nominated April 2020 and April 2021 as potential dates for the reform of Embedded Benefits to come into effect. Ofgem have now ruled out April 2020, citing April 2021 as their preferred date. Options for the implementation date for new residual charging arrangements were April 2021 or phasing between 2021 and 2023. The regulator has indicated that they now consider April 2023 as a leading option, alongside the other two.

Regarding the Access reform, Ofgem originally scheduled changes to transmission charges to come into effect in April 2022, and changes to distribution arrangements in April 2023. This has now been revised to April 2023 for both changes.

Future Triad periods

Under the TCR proposals transmission demand residual charges (Triads) would be changed to a fixed or agreed capacity, avoiding the incentive for Triad avoidance in the future. The nomination of a potential implementation date of April 2023 for new residual charging arrangements increases the likelihood that the last Triad could be Winter 2022/23, totaling three Triad periods overall.

Claim your free 360 Strategic Review

EIC are able to calculate your Transmission costs for the next year. This forms part of our 360 Strategic Review which is the ideal first step to creating a Strategic Energy Solution for your business. It is key to unearthing hidden savings potential within your business.

To claim your review click here

Stay informed with EIC Insights

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

Visit our web page to find out more about EIC Market Intelligence and how we keep our clients informed at a frequency to suit them.

Energy Policy Dates for 2019

As we look ahead to 2019, we’ve outlined key energy industry changes and dates to take action by.

EU ETS – Market Stability Reserve (MSR)

1 January – MSR Implementation

The European Commission is introducing a solution to the oversupply of allowances in the carbon market, which will take effect in January.

EU carbon allowances, or European Allowances (EUAs) serve as the unit of compliance under the European Emissions Trading Scheme (EU ETS). In response to a build-up of these allowances, following the 2008 global financial crisis, the European Commission has introduced a long-term solution known as the Market Stability Reserve (MSR). With Brexit looming, there’s uncertainty as to whether these changes will affect the UK.

 

Energy Price Cap

1 January – Price Cap implementation

Price protection for 11 million customers on poor value default tariffs will come into force on 1 January 2019. Ofgem has set the final level of the price cap at £1,136 per year for a typical dual fuel customer paying by direct debit.

When the price cap comes into force suppliers will have to cut the price of their default tariffs, including standard variable tariffs, to the level of or below the cap, forcing them to scrap excess charges. The cap will save customers who use a typical amount of gas and electricity around £76 per year on average, with customers on the most expensive tariffs saving about £120. In total, it is estimated that the price cap will save consumers in Great Britain around £1 billion. Read more here.

 

Ofgem’s Targeted Charging Review (TCR) – the end of Triad season?

4 February – Consultation conclusion

Ofgem has launched a consultation, due to conclude on 4 February 2019, into how the costs of transporting electricity to homes, public organisations, and businesses are recovered. Proposed changes could remove the incentive for Triad avoidance.

Costs for transporting electricity are currently recouped through two types of charges:

  • Forward-looking charges, which send signals to how costs will change with network usage
  • Residual charges, which recover the remainder of the costs

In order to ensure that these costs are shared fairly amongst all users of the electricity network, Ofgem are undertaking a review of the residual network charges, as well as some of the remaining Embedded Benefits, through the Targeted Charging Review (TCR). Ofgem are exploring the removal of the Embedded Benefit relating to charging suppliers for balancing services on the basis of gross demand at the relevant grid supply point. This is important as it would eliminate the incentive of Triad avoidance.

 

Brexit

29 March – Scheduled date to leave the EU

Whilst not a specific energy policy announcement, the UK’s departure from the EU is a significant event that has raised a lot of questions concerning UK energy security.

We put together a Q&A on how Brexit may impact the UK energy industry and climate change targets. Read more here.

 

Closure of the Feed-in Tariff (FiT) scheme

31 March – Scheme Closes

The Government has confirmed plans to remove the export tariff for solar power, which currently provides owners of solar PV panels revenue for excess energy that they generate. This will coincide with the closure of the Feed-in Tariff (FiT) scheme.

The FiT scheme was introduced in April 2010 in order to incentivise the development of small scale renewable generation from decentralised energy solutions such as solar photovoltaics (PV), wind, hydro, anaerobic digestion and micro Combined Heat and Power (CHP). Generators were paid a fixed rate determined by the Government, which varied by technology and scale.

The scheme will close in full to new applications from 31 March 2019, subject to the time-limited extensions and grace period.

 

Streamlined Energy and Carbon Reporting (SECR)

1 April – SECR implementation

Streamlined Energy and Carbon Reporting (SECR) is on the way, due to come in to effect from 1 April 2019. The introduction of this new carbon compliance scheme aims to reduce some of the administrative burden of overlapping schemes and improve the visibility of energy and carbon emissions when the CRC scheme ends.

EIC can help you achieve compliance. Read more about Streamlined Energy and Carbon Reporting (SECR) by clicking here.

 

UK Capacity Market

Early 2019

The UK Capacity Market is currently undergoing a temporary suspension, issued by the European Court of Justice (ECJ), on the back of a legal challenge that the auction was biased towards fossil fuel generators.

The ECJ’s decision means that payments made under the Capacity Market (CM) scheme will be frozen until the UK Government can obtain permission from the European Commission to continue. In addition, the UK will not be allowed to conduct any further CM auctions for energy firms to bid on new contracts.

The UK government has since iterated that it hopes to start the Capacity Market as soon as possible and intends to run a T-1 top-up auction next summer, for delivery in winter. This is dependent on the success of a formal investigation to be undertaken by the European Commission early in the New Year.

 

Spring Statement and Autumn Budget

The UK Government’s biannual financial updates are always worth looking out for.

The Spring Statement will be delivered in March and the more substantial Autumn Budget is scheduled for October. The 2018 budget had a very heavy focus on Brexit, with very little to say concerning energy policy. It is likely this will be the case for the Spring Statement and potentially going forward.

 

Energy Savings Opportunity Scheme (ESOS)

5 December – ESOS Phase 2 compliance deadline

ESOS provides a real chance to improve the energy efficiency of your business, on a continual basis, to make significant cost savings.

In Phase 1 of ESOS we identified 2,829 individual energy efficiency opportunities, equivalent to 461GWh or £43.9m of annual savings across 1,148 individual audits. Our team also helped over 300 ESOS Phase 1 clients avoid combined maximum penalties of over £48million.

With EIC you can achieve timely compliance and make the most of any recommendations identified in your ESOS report.

 

Stay informed with EIC insights

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

Visit our website to find out more about EIC Market Intelligence and how we keep our clients informed at a frequency to suit them.

Will Ofgem’s Targeted Charging Review bring an end to Triads?

Ofgem has launched a consultation into how the costs of transporting electricity to homes, public organisations, and businesses are recovered. Proposed changes could remove the incentive for Triad avoidance.

Costs for transporting electricity are currently recouped through two types of charges:

  • Forward-looking charges, which send signals to how costs will change with network usage
  • Residual charges, which recover the remainder of the costs

In order to ensure that these costs are shared fairly amongst all users of the electricity network, Ofgem are undertaking a review of the residual network charges, as well as some of the remaining Embedded Benefits, through the Targeted Charging Review (TCR).

 

Proposed options for residual charges

On setting transmission and distribution residual charges, Ofgem has conducted an analysis of different approaches, leading them to two primary options that they are consulting on, the first of which is a ‘Fixed Charge’. This is highlighted as Ofgem’s preferred option, in which charges would be set for individuals in customer segments, with these segments being based on an existing industry approach.

The second option is an ‘Agreed Capacity Charge’. This would see a charge calculated directly for larger users who have a specific agreed capacity. Capacity for smaller households and businesses would be based upon assumed levels.

Ofgem’s assessment is that a reform of residual charges would result in potential net system benefits up to 2040 between £0.8bn and £3.2bn, with benefits to consumers as a whole in the range of £0.5bn to £1.6bn. In addition to this, Ofgem assess that the proposed changes would save around £2 a year for households in the longer term.

Either scenario would see a fixed rate for Transmission Network Use of System (TNUoS) charges. However, under the Agreed Capacity Charge option, as charges would be based on capacity, there would potentially be some room to reduce contribution to the residual charges.

 

Changes to Embedded Benefits

There are a some notable points within the TCR regarding Embedded Benefits; notably, Ofgem are consulting on setting the Transmission Generation Residual to zero, subject to maintaining compliance with the current cap on overall transmission charges to generators. This will remove a benefit to larger generators that receive a credit from these charges at present.

Another key point is that Ofgem are exploring the removal of the Embedded Benefit relating to charging suppliers for balancing services on the basis of gross demand at the relevant grid supply point. This is important as it would eliminate the incentive of Triad avoidance. Currently, National Grid identifies three Triads each year in order to calculate the TNUoS charges an organisation will incur. Such transmission costs can be reduced if demand is decreased when a Triad Alert is called (a warning that demand will be high that day). Find out more about what Triads are and how you can avoid them here.

For both of these points, Ofgem believes that whilst these benefits reduce costs for individual companies or consumers, they don’t reduce the total network costs that users need to fund collectively. This can lead to greater costs for other users and, if not addressed, Ofgem say this will lead to less efficient outcomes that are not in the best interests of consumers as a whole.

 

BSUoS changes

The Review outlines a proposal for Ofgem to set up a Balancing Services Use of System (BSUoS) task force. The task force would be responsible for considering how cost-reflective and effective the current charges within BSUoS are. From this, they would evaluate the potential to provide a better system in the future, looking to make it more cost-effective. This would come with the responsibility of assessing how feasible any improvements to BSUoS charges are.

Ofgem are deliberating between two reform options; a partial or a full reform of BSUoS. A partial reform would see a reduction in suppliers’ contributions to BSUoS charges, while a full reform would see the removal of BSUoS payments, and require smaller embedded generators to pay BSUoS charges.

Under the current system, suppliers are charged BSUoS based on net demand. A bill is calculated on gross demand and then any embedded generation reduces this cost to the supplier, which is recouped from consumers via a separate non-commodity cost (NCC) charge. Under the proposed full reform, embedded generators would be considered the same as transmission connected generators, leading them to be charged for BSUoS with no savings.

 

The impact to Triads

Triads are currently evaluated based on average demand during the three highest half-hourly peaks of electricity use between November and February. These periods can be forecast, allowing network users who employ Triad avoidance to reduce their electricity consumption in anticipation, for example by instead using on-site generation, Demand Side Response (DSR), or storage. Ofgem argue that whilst this reduces their own costs, the total network cost doesn’t change, meaning that those unable to employ the same avoidance methods pay a larger cost.

Under the proposals by Ofgem, charges will remain roughly the same to users where no Triad management is in place. However, it is expected that large increases will occur for those who use Triad avoidance to reduce the impact.

The new system would see single fixed charges applied based on voltage level. Ofgem believe this will result in reductions in charges for larger SMEs, whilst SMEs at the lower end of consumption will see moderate increases. Importantly, users with on-site generation will pay the same charge as those without, in contrast to the current arrangements.

The Triad period this winter will be unaffected, as will winter 2019 going by Ofgem’s timetable. However, this will have a significant impact on how businesses may seek to recover operating costs in the future. No replacement could see a lack of incentive for DSR, resulting in adverse constraints on the market.

 

Stay informed with EIC insights

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

Visit our website to find out more about EIC Market Intelligence and how we keep our clients informed at a frequency to suit them.