Ofgem’s final decision on reforms to network charging arrangements will have a big impact on business electricity bills from next year. Chris Hurcombe, director of third party intermediary Catalyst Commercial, outlines some key considerations
Ofgem’s Targeted Charging Review (TCR) will make sweeping changes to transmission (TNUoS) and distribution (DUoS) residual (or sunk) network charging structures from April 2021 onwards. A second review is considering “forward looking” charges, which are designed to provide pricing signals to consumers to encourage specific consumption behaviour and may further impact of time of use charging.
Details of forward looking charging changes are some way off. But we now know what the residual charging regime change entails:
- From April 2021 the residual charges element of TNUoS will be moved from Triad demand to a fixed charge based on site available capacity.
- From April 2022 DUoS charging structure will change to place more emphasis on a fixed charged based on available capacity with a smaller element of time-of-use charging remaining.
- Ofgem has used a banding system to decide on the level of charges, these four bands will be based on site capacity and voltage of connection.
- TCR is structured in such a way to ensure that large industrial and commercial (I&C) firms are prevented from avoiding network residual costs as they currently do through Triad avoidance.
- Triad periods are the three highest winter peak periods, revealed retrospectively, on which the transmission network component of large companies’ power bills are based. By reducing consumption or switching to onsite generation during suspected Triad periods, some firms can shave six or even seven figures off their annual bill.
As yet, Ofgem has not released any pricing around the new structure. It has released an indicative price on what it estimates it “should” be, but no confirmed prices. For end users the issues are now focused on losing out on load shifting around the red band time of day tariff and also from Triad avoidance November-February each year. (Though there are still opportunities for Triad avoidance next winter, 2020/21, because the changes are due to come into force in April 2021.)
Impact on business: will we say good-bye DSR?
Those who have worked hard to avoid the winter Triads and other peaks through demand shifting and shedding have saved money by reducing consumption. Those businesses have helped the grid in their activities and delivered money back into the business bottom line by reducing energy bills. Some businesses we have worked with have saved over £500k/annum through these activities. From April 2021 there will be no way to avoid them – they will have this price impact back.
Businesses that have avoided peak costs with demand side reduction activities (DSR) will also suffer, with Triad often forming the bedrock of DSR business cases. They will now need to find other ways to ensure DSR remains viable, if they can adapt processes to different requirements.
It’s all about kVA + capacity
The next impact is regarding a business’s available capacity. It will hit heavy power consumers with large capacity hardest.
The new fixed price is now based on a businesses currently available capacity and that capacity value decides which of the four pricing bands a business will be put into. The higher the capacity, the higher the pricing band and the higher the fixed charge on the energy bill from April 2021. A business’s available capacity over the last 24-months has been taken by Ofgem as the value to decide which of the four pricing bands they will be entered into – and hence the fixed price on the bill.
The issue with this is that over the last few years businesses have been penalised for exceeding max capacity (kVA) so have hung onto it (left themselves some headroom). The reason being is that if they surrendered that ‘spare’ capacity then it is difficult to get back and also expensive. In light of the TCR change, activities in the past will be detrimental in future as that additional ‘spare’ capacity may put them into the highest of the four pricing bands come April 2021.
It will affect NHH consumers too; but they may see a benefit
The TCR change also affects non half-hourly (NHH) businesses, which may now see a reduction in their overall energy bill.
Therefore, this change is a penalty to those who have been told over the years to actively avoid peak demand costs and help balance the grid with demand side solutions versus those who haven’t done anything in the past and have never helped the grid.
Procurement: We may have a problem
As Ofgem has not finalised the new fixed pricing bands, the industry is unable to truly deliver a procurement price for post April 2021. If a business is in an April 2020 contract or an October 2020 contract that spans beyond April 2021, they will more than likely see a change in their contract as suppliers look to recoup losses from the new TCR charging mechanism.
For these and longer term contracts, bills may be reconciled at a later date. However for now, these are unknown costs to business.
What should businesses do?
Capacity analysis: Manage capacity to remove excess ‘spare’ kVA and also look to reduce maximum capacity to bring the kVA total down and progress to the lowest possible of the four pricing bands.
Use less power overall: Don’t just look at certain times of day, consider all times of day to reduce total consumption and also reduce aforementioned kVA. Energy efficiency measures and building controls will identify waste, remove waste and also look at other activities to reduce excess consumption. All will result in less energy spend and a lower fixed price on the bill.
Procure with caution: Businesses looking for a three-year deal on fixed terms should tread with caution. There may be a huge risk premium embedded in the contract in advance of the April 2021 pricing decision. In this instance it is best to take a pass-through contract where pricing can flex to market conditions and your demand onsite.
Financial impact: How TCR could affect your business
Overall, the TCR changes will have a major impact on prices and leaves the industry with little time before implementation. It is important the businesses understand the risk the changes present, yet for now, they have only indicative prices to inform their best guesses.
To highlight the cost impacts, Catalyst Commercial Services ran scenarios across a group of high kVA and high kWh consuming clients with average available capacity of 26,000kVA and an estimated Triad demand of 4150kW. So, they’re avoiding Triad costs and via a pass through contract are avoiding peak DNUoS charges over winter period. As such their annual spend is circa £2m now. From April 2022, based on Ofgem’s indication of prices, their contract will be circa £3m/annum.
Many other large energy users can expect a similar impact – yet many are unaware or are unprepared for such a significant bill increase. We and other TPIs are working with businesses to work out cost implications, manage capacity, increase energy management and efficiency across all time periods and thereby mitigate bill increases.
Time to panic?
Ofgem has stated that its TCR reforms will universally come into force from April 2021. The industry consensus, however, is that it will be a significant challenge to respect that timetable, especially as there are currently no published charges for the four pricing bands. It is also questionable whether suppliers will be prepared to make blanket changes at such short notice.
We believe a phased approach is therefore more likely, starting with non half-hourly low voltage customers, bringing in larger users over time. But businesses, particularly those that have for many years reduced bills through peak load shifting, would do well to start immediately exploring alternative options.