Ofgem has confirmed major changes to the way business pay to use the power networks. The Energyst asked consultants and end users for an impact assessment.
Ofgem’s changes to network charges will have a major impact on business energy bills, particularly for larger power users that have traditionally reduced peak demand through loadshifting.
For some, the annual cost could run to seven figures. Water companies, for example, try to minimise grid draw during winter evenings, because their transmission charges are based on their usage during the three highest winter peaks (Triad charges, with Triad periods confirmed retrospectively).
Speaking at an MEUC conference before Christmas, Thames Water energy manager, Angus Berry, said Ofgem’s changes may cost Thames and its customers, “millions”.
“Suddenly we are facing a cost that we have not had for 20 years. On a Triad day, we shed 60-70 per cent of load,” said Berry. “A lot of businesses don’t realise what is going to hit them.”
Part of the problem is that the new charging rates have not yet been published. But here is what we know:
- Transmission: From April 2021, the residual element of transmission network charges (TNUoS) will be moved from demand to a fixed charge based on a site’s available capacity, or recent annual demand.
- Distribution: From April 2022 distribution network (DUoS) charges will also move to a fixed charge based on available capacity. Avoiding red bands will be much less valuable.
- Ofgem has come up with a banding system. Businesses will fall into one of four bands and their charges, based on site capacity and voltage connection, will fall within one of these bands.
What does that mean?
“The higher your site’s capacity, the higher the pricing band and the higher the fixed charge on your energy bill from April 2021,” says Catalyst Commercial’s Chris Hurcombe. “A business’ 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.”
Hurcombe says there’s just one problem with that approach.
“Over the last few years businesses have been penalised for exceeding max capacity (kVA) so have hung onto it for ‘wriggle room’, because getting that spare capacity back is difficult and expensive.”
Now, however, holding ‘spare’ capacity could push businesses into the highest of the four pricing bands, which means businesses should probably start ‘rightsizing’ capacity now (more from Hurcombe on that here).
Counting the cost
Andrew Enzor, senior consultant at Cornwall Insight, says there are two primary impacts of the targeted charging review.
“Firstly, the value of load management is decreasing significantly. The reduction in transmission network charges that sites which avoid importing during the three half hours of peak demand (the Triad periods) are able to achieve, will reduce by ~£50/kW. There will still be some value in avoiding usage at peak times in areas of high demand, but the majority of transmission network charges will move to a fixed charge basis,” says Enzor.
“Similarly the reduction in distribution network charges that sites which reduce overall consumption are able to achieve will reduce by ~£8/MWh on average, with the exact reduction varying by region.”
Secondly, Enzor says embedded generators will lose revenue they currently earn from mitigating balancing services charges.
“Embedded generators are currently able to reduce their supplier’s exposure to balancing services charges and are typically paid for doing so,” Enzor explains. “The value of the lost revenue varies by half hour but averages around £2.50-£3.00/MWh. This will take effect from April 2021.”
The biggest losers
James Summerbell, former head of energy procurement at Tesco and now MD at Engie Impact, agrees that Triad avoiders and firms hoarding capacity will be the biggest losers.
“Carrying excess capacity will become increasingly expensive,” says Summerbell. “Customers with very ‘peaky’ consumption will suffer the most from this and should consider solutions such as battery technology to smooth peaks,” he suggests, “although the business case for doing this will remain unclear until the rates of the new charges are released.”
While many lament the death of Triad, Summerbell points out that returns from avoidance have been diminishing for some time.
“The reality is that Triad periods have become increasingly difficult to predict. Some customers may have turned down consumption or, more often, switched on back-up generation as many as 35-40 times to ensure they capture the big three winter peaks – and even then success was not guaranteed,” he says. “This is costly and inconvenient for some, and has eroded the available benefit.”
Some large energy users, however, are scathing, suggesting the regulator’s approach is directly at odds with government.
“Ofgem’s review indicates that the regulator either doesn’t understand or doesn’t care about the pressures facing Energy Intensive Industries (EII), such as steel,” says Tim Collins, business development and regulatory manager at Simec.
“Ofgem’s reforms massively increase the network cost burden on large electricity consumers, irrespective of their competitive position. For many steel makers, electricity is the largest single cost behind raw materials. We already pay 80 per cent more than our competitors in France – and even more versus Russian and Chinese competitors. Because of these reforms to network charges, the disparity in electricity costs is set to get even wider,” he adds.
“Ofgem’s reforms work directly against Government’s efforts to give cost relief to EIIs. It’s high time reviews such as this are approached holistically as part of a joined up UK industrial strategy.”
Where are the incentives?
Ofgem has overhauled ‘sunk’ network charges because as more businesses avoid network charges, fewer consumers are left picking up the tab for the power system. The regulator says that is not fair.
Most people do not dispute the principle of fairness, but question why Ofgem is taking away incentives that help reduce system peaks without replacing them with other incentives. Many worry that the changes will further damage the business case for demand-side response and flexibility – increasingly required in a renewables-dominated power system (although others think the opposite is true).
The regulator is working on new forward looking and network access arrangements which should reward behaviour that benefits the system. But these are unlikely to be ready before 2022.
Local flexibility ‘the new Triad’?
While Ofgem and the power network operators work up new incentives, some of the DNOs have started to procure flexibility – i.e. output from small generators, batteries and flexible load – to relieve network constraints.
Presently DNO requirements are highly dependent on location, but for businesses with assets in the right places, providing flexibility services to network operators could enable some firms to partially offset the loss of Triad. But prices paid, simplicity and long term visibility are key to driving market participation.
Across all distribution network operators, some 947MW in flexibility services was tendered in 2019, with that figure set to grow in 2020.
However, to date, those tenders have only procured about 20 per cent of their total requirements on average, according to industry body the Energy Networks Association (ENA).
The ENA acknowledges that lack of standardisation in DNO requirements and contracting is a hurdle for flexibility providers and is working on harmonising requirements across regions this year.
In the meantime, it called for businesses to help shape its flexibility roadmap via a consultation that runs to 7 March.
“Stakeholder engagement is key,” said ENA head of innovation and development, Randolph Brazier. “We need [businesses] to make the market work and get more flexibility onto the system. We are open to ideas.”
Tell DNOs what you need via the 2020 consultation here.