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OFGEM’s TARGETED CHARGING REVIEW
Preparing for the Changes Starting in April 2021

Posted by: Daniella Smith
Category: News & Blogs

Ofgem (Office of Gas and Electricity markets) have reformed the ‘Residual Network Charges’ under the latest Targeted Charing Review. It is expected that the changes will make sure the network charges are evenly distributed between all sizes of businesses. This is expected to save consumers as much as £300 million per annum from 2021.

But the question on everyone’s mind is: How will businesses be impacted, and does this mean my bills will increase or decrease? So we thought we would write this piece to help clear a few things up for you.

What are Network charges?

The network charges account for 25-30% of an electricity bill. These charges are designed to compensate the National Grid and Distribution System Operators (DSOs) for the costs they incur to operate and maintain the transmission and distribution network respectively. 

 

In the UK, this is split into two types of charges 

  1. Residual charges – recovers the costs of maintaining the electricity network.
  2. Forward-looking chargescovers the cost of expanding the network, provides signals to consumers to incentivise efficient network use.

 

Distribution use of system (DUoS) charges vary between DSOs but typically make between 15-20% of an electricity bill of which about 50% is the residual charge. Transmission Network Use of System charges (TNUoS) make up between 5-8% of an electricity bill and the residual element of TNUoS charges makes up over 90% of the total charge. 

Problems with the Current System

Some consumers have manipulated the current Triad and Distribution Use of System (DUoS) system, to reduce imported electricity consumption during Triad periods to avoid paying Transmission Network Use of Systems (TNUoS) and DUoS charges. Thus, consumers with higher energy consumption can evade charges and leave users with lower energy consumption having to pay more in order to cover necessary grid maintenance charges.

There are currently 3 half-hourly settlement periods, between November and February, with a minimum of 10 days clear between those periods, where distribution chargers are higher due to electricity demand- these are known as Triad Periods. Triad charges are typically paid every month based on previous years of winter consumption. The Triad system only applies to large customers with an energy consumption of 70 kW+ per month. Smaller customers have always been charged a fixed rate.

Consumers and businesses are not informed before-hand when these periods are, but some would predict when to mitigate their energy usage. If predicted correctly, these businesses/ consumers would save money whilst others would have to pay more in order to subsidise. 

Changes to Transmission Network Charges

After March 21, 90% of these Triads will be paid based on the supply voltage and agreed on capacity. For Non-Half-Hourly customers and Half-Hourly customers, this means that instead of being charged per Kwh they will be charged depending on their supply capacity and connection voltage. For Half-Hourly customers, the opportunity to avoid TNUoS (triads) will no longer be available. As you can see from the table below reducing supply capacity and being aware of the bands, customers can make sure they are charged the correct amounts. 

Changes to Distribution Network Charges

Duos residual will be charged fixed £/day for all demand customers by April 2021. The table below sets out how the DUoS tariffs look before and after the changes. Ultimately the residual element has shifted from a flat £/kWh to a fixed daily charge based on agreed capacity

This does not impact flexibility revenues as there was no variable element to these charges previously, hence the difference between the red band (4-7 pm) and the green band (night time) remains the same.

Should I be Worried?

Businesses/ consumers will be placed into one of several bands, depending on their site size. The band determines how much you will pay for TNUoS and DUoS costs.

For metered supply with no set capacity, these charging bands will be based on Net Volumes of energy consumption. For those with half-hourly meters, the cost will depend on the agreed capacity and voltage level. Costs will also vary per region.

If your contract starts/ re-news from April 2022 there will be no additional residual costs in your quote (unless your supplier has miscalculated or if you manipulated the Triad System). However, If your contract start date is between May 2021 and March 2022, your quote should include some of the old winter charges, and some of the new monthly charges. So, some customers may see a higher quote than normal.

The closer your contract renewal date is to October 2021 the more your quote will be impacted, but this will only be a one-off adjustment. All charges should be implemented by 2023.

Some suppliers may still be building the residual cost into the unit rate, rather than just the standing charge. That may mean you get a less accurately priced quote. The issue is, if they haven’t charged you enough, they could ask you to pay more later.

Right, so how can my Business Prepare for the Future of Energy Market Pricing?

Businesses with larger energy consumption are likely to result in increased costs. However, Consumers will still be able to adapt and shift their energy usage patterns to minimise consumption during peak periods on the grid.

The wholesale market volatility has been increasing with pricing going negative 80 times last year and prices surging over £120 per MWh similar number of times (Cornwall Insights).The average arbitrage in the wholesale market pricing could increase, as people stop shifting based on TRIAD signals and DUoS red band charges.

Your business should anyways look at ways to efficiently reduce usage whilst maintaining performance. ‘Load Shifting’ (where you move electricity consumption from one time to another) will no longer be viable on its own with fixed tariffs. 

Alternative avenues need to be looked at including wholesale market tracked dynamic tariffs, with which you could benefit by optimising your energy usage based on the volatility in the wholesale markets. Other new services include Distribution Network Operator (DNO) flexibility services.

And how can Q Energy Help?

Q Energy as a smart energy services provider, providing independent advice on your energy contracts by working with all major energy suppliers in the UK. We will look at your energy data and recommend the appropriate actions you could take to get immediate monetary benefits while future-proofing your business.

We provide Energy as a Service, providing you with energy management services along with your energy contract. These services can be just the energy monitoring dashboard with analytics & efficiency recommendations; solar and/or battery storage installations or asset optimisation services.

At Q Energy we have created Smart Energy Tariffs, enabling the customer to realise the value of reducing their electricity usage when the market prices are high and benefit when market prices go down.

Get in touch for a no-obligation chat by emailing support@qenergy.ai or calling us on 0161 706 0980. We could arrange a free site survey and provide you with our energy monitoring dashboard.

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