Domestic customers with least power use and companies who have power generation on-site are set to be the losers as Ofgem announced the outcome of its Targeted Charging Review (TCR), one of several areas where the regulator is reconsidering how system costs fall as the structure of the power industry becomes less centralised.
The regulator says the charging structure has to change to cut costs and reflect a new industry. But others say the change gives the wrong signals, and that the regulator should not address this issue in isolation but in a more fundamental charging review. They fear these decisions could clash with others now under discussion and say the piecemeal approach damages investor confidence.
In the TCR the regulator has attempted to address the power industry’s ‘mortgage’ – ongoing payments for network extension that has already been built, known as residual charges. That is currently paid by both generators and demand customers. Now Ofgem has decided the costs will all fall on the latter.
Because charges are currently paid on a per MWh basis, the regulator is concerned that customers who have onsite generation, and import little power as a result, pay little network charge – although, the regulator says, they still have the benefit of the network whenever they need it. Customers who take all their power from the network end up paying a larger share. The regulator now plans to charge the residual element of the bill as a ‘banded’ fixed charge.
A second element address how balancing service charges are allocated. At the moment they are also allocated on a ‘net’ basis and suppliers can reduce their payment by contracting small scale generation to offset demand. Ofgem will remove that option.
Ofgem decided against one proposed change, which could see small generators become liable for balancing system charges (currently they are exempt). Instead, it will open a wider review of charges.
Ofgem says most domestic consumers will save around £5/year reduction in their bill when these changes fully come into effect in 2022 (transmisison changes take effect in 2021 and distribution a year later). However, some households who use the least electricity could face a typical annual increase of between £2 and £22 a year. The regulator says overall the changes will save £3.8 billon to £5.3 billion over the period to 2040.
Chris Hewett, STA chief executive, said: “Despite their own revised analysis highlighting that these changes risk delaying deployment of subsidy-free low cost renewables, Ofgem are pressing ahead with changes that make net zero harder to reach, not easier. With the urgency of climate change, it is abundantly clear that the regulator’s current objectives are now outdated and absolutely vital that the next government addresses this.”
Dr Nina Skorupska, chief executive of the REA: “Although there are a few consolations for larger generators, today’s announcement undermines the move towards a more flexible power system. These reforms mean that businesses and homes which have taken responsible steps to install low carbon technologies will effectively pay more to use the wires needed to support the system.
“Our proposal from the start was for the TCR to be progressed in combination with another set of proposed changes, called the review of ‘forward looking charges.’ Tackling and rolling out these two sets of proposals in tandem would have allowed the whole picture of grid charges to be progressed at the same time in a cohesive manner. This has not happened, however, and we now face a period of investor uncertainty and a significantly weakened business case for battery storage and the other crucial systems we need to ensure Britain has a modern power grid.
“Ultimately, this decision will negatively impact subsidy-free renewables and until the ‘forward looking charges’ review is enacted we risk further shrinking the pipeline of new projects.”
Rebecca Williams, RenewableUK head of policy and regulation: “Although we welcome the fact that Ofgem has listened to industry’s calls to modernise the way network charges are redistributed across the grid, we are concerned that today’s announcement risks damaging the UK’s ability to deploy cheap renewables as fast as possible for consumers. For example, just setting up yet another taskforce does very little to mitigate uncertainty for the energy industry and kicks the can down the road.
“We need to pull out all the stops to deliver the low carbon transition. Ofgem has a role to play in decarbonisation by minimising risks and not undermining the industry’s ability to attract much-needed investment. Ofgem’s current remit takes no account of this and that is why a clear change in strategic direction is needed to make it fit for purpose. Reforming Ofgem so that it takes account of the need to reach net zero rapidly and cheaply would unlock further investment to build the flexible, smart, clean energy system of the future – vital infrastructure which the UK needs to function in the decades ahead”.
Juliet Davenport, chief executive, Good Energy: “Ofgem’s decision on the Targeted Charging Review will have a negative impact on the growth of onshore wind and solar power, with the latest assessment predicting half of new projects projected to be abandoned due to the added costs. The decision will also penalise the most vulnerable and energy efficient customers by increasing network charges for some low-consuming domestic consumers by almost 20 per cent.
“None of these outcomes are consistent with addressing the climate emergency or achieving net-zero emissions by 2050, going against the stated policy objectives of all political parties as we head into an election. We call on Ofgem to reconsider its decision and delay any changes until a new government is in place and its policies are clear.”
Read the documents here
Further reading
Ofgem to go ahead with Triad benefit cuts, plans three-year phase-in
Briefing: behind the embedded benefits discussion
Smart energy suffers a ‘big blow’: industry responds to Ofgem’s Triad proposals
Ofgem ‘minded to’ cut payments to embedded generators
Distributed generation needs investor confidence as much as central generation does