The Targeted Charging Review: what it means for your business
Energy regulator Ofgem has reviewed the way in which UK businesses are charged for their use of the electricity network, and as a result, there are some changes being made. But what does this mean for your business and its electricity bills?
How we all pay for the network
The UK’s energy network is a huge piece of infrastructure. (Ofgem claims that if you stretched out all the pipes and cables, they would reach to the moon and back.) The electricity network is split into two parts: transmission and distribution. Transmission lines are higher-voltage lines for the long distances between power plants and substations. Distribution lines are lower-voltage and cover the shorter distances between substations and the end user.
Such a big and complex piece of infrastructure requires a lot of investment to maintain and run. In the UK, the cost of all those wires, pylons and work hours is paid upfront by dozens of network companies across the UK.
The network companies recover the costs of running and maintaining the network by charging electricity and gas suppliers, who in turn pass the charges on to their customers.
Roughly a quarter of the average electricity bill goes towards paying the network company’s costs, under the heading of Use of System (UoS) charges. These are divided into Transmission Network Use of System (TNUoS) charges and Distribution Use of System (DUoS) charges for the transmission and distribution networks respectively. Because you don’t get to choose your network company and you don’t have much choice about paying the charges, UoS charges are regulated by Ofgem. They have decided that there are problems with the current system because some network users have found ways to avoid paying their share of these charges.
Two kinds of user charges
UoS charges have two elements: residual charges, and forward-looking charges.
- Residual charges are recovered in order to pay for the maintenance of the existing electricity network and largely relate to costs which have already been incurred. This element makes up the majority of UoS charges.
- Forward-looking charges are dynamic, changing as you use electricity in different ways or at different times, with the aim that users will pick up on these pricing signals and use electricity in a way that reduces costs to the network.
Current arrangements
Currently, if a business is on half-hourly metering, its charges are calculated mostly according to their consumption.
DUoS:
The majority of DUoS charges are passed through on a p/kWh basis, and so make up part of a tariff’s unit rate. The size of the charge partly depends on when they use their power, with each day split into three time bands – green, amber and red. During the ‘green’ periods (which tend to be during weekends and late at night) DUoS charges will be lower. During the peak ‘red’ periods (usually mid-week, early evening) they will be higher. This means that users can move their consumption away from peak times, and reduce their overall charges.
TNUoS:
To calculate residual TNUoS charges, National Grid confirm the three half-hourly periods where demand across the grid was highest over the winter and use them as a basis for their calculations of the company’s usage. The three periods are known as “Triads” and a business’s usage during these periods is used to calculate their charges.
Residual TNUoS charges can run into thousands of pounds a year for a large business, but many businesses have found a way to avoid them: by predicting when the Triads will happen and then drastically lowering their usage for those three half-hours, creating an artificially low basis for how their usage is calculated.
What’s changing?
Ofgem have decided that it should no longer be possible for businesses to avoid residual DUoS and TNUoS charges by changing their behaviour. Their view is that the basic costs of maintaining the network still have to be met, no matter what individual businesses do or don’t do.
Because of this, a large proportion of UoS charges will soon be ‘fixed,’ rather than charged at a p/kWh (DUoS) or £/kW (TNUoS) basis. Network operators will charge suppliers a set amount per site, and suppliers will pass these new fixed charges on. This means it will no longer be possible to reduce these costs by reducing usage during certain periods.
The fixed costs you pay will depend on the size of your business. Ofgem has developed a banding system, somewhat like council tax bands but based on consumption levels or supply capacity. This means that many businesses will likely see their costs increase.
The changes to DUoS charges are due to happen in April 2022, but Ofgem recently announced that it is minded to delay the implementation of the TNUoS changes until April 2023. If this turns out to be the case, it would be the second time that reforms to Use of System charges have been delayed.
How to prepare for the TCR changes
When the new fixed charges come into effect, suppliers will be passing the costs on to customers, but that doesn’t mean they need to warn you about it now. Both brokers and business energy customers should carefully check any electricity supply contracts for the next year before signing. Are the new fixed charges factored into the price you are being quoted, or will they come as an unwelcome surprise next April?
Good Energy are working hard to keep customers informed of the changes and support them through this period. We are offering 24-month pricing to our business customers so that they can budget for the next two years knowing that their electricity charges will be consistent.
Protecting generators
The aim of the new system is to charge heavy users more for the upkeep of the grid, but basing the banding on supply capacity is unfortunate for generators, whose supply capacity is often very high compared to the power they actually use. Good Energy is supporting generators by helping them to secure an exemption from their network operator. If you are a generator and concerned about the charges, then please contact your business energy supplier to see if they can help you apply for exemption from the new charges. We’re already working with our generator customers to enable them easily to apply for exemption from the new charges. If you switch your electricity supply to Good Energy, we’ll keep you in the know about industry changes that could affect the amount you pay for your energy.
Many business won’t yet know the full impact of the TCR changes on their electricity costs, but the best way to prepare is by signing up with a supplier who is transparent about the future costs and prepared to support you through the transition.
For further advice on the TCR, or to get a transparent quote for your business energy supply, get in touch with our team.
