Ofgem’s Targeted Charging Review
impact on pricing for SMEs and Half-Hourly Customers
On 21 November 2019, Ofgem published its decision on the Targeted Charging Review (TCR). The TCR sought to address the perceived problem with ‘residual’ charging within the network charging cost and methodology, namely Distribution (DUoS) and Transmission (TNUoS).
Summary of the changes
- A large proportion of TNUoS and DUoS is made up of residual charges
- The residual element is not cost-reflective but has become large enough to send cost signals
- From April 2021 the TNUoS element will be turned into a fixed charge
- From April 2022 the DUoS element will be turned into a fixed charge
- The new residual charge will be split into voltage groups and then sub-bands.
The changes in detail
Current charging tariffs are created through industry approved models designed to allocate costs incurred by the network companies to consumers in a cost-reflective way. In recent years the cost-reflective aspect of the tariffs has become an increasingly smaller part of the tariff, leading to the residual element becoming ever larger.
The residual part of the charge is added on top of the cost-reflective tariff to ensure the network companies recover the revenue they are allowed to recover. This is set by Ofgem through Price Controls. Ofgem suggests that now the residual is such a large part of the charge that it is sending a cost signal even though it is not a cost-reflective part of the tariff, consumers are taking evasive action which does not aid the system.
To address this perceived issue, Ofgem has decided to split the residual part of the tariff out and charge it on a fixed basis.
How will the new fixed residual charge be applied?
Because a domestic customer should not pay the same as a large industrial user, the fixed residual charge cannot be shared out equally on all users of the network. So, Ofgem has decided to introduce a multi-tiered banding system.
This banding system is not defined yet. However, Ofgem’s illustrative view splits users into 5 ‘Voltage groups’: Domestic, SME, LV HH, HV HH and EHV. Then each group will be split into 4 bands (except domestic, which only has one).
The calculation behind the banding should mean that within each band, the ‘average’ consumer will pay the same in the future as they currently do, lower consumers will pay more than they currently do, and higher users will pay less.
How a consumer is allocated to a band is also not set. However, the initial direction is for SME to be based on historic EACs (potentially a 24m average prior to the charge setting period). It currently looks like a consumer will only move bands every price control. These are currently due to take place every 5 years, starting 2021.
This will happen to both DUoS and TNUoS. TNUoS is to be implemented in April 2021, with DUoS following in April 2022.