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Targeted Charging Review (TCR) - getting to grips

Posted February 08, 2023


Hello. My name is Binoy Dharsi. I’m a network charging expert here at EDF and I want to take you through some of the network charge reforms that are currently underway and some that are being planned for the future.

What are network charges?

When I’m talking about network charges, I’m talking about:

  • Transmission Network Use of System charges (TNUoS) – the large “motorway” wires that connect generators through to the localised distribution areas.
  • Distribution areas (DUoS) – the more complicated “b roads” which deliver power to homes and businesses.
  • Balancing Services (BSUoS) – the energy that generators produce is matched against the amount of energy that consumers consume. This needs to be balanced on a second by second basis and that pot of money is BSUoS.

These network charges are the three largest non-energy costs, and the pot of money they represent has increased over the years (due to some of the reasons below). Essentially the whole pot of money is there to be collected for the network operators to reliably provide your connection and to make sure that the system is maintained in the way it should be.

Why is the network charging reform important?

Essentially there are a few reasons:

  • The first one is that the generation that’s on the system now is no longer just your “conventional” generation (e.g. thermal generation such as gas, coal power, nuclear power stations). There is a mixture of renewable generation now entering the system such an on and offshore windfarms. Those types of energy are not as stable – the wind doesn’t blow predictably, and that’s an important factor. And equally for solar farms the sunshine isn’t predictable, so there will be fluctuations on when they’re used as well.
  • You’ve also then got the transmission network. Where your generator connects to the network has changed quite dramatically. So whilst there used to be more energy generation in remote areas and the power cables would deliver that energy to the large demand areas, you’re now getting smaller, distribution generators connecting more locally. They deliver power from a short distance to homes and businesses.
  • You’ve also got this other signal that network companies send. Whilst they’re collecting their money to run their networks, they also need to plan how much of that cable is being utilised. Lots of consumers consume energy at a particular period of the day – that’s because their businesses run at those times, or they get home and utilise domestic appliances during that time. Due to the way the cables have been built, there is a certain amount of capacity that can run through them.
  • What the network companies are looking to do is to incentivise you to move your consumption to different times of the day through signals. We’ll come to that later, but another reform is looking to send the appropriate signals to get people to shift demand.
  • On top of all of this we have the drive to net zero. The network is simply a series of cables that deliver power to different parts of the country. And  in terms of the network charging review, the net zero ambition shouldn’t be a hindrance, there should be enough capacity on the system for people to deploy low-carbon generation and get it delivered when they need to.

Let’s go through the two charging reviews which aim to deliver a little bit more fairness in the way that the distribution transmission companies collect revenue from all customers and users.

Let’s start with the Targeted Charging Review

Principally it had a really clear purpose - if you are connected to the network, you should pay a fair contribution for its upkeep.

In reality, what’s been happening (and not through any fault of customers) is that the actual charging signals that the network companies were sending were asking people to rightfully reduce their usage at peak periods, so they wouldn’t have to be investing in more cables. But that signal became increasingly higher and higher. And when the network companies needed money to build up the network, those signals became even higher. It became so high that the cost that was being avoided was running into hundreds and hundreds of millions of pounds. In the future, it could have got to billions of pounds. The issue with that is all Network charges are a zero-sum game – so if a certain community didn’t pay for that cost, other uses would have done.

The Targeted Charging Review was simply a way to introduce a sort of a fixed cost to say “if you're connected to the network, you pay a proportion for the upkeep based on the size of your site”.

How and when is the Targeted Charging Review going to happen?

This reform is being implemented in two stages.

  1. You've got the DUoS for the distribution charges. And from April 2022, the charges became more fixed. So as a portion of your bill, you'll now see more and more collected through a standing charge than you would through the unit rate.                                                                                 
  2. And then from April 2023, the same thing will happen with transmission (TNUoS). So, we're talking almost 90% of the transmission bill would now be a fixed component.

The secondary review is called the Access and Forward Looking charge

Essentially this is the forward-looking signal where I explained there's a certain size cable and the network companies would like users to try to use more of it during the day.

Ofgem have come up with an initial view of how they think this will play out. There are some small changes to connection charges that will be implemented in April 2023, but the major reform to DUoS charges is expected to take much longer and has been descoped from the original reform. At the moment, because of so much reform ongoing, we don’t have much clarity over how this will be implemented in the future. We hope Ofgem will publish more information later this year, but we don’t expect implementation of any changes to be any earlier than 2025.

What we expect them to do is potentially make more distribution tariffs – so give people a different signal to say “If you are able to use the network during these particular points of time, you would pay this...”. And there would clearly be incentives if people were able to shift some of their demand.

In addition, as part of the network charging reform, are the changes to the BSUoS charges or balancing charges.

Just to remind you – BSUoS is a pot of money that the National Grid electricity system operator spends to transfer power across the entire network.

For example,
Imagine a very windy day in Scotland and all the wind farms are generating and producing power down through the cables. On this day, this energy needs to reach the demand areas in Manchester Leeds, Birmingham and London. With so much generation, there are only a certain amount of cables built to transport a certain amount of capacity. And once you reach that capacity, you cannot transport any more electricity through them.

So what National Grid would do is say to some of the generators of these wind turbines to stop generating, therefore alleviating the constraint on that cable. What they'll then do is contract with another generator south of the border to say “we still need this energy. We can't actually procure it from north of Scotland because the cables are at capacity.” So they would then have to pay some generators in order to be able to consume.
Equally what they could do, if it's much more cost-effective, is ask larger demand users to reduce their consumption to help the grid meet the power demand.

As you can see, all these incremental actions cost money. And this is generally the most effective and cost-effective way of balancing the system. You could build more cables, but if BSUoS is a few billion pounds, building several cables to transmit all of the energy from certain areas down into to demand areas could end up costing several billion pounds.

So, there is a balance to be made in terms of:

  • how much gets paid through localised charges through BSUoS
  • and how much gets levied through increased investment in the transmission network.

As part of the BSUoS reform, a group of industry experts concluded that BSUoS wasn't really a cost signal - you couldn’t really react to it given, that is dependent on lots of variables. So, what Ofgem have decided is that they want BSUoS to be fixed and forit to be collected solely from demand customers (so businesses and domestic customers).

At present:

  • 50% of the say 4 billion pound bill is collected by generators, and they recover that by adding it onto the cost of wholesale energy.
  • The remaining 50% is added as a cost to consumers through a component in their bills.

From April 2023, all of the BSUoS cost will be levied directly onto customers (so essentially your BSUoS bill will double in rate). However, as generators will no longer need to recover that cost themselves, they'll reduce their cost of wholesale energy. This should create a parity where there should be no overall increase for customers – the wholesale price will go down matching the increase in their BSUoS contribution.

As part of the review, Ofgem have also decided to fix BSUoS rates in advance, so it should also be a more forecastable cost in the near term. Ofgem’s decision in December 2022 says National Grid ESO (NGESO) will be required to fix BSUoS rates for 6 months at a time, 9 months before the start of that period. So for charges from April 2024 to September 2024, NGESO will confirm rates by July 2023. Due to the timing of Ofgem’s decision, BSUoS rates for the whole 12 months from April 2023 were set at the end of January.

BSUoS remains a very difficult cost for NGESO to forecast, so there is a risk that their costs outturn higher than the BSUoS rates they have set in advance. If this happens, NGESO can provide capital cover for up to £300m of excess cost. If there is more than that, NGESO may be allowed to adjust the rates they set in advance and pass that cost through to consumers. In the current very volatile market, that means there is still a reasonable chance that BSUoS costs will change within year, although going forward there should be much greater certainty.

Some key takeaways to leave you with…

  • Network charging needs to keep reforming to keep up to pace with the way people generate and consume electricity. We're going to have many more electric vehicles on our system in the future, so the system needs to be capable of supporting that infrastructure. Whilst this review moves us a step forward, there's likely to be more reform happening in the future to ensure that we meet these targets.
  • These costs are not insignificant – they can add up and at some point may reach about a third of the total energy costs. So the message that Ofgem and the network operators are trying to send is that it's a large cost and they want to make those costs fair and proportionate to all users (whereas previously a select group of customers could avoid a large proportion of the bills by changing their behaviour). Now, you need to pay a base cost to connect to a reliable network. However, they’ll still incentivise you to a more appropriate level if you're able to shift your demand elsewhere.
  • And finally – network charging is a zero-sum game. It's an amount of revenue that these network companies collect through price controls that are set by Ofgem. There’s a budget that’s set. So, if they don't collect it for one community of customers (for example, large industrial customers), they will have to collect it from smaller users or domestic users and vice versa. There's no point in actually trying to get one community to pay more than other needlessly. You just need to make sure everyone pays their fair share.

We can't be certain what's around the corner in terms of what technologies are going to be developed. We've got batteries entering the system which can store energy, we've got plans for hydrogen, and lots of different ways of consuming and generating energy in the future. So we can't be sure that this reform is ending at any point in time.

However, what I can say is this reform should make charges a little more stable. So, whilst you will see changes on your transmission and distribution bills, there is hopefully going to be some stability for the next few years.

If you want to delve deeper into the exact impacts  then please contact your account manager and we'll be happy to take you through this.

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