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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.
When I’m talking about network charges, I’m talking about:
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.
Essentially there are a few reasons:
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.
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.
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.
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:
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).
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.
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.