Reducing the risk of the Targeted Charging Review

Steve Fearns - Risk Modelling and Cost Manager
| 28th July 2021 | Energy

If you like to stay on top of any future energy cost changes that could affect your business, you’ll no doubt already be aware of Ofgem’s Targeted Charging Review (TCR). With the new rules due to come into effect in April 2022, the TCR will establish a new system by which network owners charge energy customers for the use of the electricity networks in the UK.

 

The changes brought about by the TCR will impact every business differently, so it’s vital for every business to understand how the TCR will affect their bills before they enter into their next electricity contract. Here are the main things you need to know…   

WHAT’S HAPPENING AND WHY?

The TCR is an Ofgem-led project that assesses how network charges are set and recovered. Launched in August 2017, the intention behind the TCR was to decide whether the system needed to be reformed to make it fairer. It addressed the concern that the current mechanisms used to recover Distribution Use of System (DUoS) and Transmission Network Use of System (TNUoS) charges could lead to inefficient use of the network and create an adverse effect on consumers. The current Triad system sees half hourly (HH) metered customers charged for electricity transmission costs according to their consumption during the three half-hour periods in Winter when overall demand on the grid is at its peak. Ofgem is concerned that this system distorts the market by encouraging some businesses to shift their consumption to avoid Triad periods and not pay their share towards maintaining the grid year-round.

 

Based on the findings of the TCR, Ofgem has decided to supplement the existing Triad consumption-based system for TNUoS with a banding-based daily charging system that should encourage businesses to manage their demand all year round – not just in winter. Distribution Use of System (DUoS) tariffs have always had a fixed daily charge component. But as part of TCR, Ofgem has directed that the way DNOs (Distribution Network Officers) set this charge should also change – moving some of the cost recovery that currently comes through the volume-based rates into the fixed daily charge.

 

The banding for each meter on businesses’ site(s) will be based on their agreed supply capacity (if there has been one agreed) or their Estimated Annual Consumption (EAC), if an agreed supply capacity is not in place. These changes were intended to roll out in April 2022, however Ofgem is now proposing a delay in the TNUoS changes until April 2023. A consultation on this is currently in progress and a decision will be made in August; we’ll be sure to keep you up to date on any developments. The changes to DUoS tariffs are expected to still go live in April 2022.

HOW BUSINESSES WILL BE AFFECTED 

For larger businesses able to reduce or shift energy volumes, winter Triad periods have historically provided an opportunity to make savings through flexibility by reducing consumption during peak periods. Even those who aren’t able to be flexible in their usage can mitigate the impact of Triads by increasing their energy efficiency. Under the new system, Triad avoidance will no longer be possible for many and, where it remains, the benefits will be significantly reduced. This means that businesses who used this method to reduce their TNUos costs might find their annual energy bills could be significantly increased. For businesses previously able to boost generation revenue by exporting energy to the grid at peak times, the reduction of Triads could affect their bottom line and reduce the benefits of having on-site generation. While businesses who participate in grid-balancing Demand Side Response schemes will still be able to benefit from doing so, they will lose out on the additional revenue available during Triad periods.

 

Another consideration is that the cost of Triads is typically spread across bills over 12 months, until the next Triad period. However, for those businesses whose contracts start in the October before the TCR cost mechanism comes into effect, Triad costs will have to be recovered in half the time. Businesses should therefore work these costs into their budgets now.

 

For some, the TCR will mean a bigger energy bill and a need to rebalance the budget in other ways. But large energy users who have previously been unable to consume energy flexibly and have therefore been hit with excessive Triad costs could actually see a reduction in non-commodity costs – and it’s these businesses that must think most carefully before they choose their next contract.

TOTAL TRANSPARENCY FOR OUR CUSTOMERS

Although the TCR deadline has been pushed back, we know that our customers want to prepare for the changes now, so we’re striving to provide certainty where we can (and total transparency where we can’t). DNOs have published their DUoS charges for 2022, and TNUoS charges are still to be confirmed. Whilst there might be some delays to this roll out, one certainty is that every supplier will pass these costs through to their customers differently. For example, some suppliers are building in risk premiums or change clauses to protect themselves from any potential changes to the current prices. This means customers will need to think about which supplier’s method will work best for their business.

 

Businesses who aren’t able to be flexible at peak times, and could therefore benefit as a result of the TCR, should look carefully at the way their supplier is proposing to manage the ‘risk’ related to the TCR – as this risk will not apply to them. If they opt for a contract in which the supplier has included a significant risk premium, for example, then they will miss out on the savings they could have made and could find that they’re paying much more than they need to be for their electricity.

 

At Bryt Energy, we’re trusted by nature, so we’ve come up with a transparent way to accurately price according to what we know now, to provide our customers with as much certainty as we can while recognising that prices may still change slightly. From September 2020 we’ve clearly stated the TCR banded charges into our new contracts in order to give our customers as much visibility of their costs as possible. And because our operations are built to be agile, our prices will always reflect Ofgem’s latest position and advice.

GETTING READY FOR THE TCR

Every business will be affected by the TCR changes differently, so it’s important to identify and prepare for how these changes will affect your organisation. You can do this by:

 

1. Speaking to your electricity supplier

Ask your supplier the following questions to find out how they will account for the TCR changes and how they will affect your bill if you stay with that supplier:

 

  1. Have you included TNUoS costs in your contract or are they passed-through?
  2. What band has been applied to each of my meters?
  3. In what circumstances would you amend TCR rates?
  4. How are you accounting for unknown costs?

 

2. Making the most of your flexible solutions

If you’re currently using technology or solutions to avoid Triad periods and expensive time of use charges, the benefits might be reduced slightly once we switch to a fixed-rate charge, but they won’t disappear. Now is the time to consider how you use these solutions to optimise your usage 24/7 and boost your revenue in other ways.

 

To learn more about TCR and how we’re supporting our customers through the changes, please contact us on solutions@brytenergy.co.uk.

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