The most significant element of the TCR for most business energy users is the proposed changes to residual charges which are currently charged based on time of use. Currently, businesses who can be flexible when they use energy are able to reduce this element of their network charges by consuming less energy during peak demand ‘red band’ periods for DUoS and by turning down consumption during Triad periods to lower their TNUoS charges for the coming year.
Ofgem believes that the current charging system means those users who are able to shift load outside of more expensive periods are benefiting at the expense of other users and wants to make the system fairer for all (whereas those users who currently reduce demand during these periods argue that they perform a vital role by reducing both the strain on the grid and balancing charges). A more detailed summary of the reforms is available here.
Its minded-to position is to introduce a fixed charge for all users (though the charge will depend on the connection voltage, region and in some cases the line loss factor codes that apply to the site), creating a level playing field between all system users. This could have a big impact on the bottom line for some of the largest and most flexible energy users.
It was widely expected that Ofgem would introduce the new charging structures in April 2021, although a phased implementation between 2021 and 2023 was also being considered and other elements of the TCR could have been introduced in 2020.
Last week, Ofgem confirmed that nothing would be introduced until 2021 at the earliest and presented a new, third option: pushing back the introduction of new residual charges to April 2023.
Whilst a final decision is not expected until late summer, this new longer timeline would enable Ofgem to introduce the change to residual charges at the same time as other arrangements being consulted upon (in particular, forward-looking charges that focus on access arrangements and recovering the cost of network upgrades).
Synchronising all elements of network charging would enable Ofgem to consider the full picture when deciding on the best path to take.
Introducing all changes at the same time would also potentially create a smoother transition to new arrangements, avoiding the confusion that a phased approach could potentially bring. Ofgem will need to weigh this up against the fact that any delay in changing the charging methodologies will mean users without flexibility continue to pay higher network charges than those who actively manage their demand.
Ofgem is expected to make a final decision on TCR timescales this summer, so businesses don’t need to act yet.
Whilst the proposed reforms have skewed the business case for investment in demand management technology for many users, businesses with any flexibility to shift even a small amount of consumption outside of peak demand periods should continue to do so: demand management will continue to be an important tactic to avoid higher than necessary costs until Winter 2021 at the earliest – and even when charging reforms are implemented, there will still be incentives to reduce consumption at peak periods, particularly during the winter when capacity market charges will apply between 4pm and 7pm on weekdays.
In the meantime, the best way for organisations to shield themselves from higher charges and costs is to focus on absolute energy reduction. To discuss ESOS, energy reduction or the potential impact of TCR on your organisation with one of our energy experts, get in touch today on 08451 46 36 26 or email firstname.lastname@example.org.