Ofgem has postponed the changes to residual transmission charges on demand decided upon as part of its targeted charging review (TCR).
The regulator said the delay was prompted by concerns that the exact charges would not become known until late 2020 – just months before their scheduled introduction in April 2021 – and that the supporting IT systems and charging processes may not be ready in time.
Ofgem confirmed plans in November to apply residual network charges only to demand and flatten them across both distribution and transmission by dividing consumers into bands according to their usage and applying fixed charges to each.
Residual charges are used to recover the network costs not recouped through forward-looking charges. Unlike the forward-looking charges, which are intended to pay for new investments in the network, residual charges are not meant reflect users’ impact on costs.
Among other things, the regulator said the reforms are intended to prevent some parties from shirking what it considers their fair share of networks costs.
They would, for example, bring an end to the triad arrangements for residual charges, whereby the fees for half-hourly metered non-domestic consumers are determined based on their consumption during the three half-hour periods of peak demand each year separated by at least 10 days.
The changes to transmission demand residual (TDR) charges are being introduced through the Connection and Use of System Code (CUSC) modification CMP332. The code administrator National Grid Electricity System Operator (ESO) submitted the modification to the CUSC panel in December at the behest of Ofgem.
But towards the end of last month, the ESO sent a request to Ofgem to withdraw the modification and introduce it at a later date. The regulator has now granted the request and postponed the implementation to April 2022.
Explaining the decision in a letter to the ESO, Ofgem said it had previously set the date as April 2021 in order to secure £50 million of potential benefits for consumers over the following year. The regulator said some of these benefits may not have been realised due to the long lead time needed for changes to feed through to consumers but it nevertheless expected them to the exceed the accompanying costs.
Ofgem has since altered its view based on the feedback to the consultation on CMP332. Stakeholders raised concerns that “accurate charges for April 2021 will not be available until late 2020, due to the new data requirements of the new charging structure and the code modification timeline.”
They also said the timetable gave a relatively short period in which to implement the necessary IT systems and charging processes and “very little time” to address any issues that arise during testing. Ofgem noted that the ESO and the TCR Steering Committee have developed a plan for introducing the reforms, but said this is subject to “several risks”, some of which are “very difficult for industry to control”.
“Most suppliers fix their electricity prices for many of their non-domestic customers in advance, through contracts,” said Ofgem. “The current uncertainty means that energy suppliers are not able to accurately estimate the charges they will incur in 2021 for these customers.
“We understand there is a significant variation in how suppliers are dealing with this, in setting prices for their 2021 contracts. Some suppliers have signed, or are continuing to sign, a significant number of non-domestic contracts for 2021 that do not take account of the expected changes to TDR charges.”
As average charges will rise for non-domestic customers, Ofgem said these suppliers will be forced to either incur losses or renegotiate contracts with customers, adding: “This could put some suppliers under financial strain, particularly those whose portfolios lack diversity or those who are reliant on a small number of large contracts for a significant portion of their revenue.”
“Balancing this risk against the expected benefits of the introduction of new transmission demand residual charges in 2021 compared to 2022, we now believe that a delay of one year is in the best interests of consumers,” the letter concluded.
Ofgem said the changes to embedded benefits which were also scheduled for 2021 will continue as planned and will be made “more straightforward” by the delay to the new TDR charges.