The picture is even more erratic in the business market, where charges for some classes of customer can vary between -50 per cent and 150 per cent from one year to another. Transmission tariffs are also volatile.
Large suppliers with national coverage will see some diversity benefit, and the gains and losses can even out. But independent suppliers are subject to regional disturbance, especially where they operate only in the business supply markets.
These charges – unlike other elements of the consumer bill – are regulated. They are set using methodologies agreed by Ofgem. As a rule of thumb, network charges (mostly distribution charges) represent about one-quarter of a customer’s electricity bill. The charges are based on methodologies built on principles of cost reflectivity and facilitating competition in the energy markets, but we believe the competitive impacts are not properly taken into account.
Ironically, some of the volatility can be explained by the move from individual distribution charging methodologies to a common means of deriving tariffs. This shift started in April 2010 for high and low-voltage customers and has resulted in some significant changes to charges. From April this year extra-high-voltage (EHV) demand customers will also move on to a common methodology. More changes are due from April next year when EHV generators are also to be included. This final step is likely to cause further instability and rebalancing in charges between the two methodologies and between generation and demand.
The problem might not be so bad if stability were to return after these changes had run their course, but the methodologies are complex and at the EHV level in particular they can be sensitive to changes in demand or generation connections.
On the transmission system, charges will continue to change as the methodology accounts for new and retiring plant and the reshaping of parts of the network. Further changes are likely after Ofgem’s Project Transmit and as we move towards a single European target market.
The network companies are under licence obligations to tell the market when they propose to make changes, but suppliers are left with little time to properly understand and fully take account of the new costs in their pricing structures. They are also the ones who have to explain the changes to their customers, often with poor information provided by the network owners.
Some efforts have been made to address these concerns, including a project – kicked off by the DNOs at Ofgem’s request – that examines how networks could offer longer-term products. Progress appears to have stalled. There have also been rule changes for distribution that demand more information on the inputs to the charging models – but much more is required. We believe network companies should be required to publish forecasts of charges by main customer class at least one year ahead, and to update views as circumstances change. This change would help suppliers build more flexibility into the way they price tariffs and contracts.
Alongside this requirement to produce forecasts, a mechanism should be introduced that caps the ability of network companies to alter charges in any one year by more than a specified percentage – say 15 per cent. This would help limit price shocks to individual customers.
Finally, there must be much tighter quality controls on how network companies present their indicative and final charges. All too often suppliers are midway through assimilating new charges when they are notified of errors or changes. It is time the network companies were obliged to improve data quality control.
Nigel Cornwall is managing director of Cornwall Energy. He convenes the Energy Suppliers Forum, a monthly meeting of independent suppliers.
This article first appeared in Utility Week’s print edition of 2 March 2012.
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