Ofgem has confirmed plans to transfer the cashflow risks associated with the collection of Transmission Network Use of System (TNUoS) charges from the electricity system operator (ESO) to transmission owners.
The regulator said the change would reduce overall financing costs for the industry as transmission owners would be more able to absorb the risks given their much larger size in comparison to the ESO following its legal separation from the rest of the National Grid.
Under the current arrangements, the ESO sets the TNUoS charges for generators and suppliers to reflect the allowed revenues for transmissions owners in each year. However, the ESO pays the transmissions owners based on ex-ante estimates rather than the actual revenues it has collected.
Although any shortfall that emerges can be recovered through an adjustment to future charges, this nevertheless creates a cashflow risk for the ESO. The value of these adjustments has averaged around £31 million per year since 2005/06, peaking at £99 million in 2014/15.
Ofgem proposed in December to move this cashflow risk to the transmission owners, arguing that the larger asset bases of the transmission owners and their direct interest in the revenues made them “a more natural, and more economical, owner of this cashflow timing risk exposure”. It said the financial costs of covering any shortfall would be much greater for the ESO given its small size by comparison.
The regulator said it would also bring transmission owners in line with other network companies and avoid a perverse incentive whereby the ESO could be intentionally make inaccurate forecasts to justify higher allowances for managing its cash flow.
Ofgem has now decided to proceed with the change, meaning transmission owners will now only be paid by the ESO for invoiced revenues. It will come into effect for the start of the RIIO2 price controls in April 2021, for which the regulator published its first batch of draft determinations yesterday.
The change will not apply to offshore transmission offshore transmission owners (OFTOs), which only account for a small proportion of overall revenues (11 per cent). Ofgem said their bids during competitive tenders were based on the assumption that they would not be exposed to this risk.
Ofgem is also planning to extend competition to the ownership and operation of some onshore transmission assets through the creation of competitively appointed transmission operators (CATOs). The regulator said it will consider its approach to these companies as the policy is developed further.