Ofgem have published their Targeted Charging Review ‘minded to’ proposals for changes in how electricity users pay for the electricity network.
The proposals are to move charges from paying for the network depending on how much you use, to a fixed fee. They also propose further changes to ’embedded benefits’ that will impact on distributed generators.
As discussed in our blog a few months back, these proposals are part of a range of network charging reviews that have far reaching implications for how and where we generate and use power – something the clean energy sector needs to engage much more actively in.
Firstly we need to understand some jargon. The costs we pay for using the network are split into ‘forward looking’ and ‘residual’ charges.
Forward looking charges are designed to ensure that energy users receive signals that reflect the costs of how and when they use electricity, which can encourage users to be flexible in their use in order to reduce their own electricity bills and reduce network costs overall.
Residual charges are designed to pay for network costs not recovered from the forward-looking charges.
One might think from this the residual is small beer, but in fact the charges are 10-15% of the average bill of the UK and £4 billion in total.
What are Ofgem proposing
At its basic level, Ofgem want to move from paying residual charges depending on how much power you use and when you use it to a fixed charge based on what level you connect to the network at.
This means reducing your demand, for example by generating your own power, will have no impact on this part of your bill. The whole range of services to help people avoid Triad demand periods would go, because there won’t be any Triads.
What are Ofgem worrying about?
Essentially, Ofgem are worried that as more people generate their own power this will reduce what they pay towards the network – leaving everyone else to pay more to what is a largely fixed cost, in the short term at least. They think a fixed fee means everyone will pay towards the network they rely on.
Alongside the Targeted Charging Review, Ofgem are also looking at forward looking charges and rights of access to the network though the Charging Futures Forum. One of the challenges of reviewing proposals is that from a customer point of view, it is the combined impact of all of these that matters and we don’t yet have sight of that.
If you are a low power user, or generate your own, or have been effective at reducing your bills by avoiding Triad payments, you will pay more under a fixed charge. A large power user who hasn’t been able to shift away from peak will pay less.
These changes will clearly undermine the business case for storage, demand side response and gas and diesel generators. Coming after cuts to embedded benefits and derating in the capacity market, this seems like a strange way to show support for the storage sector.
Ofgem argue that “the results suggest a limited behavioural impact for all Low Carbon Technologies (LCT) as the costs/savings represent a relatively small share of the total lifetime costs for each LCT”. It will be interesting to see if the sector agrees.
Interestingly Ofgem predict the changes will raise prices in the Capacity Market (assuming we have one again), presumably because without Triads reducing peak demand, we will require greater back up capacity – an example of how costs shifted in one area can reappear elsewhere.
They also predict the changes will reduce carbon emissions by moving from inefficient onsite generation to more efficient centralised power.
Embedded benefits in the firing line again
Having dramatically cut the payments for decentralised generators get for offsetting the flow of demand on to the transmission system, Ofgem are taking aim at another embedded benefit – Balancing Services Use of System.
Instead of being credited for reducing balancing costs decentralised generators will now have to pay towards system balancing.
Aren’t we supposed to be becoming smart, flexible and decentralised?
All this seems a bit odd when we are supposed to be encouraging smart flexible energy use and renewable generation. It could be the review of forward looking charges will balance things up again – but on this evidence Ofgem still yearns for the days of a few big generators before energy users started doing dastardly things like generating their own power.