Dialing up the unknowns on network charging

In a world of open governance code modifications, change is a constant. You only have to look at the number of code modifications ongoing at any one time – National Grid lists 36 modifications in development relating to transmission network charging alone – for evidence of that. But in recent years, the dial has been turned up even more on network charging reform, inevitably impacting on many market players. Investors in particular face a significant challenge in deciding where (or even if) they should deploy capital. In this week’s blog we take a look at the latest developments and what we can glean on the direction of travel for the current reform packages.

Do you know your Task Force from your Significant Code Review?

At last count, we are on the third Task Force and third Significant Code Review in the space of five years. So, high time to attempt to demystify the myriad of consultations, webinars and decisions competing for attention.

Balancing charges

Balancing charges recover the costs to the system operator of keeping supply and demand on the electricity system aligned in real time. We’ve written about balancing charges publicly several times recently. This is an area where reforms are at least moving towards a conclusion, with two Task Forces and a series of code modifications leading to one major change coming up in April 2023. These costs will be recovered fully from suppliers, moving away from being split between suppliers and large generators. A sigh of relief from generators as a major uncertainty falls away. Uncertainty prevails for suppliers however – the magnitude of balancing charges has been highly volatile for a long period and is expected to remain so, albeit further code modifications currently pending Ofgem determination could dampen this somewhat with costs fixed for a relatively long period rather than varying every half hour as they do today.

Distribution charges

Distribution charges recover the costs of investing, maintaining, and operating the distribution network, which connects homes and businesses to the wider electricity system – the A and B roads of the electricity network. Those with long memories will look back with fondness (or perhaps not) on the Targeted Charging Review, launched way back in summer 2017. That review fired the starting gun for a long-running saga which is by no means concluded. Step one – the Targeted Charging Review – saw large portions of charges shift from variable p/kWh charges to fixed £/year charges from April 2021. It was followed by the snappily titled Network Access and Forward Looking Charges Review (“NAFLC” or “the Access review” depending who you speak to) which sought to introduce more nuanced locational and time varying distribution charges, while also making changes to connection charges. The latter is progressing toward implementation in April 2023 to align with the start of the next electricity distribution price controls. But Use of System charges remain under the microscope, with a further Significant Code Review (the “DUoS review”) now in progress. These charges are key for end users and small generators alike, so understanding the likely outcomes of reform remains critical for many.

Transmission charges

Transmission charges recover the costs of investing and maintaining the transmission network – the motorways of the electricity network. The Targeted Charging Review also impacted transmission charges, with a series of code modifications continuing to be developed impacting charges for demand users. For generators, those with even longer memories will look back with similarly mixed feelings on “Project TransmiT”, concluding in 2014 and drawing a line under years of debate on transmission charging. Or so we thought. The Access review included consideration of how distribution connected generators are charged for use of the transmission system, but ended without conclusion, paving the way for another Task Force which is currently ramping up its activity. Its scope includes reviewing input data, considering how closely the charging methodology should reflect “real world” operation of the transmission system, and importantly which elements should be paid by distribution connected generators. It’s early days for the Task Force, but from Ofgem communications the one certainty is that the uncertainty is set to continue, with the Task Forces expected to make decisive recommendations for significant reform.

What next?

Clearly the end is not in sight for uncertainty on network charges. But that doesn’t mean we’re in the dark on the direction of travel – the Access SCR acting as the forerunner to both the DUoS review and transmission charging Task Force gives a direction of travel. And updates from both workstreams will enable us to gradually fill in the picture and provide some comfort to anyone needing to get a handle on these important elements of the cost stack – for retailers, asset operators and investors alike.

How we can help

Our regulatory services provide ongoing updates on network charging reforms, including Alerts detailing the “need to know” updates from consultations and decisions; consultation and modification registers making sure you never miss opportunities to contribute to developing thinking; and bespoke packages helping you understand the impacts on your business. Our consulting team is well-placed to cut through the noise to provide you with insight and analysis on important aspects for your business, and to quantify the impacts of reforms on your portfolio. Reach out to Andrew Enzor (a.enzor@cornwall-insight.com, 01603 604400) if you’d like to discuss any of our services in more detail.

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