Now that the General Election is done and dusted, Ofgem has begun to move on some of the topics which were delayed under purdah. On 4 August, it launched its targeted charging review (TCR) significant code review (SCR). As expected it will be considering how to systemically overhaul electricity transmission and distribution residual charges, while keeping other embedded benefits under a watching brief. Amid the technical language is the prospect of the most fundamental overhaul of electricity tariff construction since the liberalised era began in 1990. This is because the review puts on the agenda changes to the peak consumption-led nature of network charges for consumers. These charging structures still largely mirror those in place at privatisation, when separate costs of transmission, distribution, wholesale energy and supply were first accounted for.
Network tariffs are broadly set using regional, marginal cost-based allocation models which are topped up by residual elements to ensure that the full costs of the networks are recovered. Residual is a misnomer as this element can form the majority of charges as it currently does in electricity transmission.
A residual charges working paper is expected at the end of 2017, with a draft impact assessment and minded-to decision in Q2 2018 and a final decision and impact assessment in Q3 2018. Ofgem has opted to implement the SCR by directing licensees to raise modification proposals alongside its final decision. It hopes to take the final decisions on these modifications in early 2019, to affect charging from the 2020-2021 charging year. This is somewhat surprising, given that it decided to develop both of the other recent SCRs – faster and more reliable switching, and electricity settlement reform – in-house from end to end. Whether the regulator views this area as sufficiently straight-forward to entrust to industry, or it has simply reached the limit of its available resource, is not clear. It is also working to very ambitious timelines, given previous experience of SCRs, and the added complications surrounding network charging, and the need to provide adequate forewarning for investment decisions.
Accompanying the launch of the SCR was the setup of a new panel, the Charging Futures Forum (CFF). This body, chaired by Ofgem, will bring together representatives from the DNOs, the system operator, and the charging code administrators. While initially focused on this SCR, the CFF will be enduring, and review charging more widely across the industry, coordinating efforts and assessing cross-code impacts, starting from its first meeting in the autumn.
How it will interact with the new Consultative Board, which is arising from Ofgem’s implementation of the Competition and Markets Authority’s recommendation on code governance, and which is intended to fill a similar if much broader cross-code function, has not been established.
Meanwhile, Ofgem expects that reform of charges to storage will be taken forward independently of the SCR, and without hand-holding from the regulator. It has announced that storage should be treated as generation for setting TNUoS residual charges, and should not be liable for both demand and generation BSUoS charges.
Two modifications are already in hand – CMP280 Creation of a New Generator TNUoS Demand Tariff Which Removes Liability for TNUoS Demand Residual Charges from Generation and Storage Users and CMP281 Removal of BSUoS Charges from Energy Taken from the National Grid System by Storage Facilities, both of which basically do what they say on the tin – so optimism in this area is not, perhaps, unwarranted. On the other hand, the decision noted that consultee views on its proposals were mixed, with only a small majority supporting its suggestions. We will see over the next few months if the antipathy of some industry stakeholders will be enough to scupper much-needed reform in this area.
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