Ofgem’s Targeted Charging Review (TCR) proposes to charge network residual costs – those relating to the sunk costs of the network – through fixed or capacity charges. However, the latest Third Party Charges forecast from Cornwall Insight highlights that there is substantial regional variation between residual values which appears not to be highlighted in the TCR.
The graph below outlines the forecast residual cost, in p/kWh, of network charges in 2020-21 assuming a flat unit of demand throughout the year. The total p/kWh varies from 0.292p/kWh in London to 2.623p/kWh in the South West.
Dan Starman, Lead Consultant at Cornwall Insight, said:
“Distribution Network Owner (DNO) data shows that in the year 2020-21 most of the residual value will be clustered in the South West, Scotland and Wales. There are several factors behind such large local differences – population density, the topography of the region and the amount of commerce or industry in the area. Generally speaking, rural regions will have higher residual costs.
“This cost currently represents value to behind the meter generation, energy efficiency improvements and behavioural changes that all can avoid these charges – these are presently levied on a volumetric basis. From 2020-21 it is likely they will lose this value, severely damaging the business case for such assets.
“With considerable regional variation, the loss of value will be felt the most in regions that have the most significant constraint and network management issues – areas where such assets, if used flexibly, could provide the most value.
“There are valid reasons for Ofgem to examine the whole area of network charging; however, the current time-scale of just two years notice will impact the energy investment environment. If this is not addressed, it is likely to have wider implications for the UK’s carbon reduction targets as well as the Smart Systems and Flexibility Plan.”