What to look out for in Third Party Charges in 2022-23

In recent months, the GB energy market has been exposed to extreme volatility as wholesale prices have grown rapidly, leading to a significant number of supplier exits and questions over consumer affordability of energy bills. This has resulted in notable movement across a number of non-commodity costs (also known as Third Party Charges (TPCs)) which, in addition to some reform, has created a range of dynamics to look out for in TPCs in 2022-23. In this blog, we explore several significant drivers expected to impact energy bills in the upcoming financial year, as explored in our Third Party Charges report.

Reform drives significant variation in network charges…

Transmission Network Use of System (TNUoS) and Distribution Use of System (DUoS) charges are currently undergoing reform as the Targeted Charging Review (TCR) comes into effect and wider reviews are launched to assess the charging structures of transmission and distribution charges. The TCR will implement changes from April 2022 for DUoS charges, resulting in reform to the ‘residual’ charge component of tariffs and its general application to standing charges. The impacts will vary significantly dependent on users’ specific use of the network and location. TNUoS and DUoS charges will also be subject to discussions regarding wider reform this year as Ofgem published its decision on 25 February to launch a dedicated Significant Code Review for DUoS charge reform to be carried out over the course of 2022. The regulator also outlined on the same day its intention to ask National Grid Electricity System Operator (NGESO) to launch and lead task forces to consider the root causes of unpredictability in TNUoS charges and how to address them, as well as looking at the input data into the calculation model for locational elements. Ofgem will undertake work alongside this looking at the longer-term purpose and structure of transmission charges.

…while supplier failures add significantly to domestic distribution costs…

Network charges have also been hit recently by the recovery of Last Resort Supplier Payments (LRSP), in response to the large number of supplier failures seen in 2021. The Supplier of Last Resort (SoLR) process appoints a new supplier for customers of failed suppliers, with onboarding suppliers then able to recover some costs for doing so. A number of SoLR events will be recovered from consumer bills in 2022-23, with these charges fed through to consumers in their network distribution charges. This has resulted in an uplift of £34.46 and £32.54 for domestic electricity and gas bills respectively. Further LRSP claims are expected over the coming year which is likely to result in revisions to 2023-24 charges as well, making SoLR costs another significant driver acting to push up energy bills over the coming years.

…and the costs of balancing the system increase with commodity prices.

Additional consideration should also be made to Balancing Services Use of System (BSUoS) charges in the next year, with high costs and further upcoming reform looking to be a major driver of rising TPCs over the next 5-years. Over the recent winter period high gas and electricity costs and high renewables output that have acted to increase balancing costs, which hit a peak of over £60mn on 24 November 2021. In response, CMP381 was approved on 14 January as a short-term measure to defer exceptionally high winter 2021-22 BSUoS costs to 2022-23. The modification looks to cap costs at £20/MWh from 17 January to 31 March 2022, up to a limit of £200mn, and any deferred costs will be spread equally across the 2022-23 financial year. It is currently uncertain to what extent this may impact charges next year as charges are currently still subject to the cap. However, any deferral will put further upwards pressure on already elevated charges as we move into the new financial year. In the long-term, BSUoS costs are expected to rise even further as Ofgem issued its minded-to decision to remove BSUoS from generation on 8 December. The reform will almost double BSUoS costs as charges are recovered from a significantly reduced charging base.

Meanwhile CfD forecasts turn negative…

Contracts for Difference (CFD) charges will be a main driver of non-commodity costs in the coming years now that the Renewables Obligation (RO) and Feed-in Tariff (FiT) schemes are closed to new capacity. However, unlike other many other TPCs, CfD costs are looking to decline significantly in 2022-23 acting to partially offset some of the rises we expect in wider charges. CfD charges are inversely proportional to wholesale power prices and the large rise in forward-looking power prices has resulted in our forecast annual costs for 2022-23 dropping considerably as the Interim Levy Rate looks to be set at zero for the foreseeable future. Generators are expected to make payments back to the Low Carbon Contract Company (LCCC) over the next year as wholesale prices fall significantly above project strike prices. Any overcollection from suppliers will be put towards the Total Reserve Amount (TRA) for the next quarter and, in the (currently likely) event that the sum of surplus funds is higher than the next quarter’s TRA, the difference is then returned to suppliers. Our forecast of annual CfD payments is therefore set negative for 2022-23; a first in the history of the scheme.

…but Capacity Market costs near double for the next Capacity Market Year…

On 25 January 2022, NGESO published the updated guidelines for the T-1 auction for delivery in 2022-23 which saw the procurement target raised from 4.5GW to 5.4GW in line with the letter published from Secretary of State, Kwasi Kwarteng, on 21 January. The new procurement target was notably above the ESO’s recommended target of 4.7GW, with the Secretary of State attributing the decision to “the broader uncertainties within the power sector”. This figure turned out greater than prequalified capacity, forcing the auction to clear at the cap of £75/kW, which is significantly higher than the clearing price of any previous T-1 auctions. Total costs for the auction are approximately £400mn, which has resulted in a notable increase in 2022-23 charges compared to previous expectations.

…with wholesale and TPC price spikes triggering consumer affordability concerns.

Domestic consumers are expected to be particularly hard hit in the coming year as the April 2022 price cap is raised to its highest ever level. Commentators have made stark warnings of a significant rise in fuel poverty next year and, in response, the Chancellor of the Exchequer announced on 3 February that all domestic electricity customers will receive £200 off their energy bills from October 2022. Energy suppliers will apply the discount to domestic electricity customers. This will then be recovered from bills in equal £40 instalments over the next five years beginning from 2023, when (at the time of the announcement) global wholesale prices were expected to come down.

Growing concern over affordability coincides with the government’s intention to address the reallocation of policy costs this year. In October, the government’s Heat and Buildings Strategy and Net Zero Strategy both detailed an upcoming Fairness and Affordability Call for Evidence, which will formally look to rebalance electricity and gas prices and support green choices, with a view to taking decisions in 2022.

We can help you navigate these turbulent times.

As we expect to see another year of considerable volatility and uncertainty in energy bills, TPCs will remain an important component of the delivered energy bill. Our TPC report tracks important developments impacting consumer energy bills, providing quarterly updates of the key cost drivers and sensitivities. The service includes individual 5-year forecasts on all non-commodity cost components for domestic and non-domestic users, including network charging, renewable energy support levies, energy efficiency schemes, and smart costs.

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