While the final outcome of Ofgem’s Targeted Charging Review (TCR) won’t be announced until later this year, as consultations continue, we are gaining a clearer perspective on the likely impacts of potential changes for customers.
What’s the latest?
Last week, Ofgem reopened consultation on the latest TCR thinking in four areas, with the key focus on how the proposed changes will work if the Capacity Market (CM) is not reinstated. With the CM still on hold, Ofgem has modelled a scenario without the CM in place to see whether changes to residual charges and embedded benefits would still be beneficial to customers.
If the CM isn’t reinstated, Ofgem predicts there will be lower investment in generation, although they still expect to see a shift to more efficient generation once their reforms come into force. This will lower carbon emissions, but the predicted drop in investment in generation will push up wholesale costs.
However, they have determined that their proposed changes will still benefit customers even if the CM remains suspended, mainly because lower levels of charge avoidance will still outweigh higher wholesale prices. Ofgem states that the net value of the reforms to customers will still reach around £4.8bn over the period to 2040, even without the CM.
What does this mean?
Ofgem’s latest update on the TCR seems to be a strong indication that they are planning to implement their ‘minded to’ position.
This will see the charging structure change from a consumption-based approach, where charges are determined by when and how much energy businesses use, to a fixed charge based on the market ‘segment’ a business operates within. Each supply point within a business will be allocated to a segment based on its line loss factor class, which will be the same class system used to calculate Distribution Use of System (DUoS) charges.
How will this affect business customers?
Although consultations are ongoing, we do know that any changes that are made as a result of the TCR will affect all businesses, as they are proposing fundamental changes to the way network costs are passed through to customers. Whether the review has a positive or negative effect on their energy bills, however, will depend on which segment their business falls into and whether they currently manage their demand.
Under existing rules, transmission network costs are recovered through the Triad scheme, which means that many businesses manage to avoid high charges by shifting their consumption away from peak times. If Ofgem decides to move to a fixed charge approach, these businesses will no longer be able to use their flexibility or switch to behind-the-meter generation to avoid peak charges. Most of these organisations will see their energy bills rise under the new arrangements.
Organisations that are unable to shift their consumption away from peak periods are far more likely to welcome the proposed changes, as they should see their residual charges fall if Ofgem opts for a fixed charge scheme.
How can I prepare?
As we’re still at consultation stage, there’s enough time for businesses to prepare for the changes, which won’t impact them until at least winter 2021. In fact, Ofgem are considering postponing the changes until April 2023, in line with potential changes to forward-looking charges.
This means that if you work within a business that has the flexibility to shift its consumption away from peak periods, you should continue to employ demand management, as you should benefit from doing so for at least one more winter. However, the key focus for all organisations should be on reducing their overall consumption, as this is the only guaranteed way to avoid paying more than you should be for your energy.
If you’re looking to find out more about how TCR could affect your business, and what you should do now to avoid price rises in the future, call Inspired Energy today on 01772 689 250.
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