The changes are part of an update on the Targeted Charging Review. The energy regulator is currently assessing the framework designed for residual charging and cost-recovery as part of Ofgem’s price controls.
Residual charges are costs in place to allow network companies to recover their allowed revenue. Ofgem is assessing various options as to how these costs could be recovered, proposing four different methods: fixed charge, capacity demand charge, gross consumption charge, and baseline charge.
Impact on Demand Side Response (DSR)
The regulator is developing plans to balance the network on gross electricity demand. Currently, the network is balanced based on net demand. The difference is that net is actual system demand, reflecting the electricity needed from grid-connected generators. Meanwhile, gross demand is the underlying electricity demand, including all of the consumption met by alternative forms of generation. This change would have a significant impact on those using onsite generation. A gross consumption charge would mean businesses would have to pay network charges even when using electricity generated onsite from its own facility. Such a move could significantly damage the growth of Demand Side Response (DSR).
Ofgem has argued the changes will increase incentives for greater energy efficiency, as businesses will attempt to lower consumption in order to pay lower network charges. However, Ofgem’s initial assessment of the practical implications of the four options say that residual charges on gross consumption will result in the biggest cost of all the listed options. This is largely due to the additional half-hourly (HH) metering to be installed and data collection required, with the residual charge applied to total gross consumption. However, the regulator points out that at present, there is no measurement of on-site consumption or behind the meter generation which also increases the implementation cost of this option.
Furthermore, the regulator has said it wants residual charges to be recovered from suppliers, rather than generators, or perhaps a combination of both.
Ofgem expects to publish a consultation on this position next summer, with any new arrangements, if and when agreed, to be in place by 2020/21.
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