Distribution Change Proposal 228 (DCP228), which was approved by Ofgem last September, will affect charges for electricity distribution. Here, Dylan Crompton, Head of Major Accounts at British Gas Business, explains how that will impact customers when changes take effect from April 2018.
Since 2010, the Distribution Network Operators (DNOs) have recovered costs for managing the local networks through a triple-tiered, Red-Amber-Green, time-based structure heavily weighted towards the early evening red period.
This methodology ensured a consistent approach across DNOs and created financial incentives for consumers who could manage their demand to reduce peak consumption.
However, the methodology generally overstated the peak ‘red’ rates as it included, within the red rate, revenues that were not related to peak conditions. This causes the incentive to manage demand to be higher than it should be, making it unsustainable and bad for all customers in the long run.
With the rise in smart assets, energy storage technologies and a more diverse generation mix, the way we interact with and pay for the networks also needs to shift.
Put into wider context, government expects the role of a DNO to change to that of a DSO – Distribution System Operator – actively managing the flow and balancing supply and demand of power on their local networks. As such, the distribution charging mechanism may have a key role to play in supporting the move to a smarter, more flexible grid.
So, what is DCP228?
Officially, this amendment realigns the amount of scaling in the Common Distribution Charging Methodology (CDCM).
In more simple terms, this usually means the gap between charges in each time period will be reduced, making the green zone slightly more expensive and the red zone cheaper.
Generally speaking, domestic and single-rate non-domestic customers (profile class 03) will see a reduction in distribution costs.
Half-hourly business customers may see a rise in costs on aggregate with the greatest increase borne by high voltage sites and those with high baseload or night-time consumption.
These changes will take effect from April 2018.
What does that mean for my energy management strategy?
Some customers have expressed concern that this change reduces the incentive to manage demand, due to the reduction in cost differential between peak and off-peak DUOS charges. However, whilst many businesses have been told by the industry for years to take advantage of this discrepancy, this change creates an opportunity to look at how we reduce consumption throughout the day.
Also, with the discrepancy corrected by this modification, we should now have greater confidence to invest in optimisation techniques, with charging arrangements now on a more sustainable basis.
In a policy environment where we could see dynamic, time-of-use tariffs becoming the norm, it makes sense for astute end-users to shift away from the idea of having only a short window for demand reduction, where multiple consumers chase the same diminishing returns in the red period.
Instead, we should adopt a broad range of techniques to optimise our energy procurement, reduce consumption and prepare our estates for the rise of variable price signals.
The opportunities arising for behind the meter energy reduction projects, particularly when informed by smart data from internet of things (IoT) connected devices, are significant, particularly when combined with an effective purchasing strategy. It is therefore important to review our current energy strategy.
Customers on fixed-price contracts experience a less administratively demanding billing structure and a more risk-averse approach but as electricity distribution (DUoS) costs are bundled in with wholesale rates, they may not immediately see the full benefit of energy conservation measures.
For customers with a more active energy management regime, a flexible price contract gives the customer greater control over third party charges as well as more freedom to take advantage of favourable movements in the market.
Both approaches will be impacted by the DCP228 changes and it is important that suppliers and energy buyers join forces to develop the right risk management strategy for each individual customer and site, ensuring you have full control and confidence over your procurement strategy.
As we transition to a flexible energy system, it is important to remain focused on the opportunities to manage costs and realise a more sustainable approach to energy management.
At British Gas Business, making sure our customers have the necessary support to make informed decisions is central to our philosophy.
If you want to speak to someone about your energy procurement strategy or using smart energy data insights, call us on: 0845 070 3720. For further information on managing your business’ energy more generally, visit www.britishgas.co.uk/business
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