Ofgem has confirmed controversial plans that will see all businesses and households pay for the use of the electricity network via a fixed charge.
The regulator’s Targeted Charging Review (TCR) examined the ‘residual charges’, which recover the fixed costs of providing existing pylons and cables and the differences in charges faced by smaller distributed generators and larger generators, known as ‘embedded benefits’.
Transmission General Residual charges will also be scrapped and suppliers will no longer be able to contract small distributed generators to reduce their balancing services liabilities, called Balancing Service Use of System (BSUoS) charges.
Ofgem says the residual charges are currently largely based on an individual user’s consumption from the grid and by taking less electricity from the grid by either self-generation or taking other action, some households and businesses currently avoid paying some or all of these charges, despite being able to draw on the networks as and when they need.
This has enabled businesses with onsite generation to reduce the amount they pay and also earn money by helping suppliers avoid system balancing costs.
However, the regulator adds the costs they avoid falls on those that are not able to take similar action – and the new reforms are expected to help many homes and businesses save money.
Ofgem says the costs of maintaining the electricity grid will now be spread “more fairly” and consumers will save around £300 million a year from 2021, with between £4 billion to £5 billion of savings in total until 2040.
The fixed transmission charges will be introduced in 2021 and distribution charges in 2022.
Chief Executive Dermot Nolan said: “We have witnessed large changes in the way electricity is generated, transported and used in recent years as the UK moves to a smarter, lower carbon and increasingly decentralised energy system.
“As the energy regulator for Great Britain, Ofgem is laying the foundations for a net zero economy whilst ensuring the networks run efficiently and costs are kept down for consumers.
“The outcome of the TCR will help achieve this goal. It was set up in response to the changing role of the networks as more electricity is generated from a wider range of sources, including from smaller scale generators and as demand becomes more flexible both in terms of time and location.”
Businesses that generate electricity onsite and those involved in demand side response have repeatedly raised concerns about the reforms having a negative impact on the business case for flexibility.
“Undermines renewables deployment and grid flexibility”
The Renewable Energy Association (REA) believes Ofgem’s final TCR decision undermines the deployment of renewables and the development of a more flexible electricity system.
Chief Executive Dr Nina Skorupska said: “Although there are a few consolations for larger generators, today’s announcement undermines the move towards a more flexible power system. These reforms mean that businesses and homes which have taken responsible steps to install low carbon technologies will effectively pay more to use the wires needed to support the system.
“Our proposal from the start was for the TCR to be progressed in combination with another set of proposed changes, called the review of ‘forward looking charges’. Tackling and rolling out these two sets of proposals in tandem would have allowed the whole picture of grid charges to be progressed at the same time in a cohesive manner. This has not happened, however and we now face a period of investor uncertainty and a significantly weakened business case for battery storage and the other crucial systems we need to ensure Britain has a modern power grid.
“Ultimately, this decision will negatively impact subsidy-free renewables and until the ‘forward looking charges’ review is enacted we risk further shrinking the pipeline of new projects.”
“Uncertainty over future grid charges”
Morag Watson, Director of Policy at Scottish Renewables, said: “Ofgem’s plans for partial reform of system balancing charges (BSUoS) are more positive than full reform but the information published today does not remove the uncertainty hanging over the future of grid charges.
“A proposal for the second BSUoS taskforce which will not produce a final report until June 2020, alongside an implementation timeline which does not align with the Access and Forward Looking Charges Review, creates further uncertainty. We remain concerned that Ofgem is not giving due regard to the impact that ongoing changes like these are having on investment in the UK’s energy industry, or the achievement of our net zero climate change emissions targets.”
“Negative impact on growth of renewables”
Good Energy also believes Ofgem’s TCR decision will have a “negative impact” on the growth of onshore wind and solar power, with the latest assessment predicting half of new projects projected to be abandoned due to the added costs.
CEO Juliet Davenport adds: “The decision will also penalise the most vulnerable and energy efficient customers by increasing network charges for some low consuming domestic consumers by almost 20%.
“None of these outcomes are consistent with addressing the climate emergency or achieving net zero emissions by 2050, going against the stated policy objectives of all political parties as we head into an election. We call on Ofgem to reconsider its decision and delay any changes until a new government is in place and its policies are clear.”
“Smaller distributed generators lose out”
Chris Hewett, Chief Executive of the Solar Trade Association (STA) said: “Despite their own revised analysis highlighting that these changes risk delaying deployment of subsidy-free low cost renewables, Ofgem are pressing ahead with changes that make net zero harder to reach, not easier.
“With the urgency of climate change, it is abundantly clear that the regulator’s current objectives are now outdated and absolutely vital that the next government addresses this.”