As you may have heard, Ofgem is currently conducting an ‘Access and Forward Looking Charges’ (AFLC) Significant Code Review (SCR) as part of a huge shake-up into the way energy consumers access and pay for electricity.
For the uninitiated, a SCR is just a fancy phrase for Ofgem thoroughly checking over the way something works. While AFLC are elements of the electricity distribution and transmission charges that look at how much networks are likely to cost in the future.
This review follows on the heels of Ofgem’s other major reform – the Targeted Charging Review (TCR). (See our blog on this here.)
The aim of the AFLC review is to introduce four main changes:
More choice for network access: different network access arrangements for both consumers and generators
Lower charges where network reinforcement needed: a reduction in how much upfront investment customers will have to pay for new connections
Around £56 million* in extra transmission charges for embedded generators: increasing network costs for embedded generators (>1MW)
Huge changes for Distribution Use of System (DUoS) charging: more locationally and temporally granular charges for (DUoS) costs – potentially lifting the number of charging rates to more than 100,000!
Likely delays until April 2024
These changes were due to be introduced by April 2023. But as a result of the Covid-19 pandemic, the review is currently around six months behind schedule – so it’s now looking like that implementation will be delayed until April 2024.
So let’s look in more detail at these four main areas that the ALFC covers – and what these could mean for large business consumers…
1. More choice for network access
Currently energy consumers do not have much choice when it comes to electricity network access rights, as most Distribution Network Operators (DNOs) only offer two types of connection.
These are either a firm connection, which allows you to import/export any amount of power up to a set capacity. Or a flexible connection, which is typically offered if you are connecting to a constrained part of the network. This gives the DNO the capability to curtail power when the system is stressed, which may – or may not – result in compensation.
For large consumers, the AFLC is looking to create other types of access rights such as:
Time-profiled connections that allow you to declare what level of firm capacity you want for various time bands – for example, peak, off-peak, summer, winter – and what level of capacity can be curtailed during those time bands. Compensation for any curtailment would then be reflected via DUoS charges or the connection charges themselves
Non-firm connections that are very similar to the current flexible access arrangement
Shared connections that would allow a number of consumers to sign up together with a collective total capacity requirement (rather than the sum of their individual capacity requirements). Each consumer could then balance their energy demands/generation to stay within the shared access right. This could be useful for social schemes such as community generation, although Ofgem is looking for more evidence that this can work and that there is sufficient demand
2. Lower charges where network reinforcement needed
Customers connecting to constrained parts of the distribution network currently face connection charges that can include hefty network reinforcement costs.
As part of the AFLC review, Ofgem is investigating whether this cost is putting customers off from investing in assets such as low-carbon generation. If so, then lower-cost alternatives will be considered.
3. Around £56 million* in extra transmission charges for embedded generators
Currently, embedded generators (EGs) do not pay Transmission Network Use of System (TNUoS) generation charges, as they are treated as negative demand for the purpose of TNUoS charging. This means EGs receive credits regardless of their actual impact on the network.
Ofgem have identified this as an issue. For example, Cornwall’s network on a sunny summer’s day is constrained due to too much generation – yet embedded solar still receives TNUoS credits.
Ofgem’s favoured option is to therefore start charging TNUoS charges to EGs with >1MW generation capacity. This means that transmission-connected generation and EGs will compete on a more level footing.
However, for existing EGs, the business case changes. So Ofgem is considering transitional arrangements.
In early indicative analysis, Ofgem suggests that the biggest impact will be felt by Scottish embedded onshore wind, which could see annual TNUoS increases of £31m.*
English and Welsh conventional generation (not CHP) could see TNUoS increases of around £18m, while English and Welsh solar could see TNUoS reductions of around £17m.*
Overall, EGs could see TNUoS increases of around £56m a year.*
4. Huge changes for DUoS charging
DUoS charges are currently calculated separately for consumers with Extra High Voltage (EHV) and those with High Voltage (HV)/Low Voltage (LV) connections.
EHV charges are calculated on a site-specific basis, while HV/LV charges are based on a representative model for each DNO area.
But Ofgem is minded to move to zonal models for both, either at bulk supply point level (~800 zones in the UK) or to primary substation level (~5800 zones in the UK). Therefore, DUoS charges are almost certainly going to become more locationally granular.
In addition, Ofgem is considering introducing time bands for all consumers, and potentially making these seasonal too.
What’s more, Ofgem is looking at equal and opposite charges/credits for demand and EG customers, depending on whether they are working to balance the network. For example, favouring generation in a demand-dominant area or demand in a generation-dominant area.
The AFLC review is evolving and it will be many months before all the changes are confirmed. However, our industry experts are participating in the consultation process and we will bring you regular updates. In the meantime, you can find out more about this could impact your business from your Client Lead.
*Please note: these figures are all indicative forecasts and are subject to change.
Stephen has worked in the E.ON/npower business for over twenty years advising the businesses’ trading, generation and retail divisions as an industry expert. For the last nine years he has been supporting domestic, small and large business customers on various elements of their bill and for the last couple of years Stephen has been leading the ‘Costing and Risk’ team forecasting over 60% of the final bill for all of E.ON and npower. Stephen ensures his team and the wider business are particularly well positioned to meet the needs of business customers.