Ofgem’s Targeted Charging Review (TCR) – How will it impact your business?

As of December 2019, Ofgem published its decision on the Targeted Charging Review (TCR) with the fall-out being that there will be fixed residual charges for both domestic and business consumers.

The regulator also made a number of changes to ‘Embedded Benefits’.

The question of how the changes will impact bills overall remains unclear for a lot of businesses, with uncertainty of whether bills will increase or decrease.

In this piece, our experts examine exactly how and why businesses will be impacted by the regulator’s changes.

What is the Target Charging Review (TCR)?

Ofgem are reforming the way in which consumers are charged for electricity network costs.

As part of the TCR, Ofgem have examined the ‘residual charges’ which recover the fixed costs of providing existing pylons and cables, and the ‘Embedded Benefits’ charged to small and large electricity generators.

Residual Charges Decision

It has been decided that all households and businesses connected to the network will pay a fixed residual cost.

Under the new legislation, charges will be based on voltage which will be calculated at the Grid Supply Point. Based on usage, consumers will be placed into charging bands, with a single charging band for domestic consumers and a range of bands being introduced for businesses.

Embedded Benefits Decision

“Embedded Benefits” refers to the differences in transmission and balancing services charges between smaller and larger energy generators that are connected to the network.

Two Embedded Benefits under the current system are to be revised. Through the Significant Charging Review, Transmission Generation Residual charges will be scrapped, and suppliers will no longer be authorized to make arrangements with smaller electricity generators in an attempt to reduce their balancing services liabilities. 

Why have changes been made?

Currently, users can manipulate the system in order to avoid paying certain charges. With things such as load shifting during Triad periods, consumers with a high energy use can evade charges. This results in users with a lower consumption paying a greater charge in order to cover the necessary grid maintenance bill.

Ofgem has expressed that all users of the grid should pay towards its upkeep and hopes this new approach to charging will result in a fairer system overall as well as providing “significant savings to consumers” with £300m per year from 2021, with £4bn-£5bn consumer savings in total over the period to 2040.

When will the changes come into effect?

The revised legislation will be implemented in stages. The fixed transmission charges will go live in 2021, with distribution cost changes taking effect in 2022.

Will I still be able to save through load shifting energy usage?

For many businesses with a large energy consumption, the changes could unfortunately result in increased costs. Currently, many large consumers can shift their usage patterns to minimise energy consumption during peak demand times (Triad periods) on the grid.

The current Triad system is to be replaced with a fixed charge approach from 2021. As a result, Transmission Network Use of System (TNUoS) charges will no longer be avoidable and will have to be paid by businesses. The final Triad season will be during winter 20/21.

How can I limit a negative impact of the TCR?

Alternatives to Triads must be deployed quickly if large consumers are to mitigate the impact of the TCR. Load shifting will no longer be a viable option to save so businesses must look at ways of reducing usage whilst maintaining performance.

Basic steps such as, buying energy in bulk or arranging future energy contracts early can aid in cost savings. Our energy experts can provide bespoke recommendations based on your business and ensure you are taking all of the necessary steps towards making your energy strategy work for you.

Get in touch for advice from our experts on limiting the impact of legislation changes.

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Paul JohnsonGroup Financial Director

Paul Johnson is very much a home-grown talent.

He joined Great Annual Savings Group in its infancy, fresh from a youth career as a professional footballer with Hartlepool United.  He quickly established a reputation within the business and aced all required accountancy qualifications in the space of four years to become the Group’s Management Accountant.

Several successful projects later, Paul was promoted to Head of Finance.  When the former FD left GAS, he took on the mantle of the business’ most senior finance professional; boasting a string of incredible achievements all under the age of 30.

Quote:

“I have witnessed phenomenal growth at the Group over the many years I’ve worked here and I’m looking forward to guiding the Group into an exciting new chapter.”

Interesting fact:

Paul made his professional debut for Hartlepool United against Bournemouth in the Football League.  Some say Danny Ings still resides in his pocket to this day.