Significant changes to network charging methodology announced by Ofgem are likely to have a major impact on industrial and commercial (I&C) energy bills from April 2021, writes Charlie Ward of New Stream Renewables.
Under the changes, the result of Ofgem's Targeted Charging Review, the residual element of transmission network charging will be moved from demand to a fixed charge based on a customer's recent annual demand, whereas currently transmission charges are based on usage during the three highest winter peaks, commonly known as Triad charges.
Not only this, but from April 2022, distribution network charges will move to a fixed charge based on capacity. Ofgem has created 4 bands based on site capacity and voltage connection - the higher the site capacity, the higher the pricing band.
Within the current regime, larger power users can manage their demand through peak power periods by load-shifting, but the changes in charging methodology will make it expensive for businesses to carry excess capacity.
Ofgem's review of "sunk" network charges is intended to bring fairness to the market, to redress the imbalance between businesses avoiding network charges and other consumers. So, effectively Ofgem intends making businesses pay for the ability to use the network via a banded fixed charge, and look to reduce or end payments they can receive by avoiding balancing charges.
Less understandable is why Ofgem is introducing no new incentives that can help reduce system stress. This could undermine the business case and model for demand-side response and flexibility - when we know that flexibility is going to be key to delivering the intermittent renewables-dominated power system that we all want to see.
Ofgem says that "it will drive electricity distribution companies to go further to decarbonise power generation, transport and heating where required to help deliver a net zero emissions economy," but the infrastructure in terms of cable and transmission just isn't there.
To hit Net Zero targets, we will need to see some huge structural changes and investment to deal with the intermittent nature of the supply and the demand growth from EVs etc, but a significant chunk of the estimated £20bn cost of reinforcement could be avoided by increased network utilisation and smarter DNO operation. Hopefully, we will get clarity in Ofgem's soon-to-be-published decarbonisation plan.
So, while we have to wait and see what Ofgem will do in terms of new incentives, at New Stream Renewables we are working with some DNOs to provide flexibility to relieve network constraints. This is being provided by small gas-fired generators, storage and demand / load response.
We'll also be looking at new procurement and energy risk management models for I&C users to mitigate the impact of Ofgem's revised network charges. Our view is that this will add impetus to exploring distributed generation - such as battery storage - to help users with very "peaky" consumption to smooth out those peaks.
On the generation side, it's also going to be really interesting to see what happens because the Triad system has given a great incentive to run distributed generation through the peak when there isn't necessarily a price signal. Only time will tell just how spikey winter peak pricing will get without that additional generational supply onto the system.
Charlie Ward is Head of Renewables at New Stream Renewables, a specialist renewable energy market advisor, energy risk manager and operator for distributed energy assets across the UK.