Are IDNOs margins about to be squeezed?

Earlier this month, voting closed on a potential rule change that could have important consequences for the network charges faced by electricity Licenced Distribution Network Operators (LDNOs), including independent network operators (IDNOs).

DCUSA proposal DCP266 The Calculation and Application of IDNO Discounts was raised by British Gas in March 2016 and has since been developed by a workgroup. It is seeking to change the way that distribution use of system (DUoS) revenues are allocated between host DNOs and downstream networks.

Currently, IDNOs receive a discount on the “all the way” DUoS tariff charged by the host DNO, which is broadly meant to represent the network service that they provide to the customer. The IDNOs then normally charge their customers the full “all-the-way” tariff and retain the difference. The proposal would change how that discount is calculated in the common distribution charging methodology (CDCM) for connection at low or high voltage and therefore would directly impacts IDNO revenues.

British Gas said it was seeking to achieve a better allocation of revenues between an LDNO and the host DNO to ensure an LDNO can receive the same margin as the host DNO’s notional downstream business. It argued there is a disconnect between the models that create the tariffs, as the Price Control Disaggregation Model that determines the portion of the all-the-way revenue that an LDNO should retain uses a total cost approach, but the CDCM uses an incremental cost approach. British Gas believes that this will not produce a reasonable allocation of the total costs of the elements of the DNO’s business, and therefore proposed a different approach: the avoided total cost would be compared with the average p/kWh figure for each all-the-way CDCM tariff in order to determine the IDNO percentage discount figure to be applied.

The impact on each IDNO would depend upon the profile of its customer base. For most tariffs in most DNO areas and at most boundary levels, DCP266 would raise percentage discounts. Taking all DNO areas together, the impact assessment indicated that it would increase LDNO margins at CDCM boundary levels by 2.29% (£897,568) in 2018-19 and 1.55% (£800,125) in 2019-20. However, for some high-volume tariffs, notably domestic unrestricted tariffs, the modification would in most cases lower discounts (see Figure 1).

Source: Electralink, DCUSA Change Report 

Concerns about the proposal included whether a case for change had been made and the fairness of the resulting allocation was questioned. However, a key issue was whether the proposal could represent a case of “margin squeeze” as an abuse of market dominance under UK/EU competition law. This proved a highly contentious issue that saw three workgroup members resign, and legal and Ofgem advice sought around the appropriate approach, including conducting an As Efficient Competitor test. The workgroup terminated without resolving the issue, but it was suggested that DCUSA Parties consider this when voting on their recommendation to Ofgem. The proposal has been recommended for rejection, although DNOs as a class recommended implementation; the regulator’s decision is now awaited.

If you would like to know more about our services for IDNOs please contact Pixie Energy via or on 01603 542093.

Related thinking

Low carbon generation

Data centres predicted to become prosumers of electricity

In combination with Cornwall Insight and Bit Power, Host in Ireland published its Biannual report of Ireland’s Data Hosting Industry. The report highlights the importance of sustainability in Ireland’s digital transformation. The report confirmed the number of operational data centres in Ireland increased by 25 per cent over the past...

Regulation and policy

Electricity transmission charging reform – overtaken by changing priorities?

Charging for the transmission network is never out of the development process for long. From major reviews, such as that initiated under Project Transmit in 2010, to significant reforms such as removing the triad benefit from distributed generation in 2018, and a host of smaller developments, change seems the only...

Commercial and market outlook

April showers bring DUoS for every half hour

Almost two years ago, Ofgem approved DCP268 DUoS Charging Using HH Settlement Data, which will move existing non-Half Hourly (NHH) settled demand customers onto time-based Half Hourly (HH) Distribution Use of System (DUoS) unit rate charges. With the modification to be implemented in the DCUSA on 1 April, we revisit...

Regulation and policy

Ofgem “hands-on” in RIIO-2 as net zero route unfolds

During the next round of the RIIO price controls, Ofgem can be expected to take a more hands-on approach to outputs the networks are required to provide and the allowed revenues they can charge their users or consumers. This will have impacts for network development including the enabling of electric...

Regulation and policy

Ofgem’s Network Access and Forward Looking Charges review – should I be interested

Spoiler – if you are a distribution connected generator, yes, In a big way Ofgem is currently progressing one of its biggest overhauls of network charging; with the Targeted Charging Review having only recently concluded that is quite a statement. We have already seen the value to distribution connected generators...

Regulation and policy

Targeted Charging Review residual network charges – some remainders

While Ofgem has ruled on the arrangements that will apply to distribution use of system (DUoS) charges from 1 April 2022 following the regulator’s Targeted Charging Review (TCR) Significant Code Review (SCR) decision last November, it has still to determine a series of CUSC modifications that aim to put in...

Regulation and policy

New horizons: DCC plans to expand remit over next 5 years

The government awarded the Data Communications Company (DCC) licence to Capita subsidiary Smart DCC Ltd in 2013. As an Ofgem-regulated monopoly, the DCC’s remit was to set up the smart metering communications infrastructure, linking up 53mn electricity and gas meters with the systems of energy suppliers, network companies and third...

Regulation and policy

COVID-19-driven changes to electricity Third Party Charges

The impact of COVID-19 on the energy sector has been a hot topic for the last few months. As we progress further into the UK’s lockdown period we are now beginning to piece together the wider picture of effects across energy Third Party Charges (TPCs). These impacts are expected to...