Editor’s Pick | Ofgem delays Transmission Demand Residual change to 2022

The regulator has accepted a request by National Grid ESO (NGESO) to replace the current CUSC proposal to implement the Targeted Charging Review (TCR) decision for a fixed residual transmission network use of system (TNUoS). A new implementation date of 1 April 2022 will replace 1 April 2021.

NGESO submitted a letter to Ofgem on 25 March to withdraw CMP332 Transmission Demand Residual Banding and Allocation (TCR), saying that during the workgroup process and workgroup consultation “significant issues have been raised that question the value and impacts to consumers”. It highlighted two specific issues:

  • The lack of visibility to the workgroup of modelled tariffs, due to the necessary data not being available until very recently from market participants. This meant suppliers and system users could not understand the impact of the methodologies proposed and that consideration of alternatives was not possible.
  • The impact on the short-term realisation of consumer benefits, due to the short notice of the draft final charges in late 2020 which provides little time for suppliers to understand impacts, adjust their business models and pass on the consumer benefits.

NGESO asked for withdrawal to give further time for the issues raised in the workgroup to be considered and for a review of the impacts and the implementation timescales.

In its response on 31 March, Ofgem consented to the withdrawal and directed NGESO to raise a new proposal to enable the reforms to TNUoS to take effect from 1 April 2022. The regulator stressed that this decision affected only the transmission demand residual (TDR) element of its TCR decision and that all the other elements will progress as in its original Directions. Ofgem said that in coming to its decision on the TCR in November, it anticipated around £50mn in benefits to consumers from implementing TDR reforms in 2021 compared to 2022. It also expected realisation of these benefits could be limited due to the time needed for suppliers to pass them onto consumers.

Since the decision, it said several suppliers and large energy consumers had provided it with detailed information on the difficulties arising from the lack of certainty in 2021 TDR charges in the non-domestic market. These arise due to accurate charges for April 2021 not being available until late 2020 and the increasing view in industry that the TDR timeline contains significant risks, and also that the charges may not be delivered on time. It noted the relatively short period allowed for the implementation of the new IT systems and charging processes.

Ofgem said it understood that there is a large variation in how suppliers are dealing with the uncertainty around TDR charges, with some suppliers having signed, or are continuing to sign, a significant number of non-domestic contracts for 2021 that do not take account of the expected TDR changes.

On average, TDR charges will increase for non-domestic and decrease for domestic consumers. Therefore, Ofgem is concerned that suppliers continuing to contract with customers without taking account of the TDR reforms will either lead to these suppliers incurring losses, or to suppliers triggering re-opener clauses in their contracts to increase these charges. It said this could lead to disruption for some non-domestic consumers and mean that suppliers may need to re-open many non-domestic contracts to recover the additional charges. This outcome could lead to a significant level of disputes, re-contracting and switching. It could also put some suppliers under financial strain, particularly those whose portfolios lack diversity or who rely on a small number of large contacts for a significant proportion of their revenue.

The regulator has therefore concluded a one-year delay is in the best interests of consumers and that it would also reduce pressures on industry and consumers in the coming months, so facilitating implementation of the TCR embedded benefit changes due in April 2021.

The risks from the short implementation timescale were evident at an early stage. While the decision now aligns the dates for changes to transmission and distribution use of system residual charges, COVID-19 could force further timeline changes as industry and the regulator re-prioritises.

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