What is the targeted charging review? (TCR)

Many businesses, particularly those with larger, HH meters, have begun noticing a massive change in their standing charge or kVA charge from Apr-22 onwards when procuring future fixed contracts. Many will also know that this relates to the ‘Targeted Charging Review’ (TCR). But many within the industry still have many questions or simply don’t know what TCR really is. The guidance provided often feels vague and jargon-prone, leaving many consumers feeling unsettled as to why they are suddenly being faced with a huge increase to their standing charge after having navigated both a global pandemic and an energy crisis where wholesale rates have lifted to record levels.

So, what is TCR?

TCR is not a charge in of itself. Rather, it is a change to the way some non-commodities (industry-wide, fixed charge akin to a tax) are to be applied. Prior to price spikes on the wholesale market, customers applying for fully fixed contracts would have noticed a drop in the unit rate and a significant rise in their daily standing charge from Apr-22 onwards; this is because of the changes introduced by TCR. Charges are being moved from a flexible cost based on consumption during peak times to a standard flat rate.

Changes introduced by TCR will be partly applied from Apr-22 and fully applied from Apr-23 onwards. As part of the reform, every single meter in the UK has now been sorted into bandings (below) and the charge will be applied in line with these bandings. These bands are determined by a user’s consumption in the case of Domestic and Non-Domestic NHH, with HH meters banded by a supply’s average kVA over the past two years.

The exact amount a consumer can be expected to pay will not be known with certainty until 60 days before the charge is applied, however, the National Grid has published forecasts that are expected to be reliable, see table below. Suppliers have relied on these forecasts to pull together fixed price offers.

Overall, customers who did not engage in Triad avoidance should see TCR as cost-neutral or potentially even cost-positive. However, customers with large kVAs (capacity) and lower levels of annual consumption – particularly those who held onto capacity due to the prohibitive expenses associated with buying back capacity once lost – will feel the sting, particularly those with kVA near a band’s threshold. Consumers with 21500 kVA will pay an eye-watering £582,000 premium compared to those with 21499 kVA, all because of single kVA pushing them into band 4.

Bandings will be reviewed every five years, with the next review expected March 2026, and is expected to again be based on kVA for Non-Domestic HHs and consumption for domestic / NHH meters. If a consumer wishes to reduce their capacity by 50% or more such that they would be moved into a lower band prior to the next banding review and charged accordingly, they can apply to have a case raised for review.

Ofgem hopes that the changes implemented will ultimately save consumers, as a collective, up to £5bn by 2040.

What Non-Commodities will TCR affect?

The purpose of the Targeted Charging Review is an effort on Ofgem’s part to modernise and distribute costs fairly across the energy industry. TCR is the first in a series of overhauls, focussing primarily on the ‘Use of System’ (UoS) charges and what is called ‘residual’ charges. These charges cover the cost of maintaining an electricity network. Ofgem has taken the view that residual charges are essential, they are costs that would still have to be paid even if there were no ‘peak’ periods of demand putting a burden on the system.  Ofgem will also be looking to reform ‘forward-looking’ charges, which cover the cost of expanding the network, in the future.

Balancing Use of System (BSUoS) – Covers the cost of ‘balancing’ the system to cover any electricity short-falls and prevent blackouts. To be charged on gross, rather than net, demand from April-21. Smaller generators that were connected to and exported their power to distribution networks used to be able to circumvent BSUoS charges by treating embedded generation as ‘negative demand’ and was thus not covered by the net charge. Ofgem estimates that consumers will save between £3.8-5.3bn by 2040 as a result of this change. Further changes to BSUoS can be expected in the future.

Distribution Use of System (DuOS) – Covers the cost of installing and maintaining local distribution networks, aka, offshoot cables that ferry power to their ultimate destination. On average, 50% of DuOS charges will be moved to a fixed (£/day) from April-22, moving away from p/kWh uplift. Under the old method, supplies would be charged for units used within the Red, Amber, Green(RAG)  time zone, with each distribution area in the country having its own set of time zones approved by Ofgem. Red zones are akin to a peak train fair – it is the most expensive time to use electricity as it puts the most pressure on the grid, typically when business and domestic usage overlaps on a weekday’s early evening. Green zones are the least expensive periods, usually covering the early morning and all-day Sat-Sun.

With TCR, RAG charges will be reduced – meaning dual / tri-rate meters will see their advantages diminished. Rates will continue to vary depending on region, however, with the % taken as a fixed charge in the North generally higher than the South. For example, 60% of the DuOS tariff in the Scottish Power distribution area will now be recovered on a fixed basis, with the remaining 40% charged on the RAG structure. In the Eastern distribution area, just 11% is deemed residual, the other 89% recovered using the current RAG methodology.

Transmission Network Use of System (TNUoS) – Covers the cost of installing and maintaining the transmission network, aka, the cables built to supply energy across the grid. Runs to an overall cost of ~£3bn. Around 90% of TNUoS charges will be converted to a fixed (£/day) charge for all customers from April-23, moving away from p/kWh uplift. Charges will be equalised across the whole of the UK, unlike the current system where London is charged the highest rates and Northern Scotland the lowest.

10% of TNUoS charges will remain as a ‘forward-looking’ charge and will continue to be paid via the Triad charging structure.

Ofgem is currently running a Call for Evidence until 12 Nov-21, seeking views on the extent to which an even broader reform of TNUoS is needed. Have your say here.

Transition Premium

Supplies on a fixed-priced contract secured between Apr-22 and Apr-23 are expected to incur a ‘transition premium’, intended to be a one-off premium to accommodate the change in charging structure. This can add as much as 3% to a renewal price and is expected to be spread out over 12m.

Triads

With the introduction of TCR, the Triad structure of charging will come to an end, with the last Triad season to be Winter 2022. Triads are the three highest peaks of electricity demand between November – February, occurring at a half-hourly interval between (usually) 4 pm – 6 pm on a weekday. To avoid consecutive days of Triads, each period must be separated by at least ten days. Triads are calculated retrospectively by the National Grid on settlement, and so there is no way of knowing which day or interval will be classed as Triad until after the fact. TNUoS charges were then calculated by the meter’s half-hourly average demand during these peak three Triad periods. On fixed contracts, forecasted rates were built in as standard.

Every season, some consumers made a game out of avoiding Triad periods, minimising or eliminating TNUoS charges if they managed to correctly guess the Triad period and reduce consumption during this time. Some could make savings in the hundreds of thousands.

The reason for phasing out the Triad structure of charging is that it is oft criticised as confusing and unpredictable with major winners and losers. As consumers became more educated on how the Triad system worked, it led to an influx in on-site generation with savvy users switching to backup generators and relieving pressure from the grid during these peak periods. Though this was initially encouraged by Ofgem, this ultimately meant that fewer meters were left to carry the cost-burden – TNuOS obligations on network companies did not lessen when users avoided the peak periods, simply that those who were unable to avoid peak periods ended up paying a larger proportion of the charges. Triad periods have also become increasingly difficult to predict, with some reporting switching to backup generation 30-40 times during the winter season – oft eroding any benefits.

HH customers who did not engage in any Triad avoidance will likely benefit from TCR as the cost is distributed across the industry.

10% of TNuOS charges will still be collected via Triad charging even after TCR has been fully applied, values are expected to be minimal compared to as is and will not be available in all regions.

If you have a HH meter and are on a contract that passes through TNUoS costs, you can still benefit this year and next from Triad avoidance. Signing up to a Triad Alert Service, such as through DB Group, can help identify when a Triad period is most likely to occur. Ironically, robust Triad Alerts have also contributed to the difficulty in accurately predicting Triad periods – if everyone receives the same Alert and reacts accordingly then the system is no longer pressured by the same level of demand! DB has partnered with suppliers and SaaS energy data solutions providers to try to counteract this by offering Alert notifications provided by energy demand specialists while accounting for weather and generation types. Reducing consumption during these periods, even if they do not manifest as a Triad event, could still impact your energy bill as Triads typically occur during the red DuOS band. You can sign up for our Triad Alert notifications here.