Confused on what is happening to triads and other charging mechanisms? Read on for more information.
Electricity in the UK is transferred from generators to end users via transmission and distribution networks as shown in the figure below. Transmission networks can be considered the highway of electricity transfer, where high voltage electricity is transported over very long distances across the UK. The ends of the transmission lines are connected to transformers, which are used to lower the voltage of electricity before transferring it to a distribution network. Distribution networks transport electricity more locally as they are connected directly to homes and businesses.
In the UK, transmission and distribution networks are owned by monopoly companies which are strictly regulated by Ofgem to ensure that their services are affordable for the end consumer. These companies generate revenue through various tariffs and the revenue these companies make is strictly controlled.
The transmission & distribution charges are transferred to the end user in the following ways:
Transmission Use of System Charges (TNUoS)
These charges are used to cover the installation and maintenance cost of the transmission system in the UK. The majority of this cost is charged retrospectively as a residual charge to the end user through the Triad mechanism. The Triad costs are calculated by retrospectively identifying three thirty-minute intervals between 01/11 and 28/02 where usage is at its peak in the UK and therefore the biggest strain is placed on the transmission system. The usage in those intervals is based on end user half hourly meter readings.
An average of a site’s consumption, within the three Triad periods, is calculated to determine the TNUoS charges. Since transmission companies’ revenues are set yearly by Ofgem, the TNUoS charges are split between individual sites to recover the total set revenue. The price is proportional to the site’s share of consumption during Triads compared with total consumption across the UK. This method encourages end users to reduce peak loading which reduces the strain on the transmission system.
Users with non-half hourly meter readings are debited based on their overall consumption as opposed to being judged on peak interval periods.
Balancing Services Use of System Charges (BSUoS)
These are charges aimed to cover the cost of the day to day operation of the transmission system where a necessary balance between supply and demand has to be achieved. They are applied to generators and suppliers after which suppliers apply this to customer invoices based on half hourly consumption data.
End users with on-site generators can export surplus electricity. If these generators are connected directly to the local distribution network, the electricity demand from the transmission network is reduced in the site’s local area. This translates to lower BSUoS charges for suppliers as they avoid the use of the transmission system to supply homes and businesses. As a result, suppliers pay end users with small on-site generators (below 100 MW) for exporting electricity to the local distribution network. These payments are called embedded benefits.
Charges to cover the installation and maintenance cost of the regional distribution networks run by the District Network Operators (DNO).
Distribution Use of System Charges (DUoS)
Aimed to cover the cost of your local distribution system. These are forward looking charges structured in the form of bands (red, amber and green), where higher prices are imposed at time of the day where usage is high in the area e.g. Monday – Friday at 4-7pm.
Why is it being changed?
For decades, this system has been used to charge end users for network operation, development and maintenance. There are a number of reasons for the changes, specific to each charge as listed below:
TNUoS – Triads
Many companies have resorted to on-site generation, demand side response and energy storage to minimise and sometimes completely avoid power consumption from the grid during suspected Triad periods. Their share of payments to cover a transmission company’s set revenue is reduced as a result, causing companies that don’t lower their usage to pay a larger portion of the fees.
This also results in distortions in the charges as the load shedding end users pay very little towards the maintenance of the transmission network but are still capable of putting big strains on the network outside of the monitored intervals.
Ofgem believes that this method of charging end users favours sites and companies who have the flexibility to minimise their consumption therefore have transformed the basis of these charges to ensure they are split more evenly and fairly across the sites in the UK.
BSUoS & Embedded Benefits
Ofgem feels that utility companies value embedded generators far higher than the actual financial worth of the electricity generated.
Utility company charging structures that incentivise the installation of embedded generators cause a major problem for transmission companies as they are unable to monitor electricity exported from generators to local distribution networks, reducing their ability to accurately balance the transmission network. As a result, embedded generators increase the overall cost of running and maintaining transmission networks whilst simultaneously enabling utility companies to omit these costs.
Transmission charges are increasing as the requirement for investment in ageing assets and the need for reinforcement works is intensifying, along with the construction of new assets to accommodate a growing number of new generation sites. Combining this with the overall reduction in energy demand in the UK results in rising costs for the transmission operator.
There is very little information currently available from Ofgem regarding the changes, however it is clear that Ofgem’s overall aim is to give more emphasis on forward looking charges, instead of residual charges, to encourage certain consumption behaviour from sites ahead of time. The changes to these charges will be discussed in a future article when more is known.
What are the changes?
The Targeted Charging Review (TCR) aimed to replace current residual charging structures with fixed charges and remove embedded benefits by April 2021. A second reform will be introduced at a later date to place more emphasis on forward looking charges. This timeline was reviewed by Ofgem on 31st March 2020, where changes to TNUoS charges were delayed from April 2021 to April 2022. The details on the changes following the update are as follows:
- Embedded benefits of on-site generation have been removed. BSUoS charges applied to suppliers are being changed from net demand to gross therefore balancing the grid by exporting energy to a local distribution network does not financially benefit utility providers. As a result, sites with embedded generators will no longer be paid by suppliers.
- TNUoS charges will change from Triads to a fixed group charge. A site’s agreed capacity and voltage connection will be evaluated and based on those figures and the site will be placed into one of four bands where each band will have a set price to pay in £/day. These bands will be based on the 40th, 70th and 85th percentiles of end users.
- DUoS is expected to change to a fixed format of charging however the changes are not yet clear. Updates will be posted on the Carbon Architecture website.
The dates set for the proposed changes mean that the final Triad season will occur in winter 2021/22. Ofgem’s update to delay the changes to TNUoS charges was a result of the uncertainty surrounding the prices of the new system and the significant risks associated with the short time allowed for suppliers to deliver accurate charges through new IT systems and charging processes. Ofgem feels that more time is also required to enable mass contractual changes between suppliers and non-domestic customers.
It is worth noting that the current Triad pricing only applies to that financial year, whereas under the new scheme charges will only be reviewed every 5-8 years. Furthermore, a site’s capacity will be averaged based on the previous 24 months capacity. Moving bands before the next review can only occur under exceptional circumstances i.e. change of tenant or change of activity on site.
The prices for each band have not been finalised so speculative numbers are only available. According to Ofgem, these changes are set to save consumers in the region of approximately £500m at the first year of its implementation, rising to more than £3bn by 2040. In reality companies that have successful Triad avoidance schemes will lose out where as companies that are unable to avoid Triad costs will benefit.
Changes beyond TCR
Ofgem acknowledges that the first set of changes disincentivises investment in renewables for sites and discourages consumption minimisation at peak times however they are looking to encourage certain consumption behaviour in other ways such as the installation of smart meters and through the reform of forward price signals. It is widely thought that Ofgem will introduce other changes in the future to push forward energy consumption minimisation measures and renewable energy investment as they remain focused on decarbonising the grid by 2050.
How can this affect you?
Companies that apply demand side response activities and load shift to avoid high rates will likely see an increase in the their TNUoS prices after April 2022. Conversely, companies that did not attempt to minimise the costs incurred through Triads and DUoS will likely pay less. Sites with high capacity and high consumption that apply avoidance methods to minimise the charges will be most affected since they will be placed into the higher bands.
Sites typically aim to have excess capacity agreed with their suppliers since large penalty fees are incurred when the limit is exceeded. Although the capacity can be sold to drop to a lower price band, it can be difficult and expensive to retrieve. Furthermore, a site’s average capacity in the previous 24 months is used to determine a site’s band so it will be difficult to drop to a lower band if large changes are required.
Flexible consumption will still enable businesses to minimise their usage during red band DUoS intervals until changes take effect in April 2022. Prices are still unknown for both schemes but changes may occur in supplier contracts as they proactively seek to regain losses from the changes.
What can you do to prepare?
A number of measures can be taken to minimise the effects of these changes for your site:
- Understand and evaluate the financial impact of these changes on your business once the prices have been published by Ofgem.
- Check the agreed capacity with your supplier. Assess the flexibility within which your capacity can be traded off, its cost implications and whether lower price band can be reached.
- If a new contract is due with your supplier, choose a pass-through contract as it allows you to make a more informed decision once the full details of TCR have been published.
- Revise previous bills to ensure that factors were correctly evaluated and recover any lost funds.
- By utilising information from ESOS audits, a site’s overall consumption can be reduced to lower utility bills and reduce the site’s agreed capacity for the next price band review. This also minimises a site’s dependence on the grid, where future changes to legislation will have a reduced impact on the finances of a site.