Ofgem consults on network charging reforms
Ofgem is consulting on reforms to the way some electricity network charges are set as Britain’s energy system becomes smarter and more flexible.
More homes, public bodies and businesses are generating electricity on-site, particularly from renewables such as solar power, and taking less electricity from the grid. They still rely on the grid, for example, on dark winter evenings when solar power cannot generate electricity.
The costs of the pylons and cables that make up the grid are recovered through electricity network charges which amount to around £9 billion per year. They are ultimately reflected in energy bills paid by consumers.
There are different types of network charges. Forward-looking charges tell generators and other users of the system how much their usage of the network will increase or decrease costs for network companies in future. Our consultation focuses on residual charges which provide the additional revenue that the companies are allowed to recover for running the networks, under Ofgem’s price controls.
Under the current network charging system, these residual charges are based on how much electricity consumers take from the grid. Users who generate electricity themselves on site can avoid a lot of these charges even though they use the grid as back-up. As a result, consumers that take all their electricity from the grid, including households which have not installed solar panels or other renewables, pay more of these charges.
Ofgem’s proposed charging reforms will ensure these charges for the grid are shared fairly between all consumers. In a consultation, the regulator has set out its preference to introduce fixed residual charges for all households and businesses rather than charges based on the amount of electricity they take from the grid under the current charging system. They would be broadly similar to fixed telephone line rental arrangements.
Under these proposals, many homes and businesses will save money, although some, including those that generate electricity at home or on-site, could pay more. Ofgem is asking for views on whether the changes should be implemented in 2021, or phased in between 2021 and 2023.
In addition, Ofgem is proposing to remove some of the differences in the way that smaller generators connected to the distribution network are charged compared to larger generators. Removing some of these remaining ‘embedded benefits’ will lead to significant savings for consumers, and Ofgem is asking for views on whether these changes should be implemented in 2020 or 2021.
Overall the reforms to residual charges and embedded benefits set out today could lead to total savings to consumers of between £5 billion and £7.6 billion from when they are implemented, up to 2040.
Next month, Ofgem will announce the next steps for putting in place tougher price controls for energy networks from 2021, and freeing up electricity network capacity so it can be used more efficiently. Both these reforms will lower the overall cost of the networks for consumers.
Notes to editors
- On 15 November 2018 a judgement by the Court of Justice of the European Union had the effect of suspending State Aid approval for the GB Capacity Market. Any policy developments in relation to the Capacity Market will be considered in our decision on the reforms outlined today.
- Embedded benefits are payments or benefits that some smaller generators receive. This includes providing electricity to the grid when required. In June 2017 Ofgem reduced a specific payment some embedded generators received for producing electricity at peak times. This payment cost consumers around £370m per year.
Ofgem is now proposing to remove some of the remaining embedded benefits. These benefits are for providing generation to a supplier, so that the supplier reduces its payments to National Grid for keeping the electricity system in balance. Ofgem is also proposing that embedded generators pay towards the costs of balancing the electricity system, like other generators including large renewable plant. Currently embedded generators do not have to make these payments.
For media, contact
Chris Lock: 0207 901 7225
Media out of hours mobile: 07766 511470 (media calls only)
Ofgem is the independent energy regulator for Great Britain. Its priority is to make a positive difference for consumers by promoting competition in the energy markets and regulating networks.
For energy insights and updates straight to your inbox from Ofgem, please subscribe.
Latest News from
Shell Energy Retail pays £390,000 after overcharging some default tariff cap customers17/06/2019 10:25:00
Shell Energy Retail Limited is to refund and compensate around 12,000 customer accounts it overcharged on its default tariffs when the price cap was introduced. In addition, the supplier will pay £200,000 to Ofgem’s consumer redress fund, equating to a total payment of £390,000.
Ofgem sets out five point plan to help vulnerable consumers14/06/2019 13:15:00
New strategy sets outcomes Ofgem expects industry to achieve, so vulnerable consumers are not left behind by the pace of change in the energy industry
Ofgem finds E Gas and Electricity, Economy Energy and Dyball Associates in breach of competition law31/05/2019 10:15:00
Two suppliers, E (Gas and Electricity) Limited and Economy Energy, and Dyball Associates, an energy software and consultancy service, have been found to have infringed Chapter I of the Competition Act 1998 and fined collectively £870,000 by Ofgem.
Ofgem confirms network price control methodology so consumers can benefit from cheaper, smarter and more sustainable energy network24/05/2019 12:10:00
Ofgem has confirmed its methodology for calculating the next round of network price controls. The new price controls, known as RIIO-2, will deliver a smarter and more sustainable energy network that will come at a lower cost to consumers.
Cadent pays £24 million for past failures and establishes a £20 million community fund23/05/2019 10:15:00
Cadent, a gas distribution network company, acknowledges its responsibility to its customers, agrees to pay a total £24 million and is committed to implementing an improvement plan to address three serious failings after intervention from Ofgem.
Ofgem orders Solarplicity to pay Feed-in Tariff generators13/05/2019 10:25:00
Solarplicity has been issued with a provisional order by Ofgem to pay outstanding money owed to Feed-in Tariff (FIT) generators.
Ofgem announces strategic review of microbusiness energy market06/05/2019 10:25:00
Ofgem has announced its strategic review of the microbusiness energy market to better understand and address the issues faced by microbusinesses.
Ofgem consults on EPEX’s commitments following Competition Act investigation03/05/2019 10:15:00
Ofgem is consulting on commitments offered by EPEX and its parent EEX after an investigation was opened into the power exchange company under the Competition Act.
Customers entitled to automatic compensation for switching problems from 1 May01/05/2019 10:15:00
Customers will now automatically receive compensation if they are not returned to the correct supplier when they are mistakenly switched or if suppliers are late in refunding the credit balances of customers who have switched away.