Overall, most of the charges that make up the bundle of non-commodity (non-energy or third party) costs increased during Q2’21. Transportation & Distribution costs in particular grew faster than Charges & Levies (environmental and policy).

Here we delve a little deeper and focus on some of the key charges, what they are and their outlook for the coming years(7). So here we go:

Transmission Network Use of System & Distribution Use of System (TNUoS & DUoS)

These charges cover the cost of installing, operating and maintaining national and local distribution networks and are usually passed through to end-users. These charges are set annually by National Grid and the Distribution Networks and are applied from April each year. Charges vary depending on a number of factors such as time of use, location and meter type. 

• TNUoS charges have seen minimal movements in recent years but 2021/22 has seen an average 7% increase in rates. This is likely driven by National Grid forecasting an under-recovery of revenues during the 2020/21 charging year as a result of the Covid-19 pandemic. The shortfall is expected to be recovered in the 2022/23 charging year.

• DUoS charges will vary by network, but like TNUoS, these charges have also been impacted by Covid, and as a result a recovery of under collected revenues is expected during the 2023/24 charging year.

The introduction of major market reforms to network charging under the Targeted Charging Review (TCR) from April 2022 for DUoS and April 2023 for TNUoS will result in users paying an increased fixed charge based on charging bands that are determined by voltage, capacity and consumption.

As discussed extensively in our Q1’21 energy market report, suppliers have been using a variety of recovery approaches, from Standing Charge to Unit Rates, but as the networks begin to finalise the data required to price TCR correctly, we should see greater alignment between suppliers in how they allocate TCR charges.

Overall, the impact of TCR on consumers will differ depending on where a consumer sits within their charging band, with some customers benefitting from the change, others losing out.

Renewables Obligation (RO)
The RO scheme provides support for generators of renewable electricity. Energy suppliers are obliged to source a percentage of their electricity from renewable sources and recoup this charge from consumers. The scheme has been replaced by Contracts for Difference (CfD) but still exists to support renewable projects agreed before 2017.

RO charges are forecasted to increase in line with inflation, however, suppliers could be forced to make additional payments if there is a shortfall as a result of other suppliers failing to meet their RO obligations. This is called mutualisation and it has been triggered in each of the last three years. With suppliers continuing to exit the market in 2021 (Green Network Energy and Simplicity Energy for example), mutualisation is likely to be triggered for a fourth consecutive year and increase RO costs.

Balancing Service Use of System (BSUoS)

Unlike TNUos, DUoS or RO, BSUoS costs are not set in advance but calculated on a daily basis as a flat tariff for all users. The BSUoS charge is paid by generators and suppliers to National Grid to cover the cost of keeping the energy system in balance. 

BSUoS costs have been steadily increasing over the past few years and are projected to continue rising primarily driven by more renewable energy sources. Renewable energy is heavily influenced by the weather and with more generators coming online, balancing the system has become more complicated and required more interventions by National Grid.

As a result, current BSUoS charges are hard to forecast, complex and increasingly volatile. Suppliers are generally mitigating this by placing higher risk premium on their BSUoS pricing.

The regulator is changing the way BSUoS is calculated in two main ways. From April 2021, as part of TCR, suppliers are now charged based on their gross demand rather than net demand and from April 2023, generators will no longer be liable to pay these charges which means the costs would be solely covered by end-users.

Further changes are being considered such as fixing BSUoS charges for a period of 14 or 15 months to provide certainty for suppliers but also minimise under-recovery risk.

Feed-in-Tariff (FiT)

The FiT is a charge on suppliers to support small scale renewable generators (<5MW capacity). The scheme closed to new projects in 2018, but existing participants are guaranteed subsidies for 20 years.

Subsidies paid to generators will continue to be made and these are projected to increase slightly over the next five years to account for inflation and an overall decline in volume demand.

Contracts for Difference (CfD)

The CfD scheme supports the generation of large scale, low carbon electricity such as offshore wind farms. It is the only subsidy scheme for renewables that is still open for new entrants so is the fastest growing renewable levy. The Low Carbon Contracts Company (LCCC) administers the scheme and pays the difference between the strike price and wholesale market price as a subsidy to generators.

CfD charges have remained broadly stable over the past 12 months and even declined slightly in Q2’21 to £9.954/MWh from £11.269/MWh. However, we anticipate that CfD costs will increase gradually over the next five years as wholesale prices are expected to fall back slowly from their current peaks.

Sources & Notes:

(7) Selection of non-commodity forecasted costs for a sample business customer with a non-half hourly meter