Strategic Review of Network Charges

Ofgem recently published an open letter on potential reforms to network charges, find out about the charges and what was discussed in the letter below:

Strategic Transmission Charging Reform


Electricity transmission network charges recover the costs incurred by the network for providing, maintaining and developing the electricity transmission system. There are three central types of charges:

  1. Balancing System Use of System (BSUoS)- Mechanism for recovering the cost of balancing the transmission network (ensuring generation and demand are matched).
  2. Distribution Use of System (DUoS)- Recovers the cost of installing and maintaining distribution networks.
  3. Transmission Network Use of System (TNUoS)- Charges for the use of the high voltage system, applicable to all supplies and take the form of a fixed charge based on connections, voltage and agreed capacity.

With the energy system currently undergoing rapid changes and renewable generation playing a greater role, the role of transmission charges will become increasingly important as they are a policy which drives investment decisions by network users. Future network charges will need to work coherently with wider market signals and system planning arrangements, it is these considerations which have led Ofgem to produce an open letter on potentially reforming transmission charges to make them more effective. The letter can be found here: Open letter on strategic transmission charging reform | Ofgem

Improving the TNUoS Charging Methodology

Ofgem have begun work to reassess the methodology used for the TNUoS charges to ensure that it remains fit-for-purpose as the network continues to evolve over the next decade. Current methodology is designed to send cost-reflective price signals to network users to incentivise efficient network use. However, charges can become unpredictable and hinder investment decisions and therefore a TNUoS task force has been launched to improve the stability and predictability of charges with the hope of introducing reforms by 2025/26.

DUoS Review

Ofgem’s Significant Code Review (SCR) will assess whether arrangements can be made to facilitate a more efficient use and development of the distribution network whilst also working in tandem with TNUoS charges.

Objectives of Transmission Charging

Transmission charges can send two types of signals to network users, these are:

  1. Operational Signals- Aim to facilitate efficient use of existing network assets and the effective integration of future assets to reduce overall system costs, including the costs of balancing the system in real-time. To achieve this charges would have to be cost-reflective and can operate coherently with other markets and signals.
  2. Investment Signals- Aim to indicate where to invest and what to invest in thereby influencing investment decisions by signalling the long-term costs associated with assets in particular locations in the network. Signals of this form are intended to support the development of an economically efficient system at the lowest cost to the consumer and interact with other investment signals, government policy and system planning approaches to help the delivery of a net-zero system.

Ofgem believe there are significant challenges to achieving effective operational signals, such as the challenge of transforming the technical systems to reflect real-time costs and conflict with signals from other markets in real time. For these reasons, Ofgem do not believe sending operational TNUoS signals would be effective and instead in the long-term, signals should seek to influence investment decisions and not real-time operation.

Framework for Transmission Charge Design

Network charge design is a complex process and made up of multiple interlinked elements subsequently Ofgem want to introduce a simplified framework for charge designs. Three different types of costs have been considered:

  1. Network Representation- Would reflect how the network will be in the future to reduce future uncertainty.
  2. Allocation of Transmission Owner Investment Costs to Different Charge Types- Using connection charges to influence investment decisions by requiring a greater upfront cost for connecting new demand, however, this could deter investment in the demand and generation required for net-zero.
  3. Cost Drivers Reflected- Charges could be altered to reflect different cost drivers and how they impact different users of the system. Such drivers could include the long-run network cost, locational network losses-based charges or spare-capacity based charges.

Cost Allocation

Once relevant costs have been determined, the level of granularity for allocating these costs needs to be decided. Three models have been considered:

  1. Locational- The design of charges could be broken down into locational charges with zones being used to determine pricing which could change dependent on the potential expansion of the network in the future.
  2. Frequency of Reset Charges- Network charges require periodic resets to reflect up-to-date costs therefore charges could be made on the frequency of resets.
  3. Temporal- Charges could be set for users dependent on when they use the network throughout the day, month and year. Seasonal factors could become a factor alongside on/off peak times. This type of charge would aim to reduce costs in the long-term by influencing patterns of usage.

Attributing Costs to Network Users:

Three parameters have been considered for assigning costs to network users, these are:

  1. Charging Metric- What is the basis for calculating charges on a user? Choices can range from capacity, consumption and volume and would need to be consistent cost allocation choices and the different network impacts.
  2. Treatment of Different Network Users- Charging based on the characteristics that influence a user’s impact on the network.
  3. Generation Background- Assumptions being made on supply and demand characteristics become the basis for allocating costs to a user.

Next Steps

Across the next year Ofgem will continue to assess the case for change and hope to develop a long-term analytical framework. This will be examined alongside wider reforms such as the government’s Review of Electricity Market Arrangements (REMA). Ofgem welcome views on their open letter, with a deadline of 15th November 2023.