Ofgem rejects temporary relief from gas distribution charges

Ofgem has rejected a proposal to grant major consumers temporary relief from gas distribution capacity charges, saying it risks undermining the efficient operation of networks and shifting costs to other customers.

UNC725 would allow daily metered supply points to reduce their reserved capacity and the accompanying charges until the beginning of October. The modification to the Uniform Network Code (UNC) was one of five amendments to emerge from an emergency meeting of the UNC panel in April, three of which were approved by the regulator last month.

Capacity charges make up 95 per cent of gas distribution fees, with the remaining 5 per cent tied to actual consumption. For daily metered customers, these charges are calculated on the basis of their Supply Point Offtake Quantity (SOQ) representing their maximum daily demand. Under the current arrangements, this quantity can only be lowered during a set window between October and January of each year.

The modification would allow suppliers and shippers for supply points that have drastically cut their consumption as a result of the coronavirus pandemic to temporarily lower their SOQ to a level that reflects their peak daily usage between 1 April and the date of application. The change would apply until 1 October 2020 at which point the SOQ would revert to its previous value. They would then be able to apply for a more enduring reduction if desired.

The amendment was voted on by UNC panel at a meeting in May but members were evenly split, with no majority for or against.

Explaining its decision to reject the proposal, Ofgem noted that a similar modification (UNC275) allowing customers’ SOQ to be reduced below a set floor was approved in the wake of the 2008 financial crisis.

However, it also noted that unlike this previous modification, UNC725 would not require consumers to relinquish capacity beyond 1 October. As a result, they would not face a trade-off between reducing their charges and ensuring they have sufficient capacity over the medium-term, creating an incentive to reduce their SOQ by more than is necessary.

Ofgem said gas distribution networks (GDNs) would also be unable to reallocate capacity to avoid additional investment: “Knowing what the SOQ of a site will be, in advance, helps facilitate the efficient and economic planning of the pipe-line system. For example, where SOQs are falling due to significant and sustained changes in usage, knowledge of this in advance could prevent inefficient investment taking place.

“More immediately, it would make the GDNs recovery of charges less predictable and in the extreme, could redistribute the liquidity problems that we acknowledge consumers may be facing, from them to the GDNs. Neither of these outcomes would promote the efficient operation of the network.”

It continued: “Balanced against these concerns is the prospect that some daily-metered consumers may otherwise cease using the network, either through choice or necessity, and make no further contributions to the costs of its operation.

“To the extent that these consumers are not replaced entirely or within the same locality, the existing capacity may become underutilised, which would reduce its efficiency and require cost to be recovered from all other users of the network. However, we are currently unable to quantify this risk, or the extent to which the short-term relief from charges which UNC725 may offer would mitigate that risk.”

Ofgem said government support for businesses should help offset at least some of the impact, adding that whilst UNC725 has been proposed in response to the pandemic, “there is nothing in the legal text to limit its use in this way”.

Furthermore, the regulator said that any unrecovered costs would be spread across all consumers, rather than only those who would benefits from the reduced charges. It said this may be justified in exceptional circumstances but raised concerns that the modification would “undermine the current basis of the capacity charging regime.”

Despite rejecting the modification, Ofgem said it remains “sympathetic” to customers being charged for capacity they are no longer using: “We would therefore encourage further consideration by the industry, and GDNs in particular, on whether relief from capacity charges should be afforded to those consumers who continue to be affected by the Covid-19 related regulations which prevent them from making use of the network capacity allocated to them.

“As set out in our decision on UNC275, we did not consider that the additional flexibility introduced by that modification in response to the financial crisis represented a fundamental shift from the prevailing arrangements. It simply brought forward capacity reductions that would have been available to the customer in the following gas year. This was in contrast to the earlier proposals that had been raised in response to the financial crisis, which had been rejected in the form of UNC244 and its alternatives.”

“We consider that there is a reasonable case to develop a process which entails the release of capacity earlier than would be allowed through the annual process, and enabling the GDNs to utilise any relinquished capacity in furtherance of the overall efficiency of the network,” the regulator concluded.

“However, such a deviation from the standard capacity reduction arrangements would have to be based on exceptional and unforeseen circumstances, such as the closure of premises being mandated by regulations.”

Ofgem said data provided by Xoserve shows that around one in five of the roughly 1,000 daily-metered supply points in Great Britain has reduced their usage to “zero or de minimis levels”.