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Ofgem has published refined proposals for its planned overhaul of residual network charges after stakeholders expressed concerns over its minded-to decision in late 2018.
The regulator said it will now hold a further consultation on the plans and make a final decision with the next two months.
Ofgem’s preferred option is to recover residual costs through fixed charges levied solely on end-users. It has compared the approach to the line rental model for landlines within the telecoms sectors.
The charges would be set by customer segment, with non-domestic users being divided according to the ten existing line-loss factor classes.
The regulator said the majority of respondents to the initial consultation on the proposals supported fixed charges on consumers. However, a number also felt that the suggested customer segments for non-domestic users were too narrow to reflect their diversity.
In response, Ofgem has suggested that they instead be divided into 15 segments that would be set in terms of agreed capacity levels for users at higher voltages and net volume levels for low-voltage users. As per the original proposals, residual charges would be apportioned between voltage levels based on the total contribution of users at the relevant level to net volumes on each network.
The regulator has identified five charging bands for low-voltage users and five charging bands for those connected at higher voltages. As the banding would be the same for high-voltage and extra-high-voltage customers but their share of residual charges would be calculated at the voltage level, there would be 15 segments in total.
Ofgem has proposed to allocate users to these refined segments based on their historical consumption and make periodic updates in line with price control. “This should also reduce any incentives to change behaviour in response to residual charges,” it explained.
Residual network charges are designed to recover the sunk costs of the existing electricity network. Unlike the forward-looking charges designed to pay for investments in new infrastructure, they are not intended to provide a price signal to the market.
Ofgem is overhauling the charges partly due to the ability of many network users to avoid the charges and thus shift the cost burden onto others.
The regulator also addressed concerns over the impact of the reforms to residual charges and embedded benefits on renewables after Aurora Energy Research warned they could delay the advent of a subsidy-free world by up to five years.
It published an updated impact assessment from Frontier Economics and LCP exploring a scenario in which the changes result in a 50 per cent drop in onshore wind and solar installations.
The original assessment concluded that the reforms would increase system costs out to 2040 by up to £300 million but benefit consumers by between £4.5 billion and £6 billion.
The updated version found that if the gap in onshore wind and solar generation was replaced by offshore wind, then the reforms would increase system costs over the period by between £1 billion and £4 billion. The benefits to consumers would also fall to between £1.9 billion and £3.5 billion.
The deadline for responses to the consultation on the refined proposals is 25 September.
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