What does Ofgem’s Targeted Charging Review mean for flexibility?

In November 2019 Ofgem published its much-anticipated decision on the Targeted Charging Review (TCR) — an initiative that aims to ensure network charging works in the interests of current and future consumers, as more renewables and storage comes online.

Set to be implemented from 2022, the changes have serious implications for distribution-network connected assets, while showing a clear mismatch between government, policy and the UK’s commitment to achieving net zero.

What’s changing?

The most significant change is a reform to residual charging[1], which will see a new fixed charging approach introduced.

Non half-hourly metered domestic customers

Most domestic consumers will save as a result, with a typical household seeing a £5/year reduction in their bill. However, some households with lower levels of consumption could face an annual increase between £2 and £22 a year. This is because those towards the top of their charging bands will pay less than today, and those at the bottom will pay more.

Half-hourly metered industrial & commercial customers

Consumers who presently benefit from reduced transmission charges because they use their onsite generation or storage to reduce their net load will pay more, and those who haven’t taken such action will, on average, pay less.

Partial reforms will also be made to so-called ‘Embedded Benefits’ received by Smaller Distributed Generators in relation to balancing services charges[2], however the decision on whether to impose a BSUoS charge is deferred to a new Task Force.

What will the changes mean for battery storage and DSR?

The changes will dampen the business case for investing in behind-the-meter battery storage. Currently, 50% of revenues derive from reduced network charges/embedded benefits, which the reform will eliminate.

Wholesale power market arbitrage, balancing mechanism and ancillary services, will become much more important revenue streams.

What can asset owners do?

Historically, assets owners relied on reduction of network charges (most commonly by responding to ‘triads’[3]or redband[4]avoidance) and shied away from trading, viewing it as more complicated. It will now be crucial for them to consider all available options.

Asset owners should review their business models to include other revenue streams, such as Firm Frequency Response (FFR) and wholesale power market arbitrage or consider becoming part of a virtual power plant.

Although assets cannot participate in ancillary services and wholesale/balancing markets simultaneously there are opportunities to ‘stack’ revenues. For example, the Upside Platform can monitor assets (including cold storage and battery storage), forecast their loads, optimise and despatch them, across multiple markets through the day to maximise returns.

Upside’s response to the changes

Whilst we appreciate that the TCR decision aims to maintain a working electricity system, there remains a significant mismatch between government, policy and what is happening within industry.

In June 2019, the UK government committed to reducing carbon emissions to net zero by 2050. However, without investment in flexible technologies, this will be challenging as investors will hesitate to invest in these technologies.

National Grid’s Future Energy Scenarios highlight that reaching net zero by 2050 requires immediate action across all key technologies and policy areas. Electrification of heat and transport, energy efficiency and carbon capture will all be needed at a significantly greater scale than present.Electric vehicles will play a major role in decarbonising the transport sector and meeting peak demands for EV charging will require flexibility. High demand for overnight charging will be reliant on nuclear and wind generation and when this isn’t possible batteries will need to back up the supply.

UK policy frameworks need to be aligned with this.

Current energy policy still makes traditional technologies, such as coal and gas peakers, seem more attractive. These assets can secure attractive capacity market payments that help recover losses from the pending TCR reform. Supporting such assets to stay online reduces opportunities in wholesale power markets, which further dampens the business case for storage and DSR.

What is clear is that increasing the penetration of renewable energy on the grid is dependent on investing in flexible assets, such as battery storage and pumped hydro, as well as demand side response. With the review dampening the business case for such assets, it is difficult to see how carbon reduction targets will be achieved.

[1]Charges that are used to recover the sunk costs of the existing network.

[2]Charges which consumers pay to the system operator to account for the system balancing services they procure to balance supply and demand

[3]Triads are the three half-hour settlement periods of highest demand on the GB electricity system between November and February (inclusive) each year, separated by at least ten days. These are used to determine TNUoS demand charges for customers with half hourly meters.

[4]Peak periods on the network — usually weekdays between 4–7pm.