On 21 November 2019, as part of its Targeted Charging Review (TCR), Ofgem has published its decision and impact assessment. The objectives of the TCR were to "consider reform of residual charging arrangements for both generation and demand, to ensure it meets the interests of current and future consumers" and to "keep the other ‘embedded benefits’ that may distort investment or dispatch decisions under review".
The exact details remain under consideration, however the current charging system is anticipated to be replaced in either 2020 or 2021. The main design principle of the new regime is to introduce fixed network charges, which are intended to create a fair system compared to the current regime where flexible users may profit whereas less flexible users (including businesses and households) pay higher prices. Embedded benefits for generators are also expected to be removed.
The Transmission Network Use of System (TNUoS) charges are no longer to be carried by both generators and consumers, but instead shall be carried solely by consumers. The intention of this is to reduce the cost of operation of generators, in turn reducing wholesale prices. As such, the impact on consumers should be minimal.
Triad payments are to be removed, however a replacement has not yet been determined. One option is a fixed charge regime with user payments made independently of actual consumption. Alternatively, an agreed capacity charge is being considered, whereby with users agree a contracted capacity with their local distribution network operator (DNO).
Details are expected in Ofgem's upcoming Network Access Review, however in the meantime it is clear that the new charging regime will require various market participants to consider their business models, in particular whether they have profited from schemes such as triad payments or embedded benefits.
The changes will have an impact on obligations and pricing provisions under many existing long-term power purchase agreements, route-to-market agreements and wholesale market access frameworks. It is likely that they will be covered by the contractual change in law mechanics, but certain aspects could be caught by typical carve-outs from the 'economic equilibrium' concept used in prescribing rules for amending the agreement in case of a change in law.
It is also important that the impending changes are carefully considered in new agreements, to avoid them being considered as 'known changes' falling outside of the contractual adjustment mechanism, whilst their scope is still unclear und cannot fully be ascertained by the parties.
Should you have any questions as to the nature, progress and impact of the changes, in particular to your business or existing contracts, please do not hesitate to contact us.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
