Reform of network charges in the UK

Source: ofgem

TLDR: Network charges need to be reformed because they are not set up for a world with many renewable energy generators. However, no major changes will be introduced before the REMA process concludes.

The Office of Gas and Electricity Markets (ofgem) hosted its latest “Charging Futures Forum” online on 21 March 2024. This format is used to create more transparency around the reform of grid cost charges and give stakeholders a chance to ask questions directly to ofgem.

What is meant by the “Reform of Charges”?

The costs of maintaining and expanding the electricity transmission network are currently being paid for through three different charges added onto electricity bills:

  • Transmission Network Use of System (TNUoS) pays for the wider transmission network connecting the different regions in the UK and the offshore wind parks.

  • Distribution Use of System (DUsO) pays for the local electricity grid.

  • Balancing Services Use of System (BSUoS) is paid by electricity consumers to help ensure that electricity supply and demand always match.

Ofgem is reviewing the current mechanism of how these charges are calculated and who pays for what.

The need for reform

The current system was established when power mainly flowed from large central electricity generators (e.g., nuclear power plants) to consumers.

Today, renewable energy projects can be found nationwide, often feeding their production into the local distribution network rather than the wider transmission network.

This new market reality requires a broader review of how the UK electricity market operates.

  • The Department for Energy Security and Net Zero (DESNEZ) reviews the market fundamentals through its Review of Electricity Market Arrangements (REMA).

  • ofgem is reforming the process of how applications for grid connections are processed and is also reviewing the charging mechanism that pays for the electricity grid.

Connection Reform

ofgem announced that 7GW of stalled projects have already been removed from the connection queue, and 45GW of projects have been accelerated. However, they expect the overall queue to grow to 800GW by the end of this year.

The proposed new queue management process would require applicants to:

  • have a letter of authority from a landowner for grid applications.

  • demonstrate a certain degree of “readiness” before they can enter the queue.

  • meet progress milestones to keep their connection offer.

ofgem’s connection reform is independent of The Energy System Operator (ESO)’s transmission build-out.

REMA & Transmission Charging Reform

Source: DESNEZ

DESNEZ considers all remaining REMA options as credible. The target is to produce a white paper by the summer of 2025 with recommendations for the government. But this timeline depends on the outcome of the next general election.

ofgem is working on various reform options, but no significant changes will be implemented before the REMA process has been completed, as it is not clear whether we will keep the national price market or transition to a zonal price market.

Transmission Charging Update

Source: ofgem

The current TNUoS is no longer fit for purpose, as it doesn’t consider network constraints.

ofgem also acknowledged during the event that they need to be more transparent around the whole reform process.

Any TNUoS reform needs to achieve:

  • cover the maintenance and upgrade of the transmission infrastructure.

  • keep a cap on the average TNUoS charges.

  • send locational, but not operational, signals to generators (forward-looking to signal to market participants on where to plan new generation capacity).

  • become more predictable for generators.

  • move to half-hourly settlement periods.

High-Level Options under consideration are:

  • Light touch reforms → reduce volatility and link charges to future network representation.

  • Reformed cost drivers → Significant changes to the existing “transport model” to consider constraints or spare capacity.

  • Deeper connection charges → predictable and locationally specific charges from deeper connections.

  • Postage stamp TNUoS → Flat TNUOS charges suitable in scenarios with very strong locational signals from other sources.

Distribution Charging Update

Source: ofgem

DUoS charges face problems similar to TNUoS charges and need to be reformed. The reform process is only starting.

The near-term priority is to fix the pricing mechanism to prevent costs that are too high or negative charges.

A separate consultation is planned for May/June 2024 for the longer-term reform process.