What is the targeted charging review?

The Targeted Charging Review (TCR) is a significant reform by Ofgem, the UK's energy regulator, designed to change how electricity network charges are recovered in Great Britain. It fundamentally alters how the fixed costs of maintaining and operating the UK's electricity grid are distributed among all users. This shift moves away from a largely volume-based charging system towards a more fixed methodology, aiming for a fairer allocation of these essential infrastructure costs.

Understanding complex energy reforms like the TCR is crucial for managing your home's energy. Fuse Energy is committed to making energy simple and transparent for residential customers. Click here to see how Fuse can help you take control of your energy bills.

Understanding the targeted charging review (TCR)

What is the TCR?

The TCR is a regulatory programme initiated by Ofgem to restructure how existing electricity network charges are levied. It is not a new tax, but a change in how the costs for using the transmission and distribution networks are allocated. These charges, known as Distribution Use of System (DUoS) and Transmission Network Use of System (TNUoS) charges, cover the expenses of transporting energy from generation sources to end-users. Historically, these charges were largely dependent on the amount of electricity consumed or exported. The TCR introduces a more fixed approach to ensure a more equitable distribution of these costs.

Why was the TCR introduced?

Ofgem introduced the TCR to address perceived unfairness and inefficiencies within the previous charging system. The regulator was concerned that the old framework for recovering costs led to inefficient use of networks and potentially unfair outcomes for consumers. For example, some large energy users could reduce their network charges by altering consumption patterns during peak times - a practice known as "Triad avoidance" - which meant other network users had to cover the shortfall. This created market distortions and incentivised behaviours that did not necessarily reduce overall network costs.

Key objectives of the reform

The primary objectives of the TCR are multifaceted, aiming to create a more robust and equitable energy system. These include:

• Removing harmful distortions: The previous system encouraged some network users to reduce their residual charges, which could inadvertently increase overall network system costs.
• Creating a level playing field: The reforms seek to ensure that all types of generators and network users face fair charges for connecting to and using the networks.
• Improving fairness: A core goal is to allocate costs more equitably among all electricity consumers, including households.
• Promoting efficient network use: The TCR encourages efficient utilisation of the electricity grid, ensuring that all users contribute appropriately to its maintenance and operation.

How the TCR changes network charges

The TCR primarily impacts the methodologies for Transmission Network Use of System (TNUoS) and Distribution Use of System (DUoS) charges, which are significant components of an electricity bill.

Impact on distribution use of system (DUoS) charges

From April 2022, DUoS charges became more fixed, with a greater proportion of costs recovered through daily charges rather than solely consumption-based rates. While the Red, Amber, and Green charging methodology for consumption-based charges continues, the overall cost of these unit rates has decreased. Conversely, daily DUoS charges have increased, particularly for those with higher Available Supply Capacity (ASC). This means that the fixed daily component now plays a larger role in covering the costs of operating and maintaining regional electricity networks.

Impact on transmission network use of system (TNUoS) charges

Historically, TNUoS charges for half-hourly metered customers were determined by their demand during the three highest peaks in national electricity demand over winter, known as Triad periods. Businesses with flexible operations could reduce consumption during these periods to minimise costs. Under the TCR, this Triad-based approach has been largely scrapped. From April 2023, the majority of TNUoS charges became fixed, based on a site's peak demand band rather than being volume-based. This aims to ensure a more consistent contribution to the costs of installing and maintaining the national transmission system.

Residual vs forward-looking charges explained

Electricity network charges are typically split into two main components: residual and forward-looking charges.

• Residual charges are essentially the fixed overhead costs for running the existing network, covering the maintenance and operation of current infrastructure. The TCR primarily targets these residual charges, which account for approximately 90% of TNUoS costs and roughly half of DUoS costs.
• Forward-looking charges cover future network costs, such as investments in expanding and upgrading the grid. These charges are designed to send signals to users about the effect of their behaviour, encouraging efficient network use. The TCR's reforms focus predominantly on the residual component, shifting how these fixed costs are recovered.

Who is affected by the TCR?

The TCR impacts all electricity users in Great Britain, from individual households to large industrial consumers and those generating their own power.

Implications for energy consumers

Households may see changes in their electricity bills due to the shift from consumption-based charges to fixed charges, which are often integrated into the standing charge. While the overall aim is fairer cost distribution, some low-using consumers might experience an increase in their bills, while high-using consumers could see a decrease. This change means that a greater proportion of network costs are now recovered through fixed daily charges, regardless of the amount of energy consumed.

Impact on businesses and industrial users

For many businesses, the TCR has led to an increase in fixed standing charges, potentially offset by a reduction in unit rates. Businesses are now allocated to charging bands based on factors like agreed capacity or annual consumption, which determines their fixed daily contribution to TNUoS and DUoS costs. Organisations that previously flexed their operations to reduce energy use during peak times (load shifting) or used on-site generation to avoid Triads are expected to be significantly impacted, as the ability to reduce these charges through such actions has been diminished.

Effects on distributed generation and storage

The TCR reforms have also impacted those with distributed generation, such as solar panels and battery storage. Changes included setting the Transmission Generation Residual to zero and removing certain "embedded benefits" that allowed suppliers to reduce their liability for balancing services charges by contracting with small distributed generators. These reforms aim to remove market distortions and ensure that all generators contribute fairly to network costs, regardless of their connection size or location.

Changes for electric vehicle owners

Electric vehicle (EV) owners, as electricity consumers, are also implicitly affected by the TCR. While not specifically targeted, the shift towards more fixed network charges means that the cost components of their electricity bills, including those for EV charging, will reflect the new structure. Understanding these changes can help EV owners make informed decisions about their charging patterns and energy tariffs.

Navigating the TCR: strategic considerations

The TCR represents a fundamental shift in energy charging, requiring adaptation and offering new opportunities.

Adapting to new charging structures

The move from volume-based to fixed network charges means that traditional strategies for managing energy costs, such as reducing consumption during peak periods, may be less effective for mitigating network charges. Energy users, particularly businesses, need to review their energy consumption patterns and potentially their contractual arrangements. Understanding their TCR band and ASC is crucial for managing costs under the new system.

Opportunities for innovation and investment

Despite the challenges, the TCR can foster innovation. By creating a more level playing field and reducing distortions, it encourages more efficient use of the grid. This could drive investment in technologies and strategies that genuinely reduce overall system costs or enhance grid flexibility, rather than just avoiding charges. The long-term goal is to adapt the electricity network to the changing energy landscape, promoting a more sustainable and efficient system.

The TCR's role in a future energy system

The TCR is a step towards modernising the electricity network, ensuring a fairer allocation of costs for both businesses and consumers. While the implementation has been staged, with DUoS changes in April 2022 and TNUoS changes in April 2023, it is part of a broader evolution of the energy market. These reforms lay groundwork for a more robust and sustainable energy system, aligning with the transition to a low-carbon future.

Fuse Energy's perspective on TCR

At Fuse Energy, we believe that understanding complex regulatory changes like the TCR is essential for everyone involved in the energy market.

Demystifying complex energy reforms

The energy landscape can be intricate, filled with jargon and technical details. Fuse Energy aims to be the "adult in the room," translating complex regulatory information into clear, actionable insights. We provide data-backed, rigorous explanations of mechanisms like the TCR, demystifying these changes so our audience can make informed decisions.

Empowering customers with knowledge

Understanding the TCR empowers residential customers to make informed decisions about their energy usage and investments. By providing clear explanations of how these reforms impact network charges, Fuse Energy helps shift the balance of power into the hands of our residential customers. This knowledge is crucial for navigating the evolving energy market and adapting to new charging structures effectively.

Building a fairer, more abundant energy future

The TCR challenges existing, potentially inefficient network charging structures, aligning with Fuse Energy's commitment to never settling for outdated or unfair energy systems. By explaining how the TCR impacts network charges, we can show how these reforms contribute to the broader goal of creating a more abundant and fairer energy system, where energy is a resource to be played with, not feared.

The energy market is constantly evolving, and staying informed is key to making the best choices for your home. Fuse Energy is here to simplify your energy experience with clear pricing, real-time usage data, and 24/7 human customer support. We believe in empowering you to take control of your energy.

Ready to switch to an energy supplier that puts you first? Click here to switch to Fuse Energy today. You can also learn more about our mission to build a future with abundant energy by clicking here.