Distribution Charges Overview
Everyone’s electricity bill contains an element of charge to cover electricity distribution costs. Typically this distribution charge accounts for about 15% of the overall electricity bill. The distribution charge covers the cost of operating and maintaining a safe and reliable electricity infrastructure between the transmission system and end users such as homes and businesses. The electricity infrastructure includes overhead lines, underground cables, as well as substations and transformers. These networks are owned and operated by the Distribution Network Operators (DNO's).
DNO's tend to have a monopoly over electricity distribution in their area, so they are subject to strict price control regulations. These price controls are administered and reviewed by the energy industry regulator, Ofgem. Price controls are reviewed and set for eight year periods. These reviews determine how much distribution network operators can invest in their networks, and how much income they can collect from distribution charges over the period.
Allowed revenue to DUoS (Distribution Use of System) tariffs
Distribution Network Operators (DNOs) are set an Allowed Revenue to cover a price control period. The Allowed Revenue is set at a level to cover most aspects of the DNOs on-going business including maintaining, repairing and replacing network assets. It also includes the costs of reinforcing some network assets. However, the Allowed Revenue does not include costs directly paid for by customers, such as those for new connections.
The boundary between the on-going costs in the Allowed Revenue and those directly paid for is called the Connection and Use of System Boundary. This boundary is currently set at what is termed a ‘shallowish’ boundary and it is the same for both demand and generation users. The ‘shallowish’ boundary essentially means that new connections are required to pay for the assets required to connect them to the network and, where required, to contribute towards the reinforcement of the existing network.
The Allowed Revenue is mainly recovered from the electricity suppliers who use the electricity networks to distribute energy to their customers. The Allowed Revenue is collected through the application of Distribution Use of System (DUoS) tariffs. These charges are then recovered from end users as part of their total energy bill. A smaller proportion of the Allowed Revenue is recovered from other network operators that have their own networks embedded and use part of the DNOs network.
The DUoS tariffs are calculated using a combination of two charging methodologies. The first methodology is called the Common Distribution Charging Methodology (CDCM) and it is used to calculate charges to users who are connected to the LV and HV levels of the network. The second methodology is the EHV Distribution Charging Methodology (EDCM) and it is used to calculate site specific charges to users who are connected to the EHV levels of the network.
The methodologies are incorporated into the Distribution Connection and Use of System Agreement (DCUSA). This agreement governs the contractual relationship between DNOs and users of the networks. This agreement also sets out the methodologies and the procedure for interested parties to propose changes.
Pricing process overview
The method for determining tariffs starts with the level of the Allowed Revenue which is required to be collected. This annual Allowed Revenue is then entered into the CDCM and EDCM models, along with other inputs to create the DUoS tariffs.
The DUoS tariffs are then charged to suppliers and the charges collected during the year. The charges collected will not exactly match the Allowed Revenue due to the difference between estimated consumption and actual consumption, and other factors. The difference, over/under recovery, then becomes a factor in the following year’s revenue calculation.
Both the CDCM and EDCM are common charging methodologies that are used across Great Britain by all DNOs. The methodologies were developed through joint collaboration between DNOs, Ofgem and interested stakeholders. The CDCM was implemented in April 2010 for both demand and generation users connected at LV and HV. The EDCM was implemented in April 2012 for demand users connected at EHV and in April 2013 for generation users connected at EHV.
While the methodologies are identical across all DNOs the inputs to the methodologies reflect the characteristics of the network and the number and characteristics of consumers in each DNO area.
Charging commonality has brought a number of benefits to Suppliers and other users of the distribution networks. The biggest benefits have been:
- the move from more than seven different charging methodologies for LV / HV tariffs and site specific charges to one for HV / LV and site specific,
- the consolidation of more than seven sets of tariff structures including many legacy tariffs to one condensed set of common tariff structures,
- The incorporation of the charging methodologies into DCUSA so that any interested parties can bring forward change proposals through the governance process.
Since the incorporation of the methodologies interested parties have initiated change proposals. These proposals have been progressed to bring further enhancements to the methodologies including changes to reduce volatility in the movement of tariffs from one year to the next.
If you have any queries please contact the individual distribution network operators (DNOs).
Please see below links for each DNOs charging information: