Written evidence submitted by National Grid (WIN0042)

The energy price shock during winter 2022-23 was unprecedented and had far-reaching consequences across the industry and for all consumers. National Grid’s UK businesses played – and continue to play – an integral role in ensuring secure supplies of energy for Britain: at times during winter 2022-23 our interconnectors were supplying approximately 20% of electricity demand and the Isle of Grain LNG import facility had record flows of LNG, at times also meeting around 20% of demand. At the same time, our electricity transmission and distribution network businesses took steps to ensure their assets were available, reliable and resilient in the face of increased demand during the coldest months of the year.  

In light of the challenging impact the energy price crisis has had for consumers, particularly the most vulnerable members of society, we took a series of measures to help alleviate some of the pressures on households, including establishing a £50 million energy support fund, which has so far helped 30,000 households through the energy crisis.  

This response provides our views on a number of questions raised in the inquiry which are relevant to National Grid or on which National Grid has an interest.

  1. What role did the UK grid play in the high domestic prices of winter 2022-23?

All charges are stated per customer per year at 3100 kWh and the source for the data is Ofgem’s Default tariff cap level: 1 April 2023 to 30 June 2023[1].

Network charges played only a minor role in the increase in the consumer bill in the price spike period of Winter 2022/23.

Electricity Network charges are made up of:

(i)                  Transmission Network Use of System (TNUoS) charges, which recover the annual cost of the provision, maintenance, and upgrade/expansion of the transmission system;

(ii)                Balancing Services Use of System (BSUoS) charges, through which National Grid Electricity System Operator (ESO) recovers costs associated with balancing the transmission network; and

(iii)               Distribution Use of System (DUoS) charges which is how Distribution Network Operators (DNOs) recover their allowed revenue from customers.

The Electricity Network charges were at around £135-153 for a typical user in the period Apr 2019-Sep 2021 (note, total average electricity bill was c.£500-650). This rose by around £65 to about £207 for a typical user in Winter 2022/23 (note, total average electricity bill was c.£1,690-2,150). See further Figure 1 below.

The majority of the increase was in DUoS, where charges increased by around £45 for average consumers, from about £80-85 in 2019-2021 to £130 per customer in Winter 2022/23. This was in major part because of the inclusion of Supplier of Last Resort’ (SoLR) costs in DUoS. When an energy supplier fails, Ofgem may appoint a SoLR for the customers of that failed supplier and there is an industry process which enables a SoLR to seek to recover additional costs they face in supplying these customers (known as a ‘Last Resort Supply Payment’). These costs are recovered through DUoS and is no reflection on the performance of or investment in the distribution networks.

TNUoS changed very little in the period for the average customer, remaining around £40-45.

BSUoS costs increased from less than £10/customer to over £25/customer for the winter of 2022/23. This increase was predominantly linked to increased constraint costs (payments made to generators to reduce their output when the network cannot physically transfer the power from one region to another), which increased as a result of both an increase of renewable volumes being constrained and significantly higher bidding costs from thermal plants when they were needed to be activated for system balancing[2].

Figure 1: Historic typical uncapped consumer electricity bill breakdown
(£/customer/year, nominal terms) (Source: Ofgem)

  1. What more could have been done to prevent price shocks being passed to consumer bills?

N/A

  1. How should energy companies respond if customers cannot pay their bills and what actions should they not have recourse to?

N/A

  1. Has Ofgem got its priorities right in addressing customer protection?

We think it is important that Ofgem ensures it strikes an appropriate balance between protecting both current and future consumers. The energy crisis over winter 22/23 was unprecedented, and Ofgem took the right actions to implement and enforce the support schemes available for consumers. It is important that short-term actions are carried out in parallel to longer-term actions, which are crucial to delivering a secure, resilient and decarbonised energy system and which will unlock significant benefits for consumers, broader society and our natural environment.

Supporting investment at pace in both the building out of new network infrastructure and the upgrading and uprating of the existing networks required to support the government’s 2030 (50GW of offshore wind), 2035 (decarbonised energy system) and 2050 (net zero economy) net zero targets is key. Investment is critical to ensuring our networks can meet the significant increased demand for electricity forecast for the coming decades and remaining resilient to the impacts of climate change and other threats, such as cyber. This will not only enable customers to have a long-term secure, resilient and decarbonised energy system, but also ensure there is sufficient network capacity to support their own transitions to net zero, such as adopting heat pumps, EVs and other low-carbon technologies.

  1. How effective is the Government's approach towards supporting the sector and delivering a functioning energy market?

The Government protected customers from the worst extent of energy price volatility through the energy price guarantee and other support schemes, which we think was the right thing to do in order to protect consumers from the worst impacts of the energy crisis. As Government considers its long-term approach to the energy transition, it should ensure that the most vulnerable in society are protected.

The Government is currently undertaking the Review of Electricity Market Arrangements (REMA) and has recently announced plans to strengthen the retail energy market[3], including a call for evidence towards a more innovative energy retail market. We welcome the reviews being carried out by government and think it is important that market reforms are looked at holistically.

Some of the reforms under consideration for REMA will take time to implement and therefore need to be assessed against the challenges we think will exist in 2035, not those of today. 

For example, we are concerned about the option of Locational Marginal Pricing (LMP) as we are not convinced that the case has been made of the benefits which could be derived at this stage of power decarbonisation. LMP also risks undermining investment right at the point we need investors to have confidence to invest at pace to support the energy transition. 

Therefore, we consider there to be alternative low-regret’ / medium-term measures to address the system challenges and achieve locational signals. These include, but are not limited to, reforms to network charging regimes (i.e. Transmission Network Use of System), changes to the Balancing Market as well as wider use of the ESO’s constraint market and Contracts for Difference mechanism. Such measures could be implemented quicker and will derive benefits for consumers earlier. They could also avoid market uncertainty and are less complex and costly to implement. 

We were disappointed to see that the recent energy retail market call for evidence did not include plans for a social tariff, which we believe should be developed at pace ahead of the coming winter and would be a sensible option to provide targeted support to the most vulnerable.

Demand flexibility is also a route to cost savings for individual households at the same time as helping reduce costs and improve energy security at a system-wide level. It will be an important component of achieving a 2035 decarbonised electricity system (alongside other flexibility options), and government should accelerate and prioritise retail market reforms that unlock this opportunity, including the building blocks underpinning this: such as completing the smart meter rollout and setting a backstop date for all suppliers to opt-in to half hourly settlement.

It is important that any changes to the market are considered fully, together with the industry and key stakeholders, to ensure that there are no unintended consequences of the reforms. Continued investment at pace in the energy transition must progress alongside the market reviews.

 

  1. Is the legislative framework on pricing controls suitable for protecting consumers?

N/A

 

August 2023

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[1] Default tariff cap level: 1 April 2023 to 30 June 2023 | Ofgem. Network breakdown is Annex 3

[2] BSUoS costs will increase further during summer 2023; because BSUoS is now set in advance, an under-recovery in a given period is made good in subsequent periods, which is the case for Summer 2023.

[3] DESNZ Press release : Innovation at heart of plans to strengthen retail energy market July 2023