Ask the expert: Pricing Manager Ian Chadwick
Our Pricing Manager Ian is our technical lead on modelling distribution charges. Today, he’s shared his insight into the world of DUoS charges.
What are the different elements that make up a customer’s electricity bill?
A customer’s electricity bill is made up of multiple elements. Unsurprisingly, the largest contributor is the cost of the electricity, which is bought by suppliers from electricity generators on the wholesale market.
Electricity is typically generated many miles away from the end user’s property, so another cost is also included in the bill: Use of System charges. Other costs that are built into the bill are the supplier’s overheads and any applicable levies or taxes.
What are Use of System charges?
Use of System charges, split between Transmission Network Use of System (TNUoS) charges and Distribution Use of System (DUoS) charges, are the revenues that network operators are allowed to collect to build, operate, maintain and invest in the networks that deliver electricity from the generation plant all the way to the end user.
DUoS is paid by all customers that are connected to the distribution network (132kV and under), whether that be a home or business.
TNUoS is only paid by a few select customer groups for connecting directly to the transmission network (over 132kV), such as generators or larger commercial customers.
How does a customer pay DUoS charges?
All customers, from householders to commercial and industrial users, pay their energy supplier to receive electricity the exact moment when they need it; from flicking the light switch on in the morning and having instant light, to using the kettle in the Emmerdale ad break for a refreshing drink.
The supplier builds the cost of the DUoS and TNUoS charges into the customer's tariff.
For customers on our network, the money collected from this charge is split between us and the regional distribution network operator.
How does an IDNO make money?
Just like the end customer, independent network operators like us are charged DUoS too, but we pay this directly to the regional distribution network operator (DNO) and not through a supplier.
In simple terms, an IDNO charges the end customer the DUoS charges applicable for that connection. Then depending on where the IDNO connects to the DNO’s network, the DNO will apply a second layer tariff and invoice the IDNO directly for their share of the costs total.
In essence, an IDNO acts as the middleman, collecting the full DUoS revenue from the customer and then passing a slightly smaller amount back to the DNO.
As an IDNO, we make money from the difference between what we charge vs what we get charged. This retained IDNO portion is typically equivalent to between 20% and 35% of the full DUoS revenue (or around 4% of the total electricity bill).
Is there more than one type of DUoS tariff?
Yes, when you connect to an IDNO at 11kV or 6.6kV (away from the ACB) or lower voltages, we will apply the same DUoS tariffs as a DNO. The cost to the end user remains the same regardless of which IDNO is appointed. This method is via the Common Distribution Charging Methodology (CDCM).
If a user connects above at 11kV or 6.6kV (at the ACB) or above, the charging structure changes to a site-specific tariff which is calculated individually for each connection metered at these voltage levels. The charges calculated are heavily dependent on the sole-use assets being adopted by the DNO or IDNO. This method is via the EHV Distribution Charging Methodology (EDCM).
What is a Common Distribution Charging Methodology (CDCM) tariff?
Domestic customers, small businesses, and light commercial and industrial users are charged for using the electricity distribution network in line with the Common Distribution Charging Methodology tariffs.
The CDCM tariff is applied when the metering voltage is at either HV or LV. There are a number of tariffs under the CDCM methodology, and the appropriate tariff for the customer is determined based on the metered voltage, and how much electricity you use.
There are 24 import and 8 export tariffs covering low voltage, low voltage substations, and high voltage connections.
Depending on the tariff, the charges may include unit rates, a fixed charge, a capacity charge and a reactive power charge.
The unit rates are split into red, amber and green time bands, and cover all hours in a day, every day of the year.
The red time band covers the network’s peak demand times and has higher use of system charges, whereas green is the super off-peak period when demand is at its lowest.
What is an Extra High Voltage Distribution Charging Methodology (EDCM) tariff?
Heavy users of electricity, such as battery storage sites, manufacturing plants, and data centres are charged for using the electricity distribution network in line with the EHV Distribution Charging Methodology.
EDCM tariffs are made up of three elements: a capacity charge, a fixed charge and a super red unit rate.
Unlike the CDCM tariffs that are applied to homes and less-intensive energy users, sites on EDCM tariffs are only charged a unit rate during peak hours during the winter. Unit charges aren’t applied at other times of the year.
Will customers pay more using an IDNO than a traditional regional DNO?
For CDCM customers – including householders, small businesses and anyone else connected up to the 11kV – our regulatory licence commits us to mirror the charges that the regional DNO set. You will pay exactly the same amount for your connection through any IDNO or direct with the DNO.
For EDCM customers, as these are customer specific and calculated based on the assets adopted, the charges set by a DNO vs IDNO will never match. We do try to always set our charges in line with the DNO equivalent if a like-for-like charge is provided to us, however, this information isn’t always available.
We’ve agreed our calculation methodology with the regulator Ofgem and our methodology is published on our website. There are strict parameters we work with, and will always be upfront with our customers so they know what to expect before they commit to going with us vs the DNO directly.
What is the most common misconception about network operators?
The biggest one is the belief that we control the electricity we are delivering or own it ourselves. As a network operator, we simply facilitate its transport. We provide a route for electricity to travel between destinations and our responsibility is to ensure that route remains intact and can handle the volume required.
Are there any industry-wide methodology developments in the pipeline?
There are far too many to list them all, and I am sure readers are already on the verge of nodding off, so I’ll highlight the main one.
Marketwide Half Hourly Settlement, or MHHS, is a big industry shakeup and is on the back of the smart metering rollout.
For our customers, this will potentially allow them to get true time-of-day tariffs from their supplier with beneficial tariffs tailored to their needs. Think economy 7, but with a far bigger impact on individuals. For example, reducing energy consumption at peak times can be incentivised in your tariffs directly.