Ofgem confirms gas charging reforms will be implemented in October despite criticism from business leaders

What are the changes?

The "short-haul tariff" which has been in place for two decades and is based on how far gas must travel will be replaced.

The new plans are a considerable change from the current regime. Rather than commodity-based charging, the new plans will shift to revenue recovery being capacity-based and would see a single entry and exit tariff being introduced at each entry point regardless of the location.

According to Ofgem, this method could significantly reduce variable fees for entry into the national transmission system. However, some businesses have complained that the new tariffs will cost them millions and impact their competitiveness.

Businesses operating in Tyneside, in particular, are concerned as currently, Tees Valley companies pay less because of their proximity to the North Sea.

"We have invested in Teesside for the long-term and are doing everything we can to develop Teesside into the UK’s leading low carbon energy and industrial cluster – bringing in more foreign investment and creating more jobs. This proposed course of action would jeopardise our growth plans for the area and hit Teesside’s existing businesses as well," said Nomi Ahmad, head of Sembcorp Energy UK.

During the consultation period, Ofgem had initially rejected all proposals that included a short-haul tariff because they did not meet the legal requirement of avoiding undue cross-subsidisation.

EU Regulations despite Brexit

The new tariff is to be brought in to comply with new EU regulations despite the UK’s departure from the bloc in January. Due to the UK’s gas infrastructure being closely tied to Europe’s the energy sector remains closely linked to changes to rules and regulations made across the EU.

Despite this, there is anger among some that Ofgem is heeding the new EU regulations needlessly.

“This is not protecting the interests of a significant tranche of gas consumers in the northeast of England – firms that make a substantial contribution to the national and regional economy in terms of the export value of the products they make. Driving through this change to meet EU regulations after we have left the EU, is illogical, especially given the severity of the regional impact for key manufacturing industry,” said Labour MP Alex Cunnigham.

Ofgem said that is has a statutory duty to implement EU law, and the network code on harmonised transmission tariffs (NC TAR) should have already been fully effective by 31 May 2019.

No delay despite Covid-19 concerns

Many energy companies and stakeholders have called for a delay to the changes due to the serious impacts of the Covid-19 pandemic.

Many are struggling to stay on top of their workloads already with several complaining that implementing new regulations are an extra challenge to add to their already high financial and administrative burdens.

Others have argued that the increase in charges because of the removal of the short-haul discount and the low demand because of the pandemic will result in ‘significant financial stress’ due to some companies having cash flow difficulties that could spread across the supply chain to gas shippers. 

Ofgem defends its decision 

An Ofgem spokesperson said: “We published our Minded to Decision and Draft Impact Assessment in December 2019 to implement reforms to gas transmission charging on 1 October 2020, which we are legally required to do and which will deliver large savings to energy consumers.

"These changes will deliver significant savings to both gas and electricity consumers; our modelling shows that these benefits will be over £3bn over ten years. 

"Delaying the implementation of this decision would delay these benefits, meaning higher bills than would have otherwise been for most consumers in the coming year.

"We have carefully considered the implementation timing for this decision in light of the COVID-19 pandemic and have concluded it is still in consumers’ interests to proceed with implementation in October. We set out our consideration of COVID-19 in the decision."

"We understand that industry will bring forward alternatives, and we will consider these, looking to avoid inefficient duplication of the gas network which would increase costs overall."

Further Reading

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