Consultation outcome

Government response: British Industry Supercharger Network Charging Compensation Scheme

Updated 11 October 2023

1. Rationale for the Consultation

On 23 February 2023, the government announced the British Industry Supercharger (BIS): a decisive set of measures to make Britain’s strategic Energy Intensive Industries (EIIs) more competitive across Europe and tackle the challenge of indirect carbon leakage and the risk of that the policy costs imposed on EIIs could lead to the displacement of production, and associated emissions.

The BIS is comprised of 3 measures which will together address the areas of the domestic energy system which currently contribute to higher electricity costs for EIIs than comparable countries. The 3 measures are as follows:

• an increase in the subsidy under the existing EII Renewable Levy Exemption scheme from 85% to 100% aid intensity
• a new full exemption from the indirect costs associated with the GB Capacity Market
• a proposed compensation scheme for the charges paid for using the GB electricity grid through the EII Network Charging Compensation (NCC) Scheme

This consultation addressed the third of the 3 elements of the BIS package, and this document provides the government response and next steps for the measure to compensate EIIs from a portion of their network charging costs.

2. Summary of the Consultation

The consultation was published on 29 June 2023 by the Department for Business and Trade (DBT) and sought views on compensating EIIs for a portion of their network charges.

Through the consultation, DBT sought views and evidence from a wide range of audiences, including EIIs (whether currently benefitting or not from the existing Exemption Scheme), other electricity consumers, trade bodies, energy suppliers, consumer associations, the devolved administrations, and other interested parties.

DBT sought views on:

• the design of the proposed NCC Scheme
• evidence of impact on suppliers
• the impact of the design on other, non-domestic consumers

Stakeholders were provided with an opportunity to provide their views and evidence to the questions posed.

This consultation was available on the GOV.UK website and was emailed directly to a number of stakeholders who had previously expressed an interest in this issue or could be perceived as an interested party.

The consultation ran for 8 weeks and closed on 24 August 2023. A total of 29 responses were received from stakeholders, including EII companies, business representative organisations, trade associations, energy suppliers and others. Overall, responses represented the views of over 2000 organisations, when taking into account bodies who answered on behalf of multiple members. This document provides a full government response after analysing all the responses. Responses captured in this document refer to “respondents”, whereby each individual response submitted has equal standing, regardless of whether this was received on behalf of a trade body or an individual company.

This government response sets out the proposed policy change to compensate EIIs who meet the eligibility criteria from a portion of the costs that is associated with the use of the network.

3. Policy Executive Summary

This section sets out a high-level summary of the policy design of the NCC Scheme and EII Support Levy.

Eligibility for the NCC Scheme is contingent upon an EII holding a valid EII Exemption Scheme certificate. This is issued by the government to eligible EIIs to demonstrate they qualify for the EII Exemption Scheme, and the other British Industry Supercharger measures once these schemes commence.

The NCC Scheme will offer EIIs 60% compensation on eligible network charging costs.

As the NCC Scheme is funded via the EII Support Levy, compensation will be paid out to EIIs in arrears once the funds have been raised via the Levy. EIIs will be required to provide evidence of the network charges they have incurred, which will be used to calculate the necessary obligation to be raised from suppliers via the levy.

This means that network costs incurred by an EII in April 2024 will be compensated in 2025 after the necessary funding is raised via the Levy. Certain elements of scheme design require input from the scheme administrator. Once appointed, government will work with them to determine whether quarterly compensation payments work, or whether a more regular cycle that tracks the monthly levy collection would be more feasible. In any event, the burden to EIIs in terms of supplying evidence of costs incurred will be on a quarterly cycle. At the latest, EIIs could expect their first compensation payment to be made at the end of the first quarter after the commencement of the Scheme.

Figure A has been provided below to demonstrate the operation of the schemes:

3.1 Figure A

A close-up of a calendar outlining the timeline for the operation of the scheme. It has ‘2024’ on the left of the figure and ‘2025’ in the centre. Beneath these is a line which goes from the left to the right with three arrows to signify the time lapse between 2024 and 2025. Under this line are 5 sections which are separated by 4 vertical lines. The first of these sections is headed with ‘April 2024’ and is captioned ‘network costs eligible for compensation from 1st April’. The three arrows on the top line signifies the time jump to the second section which has a heading of ‘April 2025’ and is captioned as “commencement of NCC Scheme and EII Support Levy”. There is a second caption which reads “April 25 Monthly levy obligation to cover compensation for April 2024 network costs”. The third section has a heading of ‘May 2025’ with a caption of “May 25 monthly levy obligation to cover compensation for May 2024 network costs”. The fourth section follows with the heading of ‘June 2025’ and a subsequent caption of “June 25 monthly levy obligation to cover compensation for June 2024 network costs”. The final section highlights the end of the first quarter in 2025 with a heading of ‘July 2025’ and has two captions. The first reads “July 25 monthly levy obligation to cover compensation for July 2024 network costs” and the second states “EIIs compensated for April-June 2024 network costs (subject to administrator)”.

4. Evidence from the Consultation

In summarising the responses received to each question, “most” or “many” indicates more than 70%, “the majority” indicates more than 50%, “some” indicates between 30% and 50% and “a few” represents less than 30% of respondents. When considering the summaries of responses, please also note that:

• this summary does not seek to exhaustively capture all views expressed, but to summarise key themes and particularly notable points of feedback within response
• respondents used either an online response portal or sent their responses by email, and
• not all respondents answered every question

The government engaged closely with directly concerned parties throughout the consultation period to explain and clarify the proposals and support respondents in developing their submissions. Views expressed during these events are not captured in this response, however, we have factored these into our decision making and next steps.

5. Proposed timeline for implementation

The government priority for 2023 is the identification and appointment of an administrator for the scheme. We intend to lay a Statutory Instrument in Spring 2024 which will go live from April 2024. In parallel, the government (and administrator once appointed) will engage with electricity suppliers to develop the technical detail of the Levy, culminating in the publication of technical guidance on the Levy in 2024. This should enable the commencement of both the NCC Scheme and the EII Support Levy in April 2025.

6. Government response to the consultation questions

6.1 Network Charging Compensation Scheme Scope

Question 1: Do you agree with the proposal to compensate a proportion of all network charging costs? If not, please provide evidence.

Consultation response

69% of respondents who answered this question agreed with the proposal to compensate a proportion of all network charging costs. They agreed that the proposal would ensure that EIIs located in the GB can compete on a level playing field with comparable industries in other countries. Alongside their support many EIIs and trade bodies expressed their suggestion that if the measures are to be successful in addressing the competitive gap, the level of support will need to be set as high as possible and align with the government’s proposal to reduce network charges by £10/MWh.

A few suppliers raised concerns on the government’s proposals pointing to the need to fund this support through general taxation rather than placing a levy requirement on suppliers which may result in additional administrative burden and cashflow issues. A few of the respondents additionally asserted that through the implementation of the support, price signals which are typically used to encourage active demand management will be lost.

Other suppliers expressed broad support for the scheme but have requested that the government provide further clarity on the level of support and the time frame for implementation as soon as possible in order for suppliers to mitigate against any potential cashflow impact they may face.

Government response

The government welcomes the support from the majority of respondents who agree that compensation should be paid on a proportion of all network charging costs. After weighing up the need to balance providing sufficient relief on network charging costs to EIIs against the need to minimise the costs being passed through to other energy users, the government confirms it will provide eligible EIIs with compensation on 60% of their network costs. The government has modelled that the provision of compensation on 60% of network costs would equate to a saving of on average £14/MWh off electricity bills. This is in excess of the £10/MWh in relief that the policy was intending to offer when it was initially developed and modelled. Furthermore, the government has estimated that providing 60% compensation on network costs would ensure that the redistribution of costs of the British Industry Supercharger would not exceed £3 to 5 annually for household consumers and £1/MWh for non-domestic consumers.

The government notes that a number of EIIs recommended over 80 to 90% in compensation, citing international comparisons. However, the government’s view is that the 60% compensation offered will ensure that eligible EIIs will receive an average electricity price reduction of £24 to £31 /MWh once all the measures in the Supercharge are implemented. This level of reduction will bring industrial electricity prices down to an internationally competitive level.

Furthermore, the government confirms that eligibility for the scheme will commence in April 2024, though the launch of the NCC Scheme and EII Support Levy will not commence until April 2025. This means that any network charging costs incurred in April 2024 onwards will be eligible for compensation in arrears from April 2025. The government also recognises the concerns raised by energy suppliers of having ample foresight of levy obligations. By compensating for 2024 network costs in 2025, the government can ensure that suppliers are provided with greater certainty and foresight of projected levy obligations by providing an early forecast of the total monthly obligations.

6.2 Cost Recovery Compensation versus Compensation on all Network Costs

The government notes that a number of respondents expressed concern that providing compensation on all network charging costs might undermine the price signalling inherent in network charging, resulting in inefficient use of the grid by eligible EIIs. These respondents recommended that the government seek to offer compensation on only the cost recovery elements of network charges, ensuring that EIIs receive no relief on the cost reflective elements of network charging that contain price signals that encourage efficient use of the grid.

The government tested the deliverability of this proposal but has rejected it in favour of making all aspects of network charging costs eligible for compensation. The government’s concern was that EIIs pay a range of network charging costs which are determined by a number of factors including geographic location, type of grid connection and annual electricity consumption. Due to this range, any decision to offer compensation on just the cost recovery elements of network charging would result in inequitable relief being provided to EIIs, with some EIIs receiving proportionally fewer benefits than others due to their geographic location or type of grid connection. The government is concerned that the inequitable provision of relief on network charging costs could result in distortions within EII sectors within Great Britain due to certain EIIs potentially benefitting more from the scheme than others. A flat percentage rate of compensation on all network charging costs is the means to ensure all eligible EIIs are treated equitably, minimising the risk of internal sector distortions.

As set out above, the government has agreed to compensate EIIs for 60% of their network charging costs. This ensures that EIIs will receive no relief on 40% of these costs and are incentivised to respond to any locational price signalling inherent within these costs. The government’s view is that this balances the need to provide adequate relief on electricity costs for EIIs whilst maintaining incentives to encourage the efficient use of the electricity network.

The government notes that a limited number of respondents argue that use of system charges are calculated in a way that is designed to be cost-reflective, so that parties planning the location of new demand facilities, or planning production between differently-located sites in their portfolio, can take appropriate account, in analysing their energy costs, of the locational impact of their demand. Whilst the government agrees that cost reflective charges may factor in the location of new demand facilities, it is often not the sole factor for EIIs, who will also consider access to markets, raw materials and supply chains. Furthermore, the NCC Scheme (as part of the wider British Industry Supercharger) is designed to provide relief on electricity prices to foundational industries across GB, many of whom would struggle to relocate manufacturing within GB to respond to electricity network price signals without significant cost and disruption to operations, supply chains and local labour markets.

Question 2: Are there other network charging costs hereby not included within Transmission Network Use of System (TNUoS), Distribution Use of System (DUoS) and Balancing System Use of System (BSUoS) that should be included within the scope of the Network Charging Compensation Scheme? If so, please provide evidence.

Consultation response

70% of respondents who provided an answer to this question agreed that no other network charging costs should be included within the scope of the NCC Scheme. There was broad agreement that the TNUoS, DUoS and BSUoS charges are the itemised costs which appear on the energy supplier bill and can be easily identified.

A couple of EIIs although supporting the government’s proposals to compensate for a proportion of their network charging costs, outlined that National Grid ESO applies annual connection charges and Assistance for Areas with High Electricity Distribution costs (AAHEDC) which are charged indirectly and so requested that the scheme also compensate against these.

Government response

The government welcomes the support from the majority of respondents who agree that compensation should be limited to TNUoS, DUoS and BSUoS charges. The government is conscious that EIIs are subject to a variety of use of system charges and other network related costs. Consequently, the government has concluded that all BSUoS charges, all DUoS charges (including annual connection charges and distribution losses in this context) and all TNUoS charges (including annual connection charges and transmission losses in this context) will be eligible for compensation under the NCC Scheme.

However, the consultation did highlight a series of additional charges which may constitute use of system charges or network-related charges, but which will not be eligible for compensation.

AAHEDC is a charge applied by the Energy System Operator on electricity suppliers, the proceeds of which are passed on to Scottish Hydro Electric Power Distribution Ltd, so distribution charges in the North of Scotland can be reduced. Suppliers pass this charge through to their end customers. This charge is in effect a subsidy to offer relief on network charging costs for consumers in Northern Scotland. As such, compensation will not be paid on AAHEC as this charge falls outside the scope of what the government expects the NCC Scheme to achieve.

Settlement Use of System charges are charges passed through to consumers by suppliers to reconcile any discrepancy between the amount of energy a supplier purchased for its users, and the amount of energy its users actually used (the process also covers generators in a similar way). Given this is not a network use of system charge, it is outside the scope of what the government expects the NCC Scheme to achieve and therefore, compensation will not be paid on these charges.

As set out in the consultation, the NCC Scheme will compensate for network costs incurred through use of the GB National Grid. Any network costs incurred through use of the Northern Irish electricity network are outside the scope of what the government expects this scheme to achieve. As energy policy remains a devolved matter within Northern Ireland, any decision on whether to offer support equivalent to the NCC Scheme within Northern Ireland is a matter for the Northern Irish government.

Question 3: Do you agree with the proposal to not compensate any network charging costs associated with use of the gas network? If not, please provide evidence.

Consultation response

Most respondents (84.2%) agreed with the government’s proposal to not compensate any network charging costs associated with the use of the gas network. There was broad consensus across EII companies, business representative organisations, trade associations and energy suppliers that consideration should be given to incentivising customers behaviour to reduce gas usage and adopt electricity solutions.

Respondents raised additional requests that the government keep this question under review if future decarbonisation costs are levied on gas which causes and increase in price relative to competitors.

6.3 Government response

The government welcomes the support from the majority of respondents who agree that compensation should not be paid on any network charges incurred for use of the gas system. No costs for use of the gas network will be compensated through the NCC Scheme.

Question 4: Do you agree with the proposal to not compensate any costs associated with use of a private wire network (excluding those costs that can be evidenced as passed through network charging costs)? If not, please provide evidence.

Consultation response

Most (81.8%) respondents expressed their support for the proposal to not compensate any cost associated with the use of a private wire network apart from the TNUoS, DUoS and BSUoS charges being passed on to the end-users of a private write network, except – as the consultation document mentions – where an eligible EII is a tenant user. The majority of these respondents made further requests that the government keep this question under review as the use of private wires will become more prevalent in the future as the UK economy electrifies to decarbonise.

A few respondents outlined that NCC scheme should compensate EIIs for their grid-related network costs, irrespective of whether it is private wire or grid-connected as the exclusion of private wire would limit the opportunities for EIIs to consider commercial arrangements which involve private wires and leave them dependent on the grid. A particular comment was expressed that further attention should be paid to whether reducing the costs of network charging disincentivises the use of private wire or disadvantages private wire users competitively.

Government response

The government welcomes the support from the majority of respondents who agree that compensation should not be paid on any costs incurred through the use of a private wire network. The government recognises that a limited number of respondents noted the respective benefits of private wire usage. Private wire networks prove an effective means for certain EIIs to invest in on-site forms of electricity generation, managing their energy costs and aiding in their broader decarbonisation plans.

However, the government recognises also that any commercial decision by an EII to engage in behind the wire generation will result in reduced reliance upon the National Grid. This will likely result in users of private wire networks paying proportionally lower network charges than those solely reliant upon the National Grid. The intent of the NCC Scheme is to offer relief on network charges stemming from use of the National Grid and the costs associated with the operation and usage of a private wire network fall outside this intent and therefore are outside the scope of what the government expects this scheme to achieve.

The government recognises that a limited number of EIIs are tenants of a private wire network and may have National Grid related network costs passed through to them by the private wire operator. The government will work with affected parties to understand passed-through network cost and assess how such costs could be evidenced in order to access compensation.

Question 5: Do you agree with the proposal to not compensate any costs associated with new connections to the electricity network? If not, please provide evidence.

Consultation response

In relation to the proposal to not compensate any associated costs with new connections to the electricity networks, the majority of respondents (70%) expressed that they agree with the government’s proposal.

The view of suppliers was that costs of establishing new connections should not be included as to do so would unduly distort the competitive cost base of existing versus new eligible network users. Other suppliers, although mostly supportive of not compensating for the costs of new connections through this scheme, believes this can be funded through another mechanism. A similar approach is expressed by EIIs who noted that many EIIs will need to electrify their processes to support stakeholders’ national and international decarbonisation ambitions, and new electrical connections, potentially costly, will be required to support that activity.

A particular respondent outlined that the certain EII sectors’ decarbonisation pathways will lead to significantly higher electricity use if replaced with like-for-like. All decarbonisation technologies are more electro-intensive than current production methods and certain EII sectors will likely need additional grid capacity and new grid connections for their new production equipment.

Government response

The government welcomes the support from the majority of respondents who agree that compensation should not be paid on any costs incurred through the establishment of new grid connections. A limited number of respondents noted the importance of supporting new grid connections for EIIs as justification for expanding the scope of the NCC Scheme to cover these costs. The government recognises the importance of having a timely and cost-effective means of establishing new grid connections in order to support investment, growth and decarbonisation in industry. The government further recognises the financial barriers that EIIs can face in securing new grid connections, either through capex or security costs.

However, the policy intent of the NCC Scheme is to compensate for ongoing network charges, and the costs associated with the establishment of new grid connections fall outside of this scope. Consequently, the costs of establishing new grid connections will not be compensated via the NCC Scheme.

In the event an eligible EII establishes a new grid connection (to connect a new manufacturing facility for example), then any network costs incurred by the new connection would be eligible for compensation under the NCC Scheme from the date the site is covered by an EII Exemption Scheme certificate.

6.4 Network Charging Compensation Scheme Design

Question 6: Do you agree with the proposal to compensate EIIs on a quarterly basis, in arrears, for their network charging costs? If not, what alternatives could UK government consider?

Consultation response

Out of the 25 respondents who answered this question, 23 expressed their support for the government’s proposal to compensate EIIs on a quarterly basis, in arrears, for their network charging costs. The remaining 2 respondents did not disagree, but instead highlighted points of consideration for the government. The most significant of these responses pointed out that compensation should be linked to cashflow and bill payment timing constraints a customer faces into, as agreed with their electricity supplier. A quarterly scheme according to this would be the most suitable, even though a monthly scheme may reduce potential mutualisation costs if this approach is considered. A quarterly scheme was highlighted as better suiting potential challenges with recording and reconciling consumption data and may be less expensive to run.

Trade bodies have also unanimously voiced their agreement of a quarterly compensation cycle. It has been pointed out that while a more frequent submission, such as monthly, would deliver the relief more quickly, there would be a high administrative burden. A less frequent option, such as annual, reduces the administration but to an extent that payments are infrequent and means there is a risk that company staff may change during that time. Other trade bodies have supported the proposal of being paid in arrears as this means that there is certainty over the amounts to be paid, so avoiding the complexity of adjusting payments based on forecasted costs.

Several practical issues were raised by respondents such as the proposal relying on EIIs receiving an itemised breakdown of network charges, which places the onus on EIIs to move to a tariff or supplier that supports this breakdown. They have also outlined that the government will need to be clear on how such charges are to be treated by the administrator and have suggested that EIIs should be reimbursed on an as-billed basis, recognising that this may result in different phasing of Triad-related rebates for different customers.

Government response

The government recognises the need to balance timely and regular compensation whilst minimising the administrative burden for EIIs. In order to seek this balance, the government will require EIIs to submit 3 months of network charging data 4 times a year once the scheme is in operation. The expectation is that the NCC Scheme will be managed by an administrator appointed by the government. The decision on whether payments will be made to EIIs on a monthly or quarterly basis will be a matter for the administrator to determine, subject to what can be delivered.

The government recognises the challenge raised by EIIs of inconsistent itemised billing from energy suppliers, and it encourages suppliers to ensure billing is open and transparent to ensure customers (and especially EIIs) can fully understand their network costs.

6.5 Scope of the levy

Question 7: Do you agree with the rationale and scope for the proposed levy? If not, please provide evidence.

Consultation response

In response to this question, the majority of respondents (52%) voiced their agreement with the rationale and scope of the levy. Some suppliers responding to this question argued that the proposal is unfair as the effect of the levy will be to place additional network costs onto non-EII users, over and above the amount deemed to be appropriate and fair by Ofgem through network charges.

A few suppliers argued that the levy obligation should be passed onto operators as there would be significant risks to the scheme through risks of default when a supplier exits the market. To avoid this, there would have to be substantial amounts of credit cover lodged by suppliers given what the proposal is aiming to achieve, which would create more administrative costs that suppliers would ultimately pass onto consumers.

A few trade bodies raised similar issues, arguing that even though it is imperative for EIIs to be compensated for a portion of their network charging costs, this should be done through alternative mechanisms such as general taxation as they do not believe another levy is the most efficient way to do this. A few respondents, acknowledging the desire of government to levy these costs on suppliers, have stated that rather than creating a new supplier levy for this one obligation there would be value in creating a Universal Levy Obligation where all EII exemptions and compensations are combined. This would reduce complexity and ensure a consistent treatment of the costs.

When considering the government’s position, we have addressed the main points provided by one respondent who was strongly supportive of the government developing an approach for compensating EIIs for a large proportion of network charges. However, based on the information available, they offered the following comments on the design of the levy mechanism:

• Universality: any obligation in respect of the Levy would need to apply to all energy retail suppliers to avoid creating any market distortions.
• Predictability: in the domestic market it is common for suppliers to offer fixed price contracts of up to 2 years duration and in the non-domestic market for up to 3 or 4 years. These longer term fixes are helpful to customers in providing certainty of costs. In order to offer such tariffs suppliers must be able to predict levy costs with confidence over the period of the fix.
• Stability: linked to predictability, it is easier for suppliers to manage risks if the £/MWh levy does not vary significantly from quarter to quarter – as could be the case, for example, if the cost of the subsidy is stable from quarter to quarter, but the cost is recovered over a seasonally varying volume of energy supplied.
• Short lag: There will be a lag between the period in which a supplier’s eligible supply volumes are measured and the period in which it pays a levy based on those supply volumes. The longer this lag, the greater the risk of competitive distortion between suppliers. A rapidly growing supplier may over-recover its costs (or under-cut its rivals by applying a smaller uplift to bills) and vice versa.
• Recoverability through price cap: It will be important that levy amounts are determined on a timetable which dovetails with Ofgem’s timetable for price cap announcements so that they can be fully incorporated into price cap allowances with minimal lag and on a transparent basis.

Government response

The government welcomes the feedback from respondents on the rationale and scope of the proposed levy. As set out in the Consultation, these measures form part of the BIS which as a package is designed to reduce industrial electricity prices for EIIs by redistributing costs around the energy system.

A number of respondents questioned why the government discounted the proposal of exempting EIIs from network charging costs. As set out in the consultation, the government explored the practicality of offering an exemption on grounds that EIIs (with a constant and stable load profile) provide a benefit to the efficient operation of the grid. However, the research concluded that the discounts applied in other European countries do not directly translate into the GB context given the structure of GB charges are different, and as a result some of the justifications for discounts applied in Europe are already reflected in the Cost Reflective elements of network charging costs. Where a Cost Reflective discount could potentially be justified for EIIs in GB, it was found that the complexity involved in implementing it may mean it is not practical, and in any case it is likely to be very small. Furthermore, any intention to develop a bespoke exemption for EIIs from network charging costs would have undermined Ofgem’s role, as the independent regulator, to set and regulate the network charging regime. The government recognises the important role played by Ofgem as the independent regulator responsible for the setting and regulation of the network charging regime, and does not seek to undermine this role nor undertake what would constitute a significant intervention in the network charging regime. The intent and purpose of the NCC Scheme is to offer relief on network charging costs and achieves this goal whilst avoiding unnecessary wider interventions in the network charging regime itself. In order to align with other elements of the BIS, a levy has been proposed as the most effective means of redistributing costs of this measure across the electricity system.

The government commits to the establishment of the EII Support Levy on all licensed electricity suppliers within Great Britain. The Levy will not extend to non-licensed electricity suppliers given the structure of the market and non-licensed nature of its participants would create challenges on applying the proposed levy. Nor would the Levy apply to licensed electricity supplied to Northern Ireland. This includes both licensed electricity suppliers that exclusively supply Northern Ireland and also the proportion of electricity supplied to Northern Ireland by suppliers that supply both Great Britain and Northern Ireland. Northern Ireland is excluded from the levy given the scope of the NCC Scheme does not extend to cover Northern Irish network charges, hence there is no rationale for applying the funding measure to the territory.

6.6 Levy design

Question 8: Do you agree with the rationale of calculating individual supplier’s levy obligations on a volumetric basis? If not, please provide evidence.

Consultation response

73% of respondents answering this question have stated that they agree with the rationale of calculating individual supplier’s levy obligations on a volumetric basis. Those in agreement ranged from suppliers, trade bodies, consultancies and EIIs. The issue which was raised throughout these responses was the importance of stability, with respondents arguing that the chosen design should not be amended and changed to avoid changes to supplier billing systems and to avoid confusion for customers.

It was specified that a volumetric approach is closer aligned to existing technical parameters in billing systems taking into account that most costs are calculated on a volumetric basis. The volumetric approach could also mitigate potential detriment on domestic consumers. A calculation at an MPAN level was highlighted as potentially improving ability to forecast costs on a much more simplified basis and reducing costs for non-domestic consumers, however, the draw-back of this approach would be a potential significant increase in the burden placed on domestic consumers. Other respondents highlighted the importance of stability and requested that whichever design is chosen, that it does not change over time to avoid changes to supplier billing systems and to avoid confusion for customers.

Suppliers in support of the proposed approach raised additional points about the relevant reconciliation process at the end of a scheme year as electricity volume can be revised up to 14 months after the initial submission.

A particular disagreement to the government’s rationale of calculating an individual supplier’s levy obligations on a volumetric basis was raised by a trade body which argued that a per meter point charge is a fairer approach as it would likely minimise costs on other non-EII businesses who would not qualify for the compensation scheme.

Government response

The government welcomes the support from the majority of respondents who agree that the levy should be calculated volumetrically on the basis that this would prove a more equitable means of calculating a supplier’s obligation as opposed to a meter point calculation.

Question 9: How long will electricity suppliers need to incorporate a new levy into their customer billing systems?

Consultation response

The vast majority of responses to this question were from electricity suppliers who expressed that the most important aspect of any implementation will be the sufficient notice of changes to allow suppliers to incorporate their impacts into contracts with customers. Short notice changes have been highlighted as potentially increasing the risk premia and so will ultimately cost consumers more in the long run.

Most suppliers asserted that they are currently pricing fixed-length contracts for some customers out to 3 years ahead. While they can price commodity and known non-commodity costs into those contracts, up to half of their customers are on a form of fixed contract that do not enable them to pass through non-commodity costs that emerge subsequently during the duration of the contract. Therefore, they have expressed their opposition to the introduction of this compensation scheme in early 2024. Similar issues have been raised by a few other suppliers who stated that they anticipate requiring a year to incorporate a new levy into their billing systems. However, suppliers in the non-domestic sector require longer (3 years) as contracts can be agreed up to a year in advance and have length of 2 to 3 years, again highlighting that implementation in 2024 places significant pressures on energy suppliers.

Other suppliers have also expressed concerns with an implementation date of April 2024 citing their need for a minimum of 18 months to implement all required changes in their processes and systems once the final decision has been confirmed. This, they assert is necessary to manage the complexity of the implementation and to avoid putting other activities arising from other major industry projects into jeopardy.

The view of the majority of suppliers responding to this question has been that April 2025 seems to be the earliest any implementation can take place provided that the final details of the scheme are concluded and published with appropriate notice.

Government response

The government recognises that suppliers have provided a range of time periods required to incorporate the new levy into their billing systems. The intent is for both the NCC Scheme and the EII Support Levy to commence in April 2025. The government has noted the concerns raised by suppliers over their ability to pass through costs onto fixed contracts and the time needed to incorporate any new policy costs into billing systems. In order to provide suppliers with sufficient time to adapt their internal billing systems to the new levy, the government proposes the commencement of the EII Levy from April 2025.

The government priority for 2023 is the identification and appointment of an administrator for the scheme. On appointment of an administrator, the government will continue to work with suppliers on the technical operation of the Levy. This will feed into the publication of a detailed technical memorandum on the levy in 2024 to provide suppliers with the necessary technical detail on the operation of the scheme.

Question 10: The intention is to collect the levy on a rolling quarterly basis. Can energy suppliers accommodate this? If not, what alternatives could suppliers accommodate?

Consultation response

Most respondents, including, the vast majority of suppliers which this question was targeted to asserted that they are able to accommodate the collection of the levy on a rolling quarterly basis provided they receive the relevant data such as obligation forecasts and levy rates with sufficient notice, as this will afford suppliers with an appropriate timescale to arrange payments and adjust any necessary default mechanism. Supplier responses were unanimous in outlining that a quarterly process of collection would reduce the administrative burden on suppliers compared with monthly collection.

A few suppliers did however exert that it is difficult to see how a quarterly process can work if using supplier volumes as many customers on legacy meters will have been invoiced on estimated volume. Any quarterly process would either have to accept a level of inaccuracy regarding the volumes used to determine a supplier’s obligation or reconcile initial payments which will add to the administrative burden and have therefore requested additional confirmation on the process by the government.

Government response

The government welcomes the feedback from suppliers on the ideal timing and frequency of the levy obligation. The government is keen to ensure the EII Support Levy aligns with other policy costs that are raised via levies on electricity suppliers, such as the Capacity Market Supplier Charge and the Settlement Costs Levy, which are raised on an ongoing monthly basis. The government is of the view that there are benefits to a monthly over a quarterly levy. A quarterly obligation places a proportionately higher obligation on suppliers, thereby necessitating a higher degree of default protection being in place in the event of a default event. In contrast, a monthly obligation ensures demands on suppliers are spread more evenly over 12 months, reducing the risk of default and the requirement to draw upon default protection. Furthermore, given the intent to calculate supplier obligations on a volumetric basis based on ELEXON data, a monthly levy ensures obligations are more reflective of their ongoing electricity supply market share. For these reasons, the government proposes that the EII Support Levy will be raised on a monthly basis.

The government recognises that all suppliers require certainty and foresight in their projected monthly levy obligations. The government also recognises the challenge of providing suppliers with forecasts on an EIIs incurred network charging costs. As set out in the government response to Question 9, the government commits to working with suppliers on the technical operations of the Levy. The design of the NCC Scheme/EII Support Levy results in an inherent 12-month gap whereby the monthly Levy will raise funds retrospectively to compensate for costs incurred the previous year i.e. the April 2025 levy will raise funds to compensate for costs incurred in April 2024. The aim is that this intervening period can be used to provide suppliers with sufficient forecasts of the total amounts the government would be required to raise in a particular month. The government will engage with suppliers and the administrator once appointed to define and agree this forecast period.

Based on internal modelling, the government estimates that it will need to raise between £190 million to £260 million per annum or £16 million to £22 million per month in order to compensate EIIs for 60% of their network charging costs.

Question 11: How long a billing cycle (between notification of quarterly levy obligation and payment) do suppliers require?

Consultation response

As above, the responses to this question were mostly submitted by suppliers. There was a wide range of responses, with the majority of suppliers arguing that they would need a quarterly billing cycle, a few arguing for a monthly cycle, and one supplier expressing that the government would need to implement an annual billing cycle.

One supplier highlighted the importance of further detail as to how recording and reconciling consumption data could work in the NCC scheme to indicate how often the levy could be collected. This, they argued, would impact upon the length of notification time between the notification [of] and payment of the levy obligation.

Government response

As set out above in the government response to Question 10, the government intends to align the timing of the EII Support Levy monthly billing cycle with other policy levies such as the Capacity Market Supplier Charge and the Settlement Costs Levy.

Question 12: Do you agree with our proposal that electricity suppliers should provide quarterly electricity supply data to the scheme administrator to inform quarterly levy obligation calculations?

Consultation response

53% of respondents who have answered this question have disagreed with the government’s proposal that electricity suppliers should provide quarterly supply data to the scheme administrator to inform quarterly levy obligation calculations. A general point was raised by suppliers that it will be important for there to be clear guidance providing a sufficient level of detail on the data required by the administrator. This, for suppliers, would be necessary to avoid increasing the administrative burden on them and to minimise the costs of the scheme. Many suppliers argued that the scheme administration should follow the protocol for similar schemes such as what EMRS does for CfD FiT where Elexon settlement volumes are used primarily, with an option for suppliers to challenge when necessary as this will ensure consistency in the information provided to the scheme administrator and help minimise discrepancies from suppliers reporting their own data.

Government response

The government welcomes the responses from the consultation that data on energy supply volumes are available from alternative sources. The government agrees that the EII Support Levy will use Elexon data as the mechanism for calculating a supplier’s monthly levy obligation.

As set out above in the government response to Question 10, the government aims to provide suppliers with sufficient forecasts of the total amounts the government would be required to raise in a particular month. However, a supplies individual levy obligation for a particular month will be based on up-to-date Elexon data. This is to ensure that the volumetric calculation of a supplier’s individual obligation is based on the most relevant information available at the time.

Question 13: A volumetric calculation of a supplier’s levy obligation assumes that suppliers will pass the costs down to their customers on a volumetric basis. Is this assumption correct?

Consultation response

The government assumption that suppliers will pass the costs down to their customers on a volumetric basis was supported by the majority of the respondents (73%). Suppliers who will administer such costs to their customers have expressed general agreement with the government’s assumption and have outlined that if the levy is imposed as a volumetric calculation, they would seek to pass this through to customers on a volumetric basis.

However, some have noted that without a published ‘actual’ levy prudent suppliers will have to add risk to the volumetric rate to avoid under collection and may consider standing charge a better mechanism. They have raised concerns that high costs during winter may add further burden on suppliers paying their fair share obligation and feel it is not adequate to arrange rules on mutualisation without further mitigation of risk.

As with the responses to the question on the scope of the levy, suppliers have raised general comments on the importance of early notification of the design and timelines of the levy in order to develop their own billing systems as early as possible.

Government response

The government notes that from a number of supplier responses to the consultation that they are likely to pass the costs through to their customer base on a volumetric basis. Whilst this assumption underpinned the rationale for selecting a volumetric based levy on grounds of consumer fairness, the government will not prescribe how suppliers recover the costs of the levy from their customer base and considers this a commercial decision for individual suppliers.

Question 14: How will suppliers recover the new levy? Will it be through the standing charge or as a standalone levy on bills?

Consultation response

As with previous responses to questions on the scope of the levy, the responses to this question were mostly submitted by suppliers. A few of the suppliers have raised the point that recovery of the levy will be dependent on the suppliers as they may choose to take different approaches based on their customer base. Other suppliers mentioned that any recovery methodology requires a detailed distributional analysis to assess potential impact on consumers and suppliers. The analysis would need to review whether any disadvantages to vulnerable consumers who have characteristics associated with a greater need for energy (such as using assistive equipment powered by electricity) are balanced with the benefits of each potential approach.

With domestic customers, it has however been explained by most respondents that it will most likely appear as a standalone volumetric levy similar to RO/CfD.

Government response

The government recognises that suppliers will use a variety of means to recover the levy from their customers. The government will not prescribe how suppliers should recover the levy costs from customers and judges this a commercial decision for individual suppliers. As set out in the government response to Question 10, the government aims to provide suppliers with sufficient forecasts of the total amounts the government would be required to raise in a particular month thereby aiding them in internal calculations for recovering the costs from their customers.

Question 15: Do you agree with the proposal that at the end of each quarterly billing cycle, the full quarterly levy obligation will fall due? If not, what alternatives are proposed?

Consultation response

The majority of respondents (69.2%) are in agreement with the government’s proposal that at the end of each quarterly billing cycle, the full quarterly levy obligation will fall due. Suppliers have generally agreed to the proposal but have requested clarification from the government on the design of the levy collection process, including when they are billed, and the design and timelines of a reconciliation process.

Other suppliers have pointed to the fact that full reconciliation of electricity used by customers without a smart meter can take up to 14 months by the industry settlement body, and so full collection of the levy, if collected on a volumetric basis and charged to customers accordingly, could take longer than the scheme year.

General comments suggest, however, that the quarterly billing cycle would give enough time for suppliers to pass the levy to their customers and collect payments to pay the correct amount to the governing body of the scheme.

Government response

As set out in the government response to Question 10, the intention is for the levy to be raised on a monthly basis from April 2025. Therefore, an individual supplier will be notified of the payment due date of the obligation within the issued invoice. The due date will be within the appointed month and its full monthly obligation will require payment on that due date.

6.7 Default Protection

Question 16: Which mechanism would best protect against the risk of default whilst minimising the cost burden on suppliers (and their customers)?

Consultation response

The majority of responses to this question (10) was received from suppliers. It has not been possible to discern a single answer on which mechanism would best protect against the risk of default whilst minimising the cost burden on suppliers. Below is a summary of responses received for each mechanism outlined in the proposal.

A Mutualisation exercise whereby any outstanding supplier payments owed by defaulting suppliers are recovered from the non-defaulting suppliers was favoured by suppliers who were in favour of a shorter billing cycle to prevent further liabilities from accruing. It was also raised that a mutualisation process could be conjoined with the raising of a reserve fund through a marginal uplift in the levy to minimise the risk of defaulting.

The raising of a reserve fund approach was the favoured options of other suppliers who argued that doing so appears to be the lowest intervention and most feasible mechanism, whilst also spreading costs evenly and not placing undue burdens on those who avoided defaulting.

Requiring suppliers to lodge credit cover in the form of cash or letters of credit has received the most support by suppliers. Respondents in favour of this approach have pointed that suppliers have a mixture of Parent Company Guarantees and Bank Guarantees in place for network charges and would prefer that a similar approach is used to mitigate default risk for the NCC scheme. The most efficient option would be to use existing credit cover arrangements (the ones already in place for network charges) or if not possible, requiring additional cover through letters of credit.

A couple of suppliers raised their disagreement on all 3 mechanisms proposed in the consultation by pointing out that levying additional costs on suppliers to cover the failures of their competitors should be avoided and credit cover requirements will add additional cost burdens onto suppliers. They argued that believe that such shortfalls should be rolled into future levy payments which would mean that the burden will always be placed on the suppliers who fail to make payments at the right time.

Government response

The government welcomes the feedback from suppliers on the merits and drawbacks of respective default protection options. The government has considered this feedback in respect to the scale and design of the EII Support Levy and proposes a twofold mechanism for protecting against the risk of supplier default.

The primary mechanism for protecting against the risk of supplier default is the establishment of a reserve fund, to be raised via the EII Support Levy. This fund will hold sufficient amounts in reserve to cover one average month’s total levy obligation. Given the intended scale of the reserve fund, it is proposed that it be raised gradually via the EII Support Levy over the course of one year from April 2025, so as to minimise the burden on suppliers and by extension their customers. Once the desired reserve fund level has been reached (and assuming it has not been drawn upon) the presumption is that suppliers will not be billed further for the reserve fund unless a top up is required. In the event of a supplier default, the reserve fund will be drawn upon to cover the outstanding funds due from said supplier. The government/appointed administrator will pursue the defaulting supplier for the outstanding levy obligation as a civil debt and in the event the supplier settles its outstanding obligation, then the funds would be used to top up the amounts drawn from the reserve fund. In the event the defaulting supplier is unable to settle their outstanding obligation (by entering insolvency), then the government/appointed administrator will be required to top up the reserve fund via the EII Support Levy from the remaining suppliers.

In the event that there are insufficient amounts held in the reserve fund to cover a supplier default, it is proposed that a secondary means of default protection is established in the form of a mutualisation process. As with other already established levies, the proposal is that any amounts owed by a defaulting supplier would be mutualised amongst the remaining suppliers within the billing month. The mutualisation process would match that of the calculation and billing of the EII Support Levy in that mutualisation obligation amounts would be calculated based on a volumetric basis and suppliers would be provided with a billing and due dates within the appointed month. In the event the defaulting suppliers settles its outstanding obligation, any amounts raised via the mutualisation process would be returned to suppliers during a regular reconciliation process. This mechanism will ensure provides an additional level of default protection but is expected to act solely as a contingency in the event there are insufficient funds available in reserve.

The government has considered and discounted the proposal of seeking credit cover from suppliers. Whilst the government recognises the value of this proposal for certain suppliers (by ensuring that defaults are not socialised across suppliers), the government is keen to avoid placing additional collateral/security demands on suppliers, especially micro-suppliers

6.8 Direct costs on eligible EIIs

Question 17: Do you agree with the 87 pence per customer cost estimate for suppliers to pass through the cost of the EII Support Levy? If not, is there more or different evidence you could share?

Consultation response

The majority of respondents (52%) disagreed with the 87 pence per customer costs estimate for suppliers to pass through the cost of the EII Support Levy. However, there was a clear divide between most suppliers who believed that this costs estimate was too low, and trade bodies (alongside EIIs) who asserted that these costs estimates were too high.

A few suppliers argued that the 87 pence cost estimate was quoted by suppliers in 2018 which makes it completely out of date and have expressed their presumption that it doesn’t account for any increases in network costs over the previous 5 years. They have requested that DBT review this figure before expressing their position.

Other respondents expressed a similar concern with the estimate outlined in the proposal as they believe that the figure is not reflective of development or maintenance costs and that it is too early to determine and share accurate cost data before more analysis is conducted and more details are known on how the scheme is operated and how the costs would be recovered from various categories of consumers serviced by varying systems. One respondent provided an indicative estimate of required billing changes amounting to approximately £300,000 to 500,000 for part of their billing systems.

In comparison, we received similar responses from trade bodies and EIIs who have pointed out that given the industry has established protocols for other similar schemes, the 87 pence assumptions seem too high. They mostly argued that the estimate is based on suppliers’ feedback to the Ofgem consultation on the default tariff cap for domestic users and so conclude that the policy and the proposed NCC scheme are not comparable as the scope is far smaller and applies to electricity only. A far better estimate, according to most Trade Bodies would be the suppliers’ cost of administering the EII renewable exemption schemes as those schemes are more similar to the proposed NCC scheme than the default tariff cap for domestic consumers.

Government response

The government welcomes feedback from stakeholders. As part of its forthcoming engagement with energy suppliers to collaborate on the technical details of the EII Support Levy, the government will seek further views to better estimate cost pass through by suppliers.

Question 18: Do you agree with our approach for estimating familiarisation and administration costs to eligible EIIs? Are there other costs that we have not included in our assessment?

Consultation response

A total of 17 responses was received for this question with 6 responses agreeing with the proposed approach for estimating familiarisation and administration costs to eligible EIIs and 6 who disagreed. Respondents who agreed with the government approach mainly outlined that eligible EIIs will have established systems which will enable them to implement this new requirement. In comparison, a few trading bodies pointed out that the time allocated in our approach is unlikely to be reflective of either the grade of the person that will conduct the work or the time it takes for these tasks to be completed and have concluded that total familiarisation costs may have been underestimated.

We received 5 responses where the respondent did not clearly state their view on our approach and instead highlighted additional points that the government would need to reconsider. These responses mainly outlined that some EIIs may need to request different billing arrangements from their supplier (or in some cases change their supplier or tariff type) in order to receive the itemised bills that would be needed to make a claim to the administrator. This would potentially create additional costs for EIIs, which would merit further investigation and consideration. Some suppliers raised a similar issue on costs that may be incurred by EIIs to understand the changes and embed them into their systems and processes but have stated that this could be covered by the compensation they will ultimately receive.

One EII presented the government with a few possible options to arrange workshops with eligible EIIs to find a way of coordinating and consolidating data requirements across comparable elements of the EII package. They have further stated that even though eligible EIIs will have developed ways of working and data sets to suit the requirements of the package, a couple of workshops arranged by the Government could be helpful in establishing the process and supporting EIIs in including this new leg of reform into their systems with ease.

Government response

The government welcomes the feedback from stakeholders and commits to hosting a series of workshops with EIIs in 2023 to 2024 to help EIIs understand the data requirements of the NCC Scheme.

Conclusion and next steps

Following the conclusion of this consultation, the government intends to take forward the proposed measures to compensate EIIs for a portion of their network charges, based on existing eligibility criteria outlined in the consultation which will apply to the full package of measures.

The government intends to legislate with a Statutory Instrument in Spring 2024 to enable changes to be made to calculations and for savings to start to materialise from April 2024.

All secondary legislation is subject to publication of a full Impact Assessment which is scrutinised by the Regulatory Policy Committee. The government will publish evidence, including a full economic assessment and policy rationale for each of the measures in the BIS, including the Network Charging Compensation Scheme. We expect this to be made public in Spring 2024.

We continue to work across government departments to ensure that strategically important EIIs are considered in other policy development, and we will continue to explore alternative policy options to support the sector.