The 5 essentials of the capacity tariff in Flanders

    By our Energy & Utilities Consultant Margot Dia

From July 2022 onwards, the Flemish energy regulator VREG will use a new method to calculate the distribution network costs. The capacity tariff in Flanders will provide a financial incentive for households and SMEs to spread their power consumption. Margot Dia, utilities consultant at Trilations, sums up the characteristics of the new tariff: “It’s an effective tool to change energy consumers’ behavior. By discouraging peaks in power consumption, electricity bills will remain affordable in the long run.”

The introduction of the VREG’s new tariff structure is set for July 1st 2022. According to Margot Dia, there are five essentials to consider:

1. Less than 20% of the electricity bill is affected

A household energy bill can be split into energy cost (39%), levies and VAT (20%) and distribution network tariffs (41%). The latter cover the costs of the construction, operation and maintenance of electricity networks. Up to now, the distribution network tariffs were based entirely on the amount of electricity a household consumed: the higher the offtake, the higher the tariffs. From July 2022 onwards a part of the distribution network tariffs will be determined by the network capacity (kW) used: the capacity tariff. This accounts for approximately 18% of a household bill [1].

The point of reference will be the monthly peak [2] in a household’s power offtake. Those fifteen minutes a month when power consumption is at its highest –  for example because all household appliances are running simultaneously – will determine roughly 1/5 of the electricity bill. The new tariff aims to discourage consumption peaks.

 

Source: Vreg.be

 

2. Change is coming, inevitably

But why this new tariff methodology? What makes consumption peaks so bad? Margot Dia: “It makes no sense to base distribution network tariffs on a household’s average power offtake while this is not an important driver of the grid’s construction and maintenance costs. Our current grid is designed for a certain capacity and has difficulty to cope with large power peaks. They pose a threat to grid stability. Network capacity is the real cost driver and should therefore be considered in the tariff structure.”  In today’s green energy system grid operation has become a balancing act.

 To avoid blackouts, we can either make large network investments that will result in higher network costs for all in the long run. Or we can avoid peaks by embracing a set of smart and sustainable solutions of which the new capacity tariff is one.

 

3. It’s time for the small energy users!

On the injection side, the intermittent character of solar and wind power poses a threat to grid stability. On the offtake side, it doesn’t help that users tend to concentrate power consumption at certain times of day. Up to now, grid operators mainly looked at large industrial consumers for help with grid balancing. In the past decade, industrial users were rewarded for flexibility through demand-response mechanisms (like peak shaving or load shifting) and special contracts.

The new capacity tariff in Flanders finally gives a financial incentive to smaller energy users, like households and SME’s, to spread their power consumption. The digital meter is an important enabler because this type of meter records real-time consumption. At the same time, small energy users are becoming gradually more important. While we evolve towards a CO2-neutral society, more households and SME’s are using electric cars and heating pumps and are thereby increasing the load on the grid.

 

4. An incentive can go both ways

The big question surrounding the new capacity tariff is: who will benefit and who will pay more?

According to VREG estimates [3], the new tariff will have very little impact on the electricity bill of the average household with an annual consumption of 3500 to 4000 kWh. Six out of ten households are expected to pay either less or no more than 10% extra than today. A household with only standard household appliances can expect to save around €50 per year if its peak consumption remains below 3.15 kW. [4]

However, a minimal peak power of 2.5 kW will be charged each month. This puts small consumers (such as single people living in flats or tenants in student accommodation) at the risk of being disadvantaged. A small household with an annual consumption of 1500 kWh might pay around €60 more per year with the new tariff structure in place [5].

 

5. The new capacity tariff structure rewards forerunners

Households with a classical electricity meter will end up paying more after July 2022,” Margot Dia admits, “and not only because the minimal peak of 2.5 kW will apply. As explained, the distribution network costs make up for 41% of the total electricity bill whereas the capacity tariff only accounts for 18%. The main difference lies in the remaining 23%: here, households with conventional electricity meters will pay higher tariffs than owners of a digital meter.” The fact that households with electric cars or heat pumps can save up to €280 per year [6] has fueled criticism that the new tariff structure favors the upper middle class, who can afford expensive new technologies. Margot arguments that electric drivers only benefit from the new tariff when they effectively spread their power consumption over time, otherwise they end up paying more.

 In a time when car manufacturers are developing ultra-fast charging technologies that may put immense pressure on the grid, it’s essential to create awareness of the importance of grid balance. It’s high time to inspire the population to spread their power consumption. That’s precisely what the VREG’s new capacity tariff does.

 

Sources

[1]  VREG. Wat verandert er aan uw factuur?

[2]  The monthly peak will be defined per year and is in fact the average of 12 monthly peaks.

[3]  VREG. Nieuwe nettarieven – Onze simulatievoorbeelden.

[4]  Engie. Om verbruikspieken te vermijden voert Vlaanderen het capaciteitstarief voor elektriciteit in.

[5] VREG. Nieuwe nettarieven – Onze simulatievoorbeelden: Ilyas.

[6] VREG. Nieuwe nettarieven – Onze simulatievoorbeelden: Joris en Aisha.

For more information contact Frank Sels our Business Manager Energy & Utilities

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