Business energy: understanding ratchet charges

To stay in control of your business energy costs, it’s important to understand ratchet charges and when they come into effect.

Here, we explain what ratchet charges are and how you can avoid them.

What are ratchet charges?             

A ratchet is a commercial penalty charge applied to any daily meter which, during the winter period (October to May), exceeds its agreed Daily Capacity (DMSOQ). This commercial penalty exists to deter parties from setting their daily capacity requirements below what is actually needed during the winter when demand is at its highest.

When does ratcheting occur?

Ratchet season applies from 1 October to 31 May each year, in line with increased demand on the network over the winter period. Should large sites exceed their DMSOQ during this period, they will receive an ad hoc invoice separate to their usual monthly bill. Individual energy transporters apply the charge, and penalties vary depending on how much energy has been used above the contracted DMSOQ cap.

 

During the ratchet season, a site’s DMSOQ automatically increases when the energy limit is breached. This continues upwards each time daily energy use exceeds the DMSOQ until it reaches the Provisional Maximum Supply Point Capacity (PMSOQ).

How are ratchet charges calculated?

In the case where the Users Daily Quantity Off-taken (UDQO) exceeds the DMSOQ, the difference is used to calculate the ratchet charge.

  • The Supply Point Ratchet Charge shall be calculated as the Capacity Ratchet Amount multiplied by the sum of:

(a) 2 times the Applicable Annual Rate (including where determined in accordance with paragraph 1.8.5(a)) of the LDZ Capacity Charge; and

(b) where applicable, 2 times the Applicable Annual Rate of the Capacity Variable Component (if any) of the Customer Charge

To understand how ratchet charges are calculated, we’ve provided a useful diagram showing when and how penalties are applied during ratchet season. Please refer to the chart below for further information on how the process works.

 

 

Source: XOSERVE

How can ratchet charges be avoided?

By knowing your maximum daily energy limit, it is possible to monitor your energy use to avoid exceeding the DMSOQ cap. However, if you find that you regularly use more energy than your limit permits, you can review your DMSOQs with your supplier who will be able to provide you with the information needed to make an informed decision. This may provide greater flexibility, and could help to avoid future ratcheting penalties.

Once a customer requests an increase, the supplier will send the request for approval from the network.

For more information on ratchet charges, please don’t hesitate contact the Corporate Sales team on 0845 873 2291.