Business gas: understanding ratchet charges

• What are ratchet charges?
• When does ratcheting occur?
• How are ratchet charges calculated?
• How can ratchet charges be avoided?

What are ratchet charges?

A ratchet is a commercial penalty charge applied to any daily gas meter which, during the winter period (October to May), exceeds its agreed Daily Capacity (DMSOQ). This commercial penalty deters 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 gas use exceeds the DMSOQ until it reaches the Provisional Maximum Supply Point Capacity (PMSOQ).

How are ratchet charges calculated?

Since the implementation of Modification 0665, sites in Class 1 are charged a different ratchet rate to the sites within Class 2. We’ve explained this in further detail below.

Class 1 site ratchet charges

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

The ratchet charge shall be calculated as the capacity ratchet amount multiplied by the sum of:

(a) 2x the applicable annual rate (including where determined in accordance with paragraph 1.8.5(a)) of the LDZ capacity charge; and

(b) where applicable, 2x 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

Class 2 site ratchet charges 

As mentioned above, Class 1 and Class 2 site ratchet charges are calculated differently. Instead of applying a penalty, as in the case of a Class 1 ratchet (x2), the effect is to ensure that the additional capacity that has been utilised is paid for over the relevant period. Therefore, anyone under booking capacity is charged appropriately for the capacity used and cannot benefit from under booking.

A Class 2 ratchet charge is the sum of the following;

((A + B + C) * D) – ((E + F + G) * H) * J / 365

A) the applicable annual rate of the LDZ capacity charge;

B) the applicable annual rate of the capacity variable component (if any) of the customer charge;
C) the applicable annual rate of the LDZ ECN charge;
D) is the ratchetted supply point capacity;

E) the applicable annual charge of the LDZ capacity charge;
F) the applicable annual rate of the capacity variable component (if any) of the customer charge;
G) the applicable annual rate of the LDZ ECN charge;
H) is the registered user’s supply point capacity on the day of the supply point ratchet; and
J) the number of days in the period between:

(a) in the case of a supply point:

(i) for which the user was the registered user prior to the start of the gas year in which the supply point ratchet occurred, the preceding 1 October;
(ii) for which the user was not the registered user prior to the start of the gas year in which the supply point ratchet occurred, the supply point registration date;
(iii) which is a seasonal larger supply point, the first day of the restricted LDZ capacity period; and

(b) the first day of the calendar month in respect of which LDZ capacity charges, capacity variable component (if any) of the customer charges and LDZ ECN charges are determined on the basis of the ratchetted supply point; and where the ‘LDZ ECN charge’ is the charge payable by users

How can ratchet charges be avoided?

By knowing your maximum daily gas limit, it's possible to monitor your usage 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. They should be be able to provide you with the information needed to make an informed decision.

Once a request to increase DMSOQs is made, the supplier will send the request for approval from the network.This may provide greater flexibility and could help to avoid future ratcheting penalties.

If you receive a pre-ratchet notification and have reason the believe its incorrect, speak to your supplier as soon as possible to challenge it. The shipper is given 5 days from the date of the charge to investigate the consumption of the day in question, so it's important to contact them quickly. 

SEFE Energy contact details

For any questions you may have or further information relating to ratchet charges, please contact a member of our Corporate Sales team.