Cornwall Insight Explainer: the new Target Operating Model
The Design Working Group (DWG) has delivered its preferred Target Operating Model (TOM) for Market-wide Half-Hourly Settlement (MHHS) to Ofgem, outlining how settlement arrangements could be reformed to industry and consumers. Below, Cornwall Insight describes these critical changes and explains the possible benefits of the new model.
- The initial information run (II in Figure 1) will remain at four working days after the settlement day
- The initial Settlement Run (SF in Figure 1) is expected to drop from 16 working days to between five and seven working days
- The 1st 2nd and 3rd reconciliation runs (R1, R2 and R3) will be replaced with a single Interim Reconciliation Run (IR) taking around a month and a half
- The final reconciliation run (RF) will also drop significantly from 14 to four months
- It is recommended that the Dispute Final (DF) run will be reduced to at least 12 months instead of the current 28 months
Rowan Hazell, Analyst at Cornwall Insight, said:
“This is an interesting time in the market with MHHS being just one of many changes that the industry is grappling with. The shorter settlement timeframes proposed here should allow the market to respond better to at least some of the challenges that it faces.”
“If this model is adopted then settlement timescales would be reduced significantly. This shorter window would provide earlier certainty of supplied volumes and offer far more certainty over almost all the direct costs faced by suppliers.
“Most businesses work to a 12-month schedule for reporting financial results. The proposed shorter settlement timeframes are likely to aid suppliers in their financial reporting. In addition, the recommended reduction of the Dispute Final timescale by 12 months is expected to give suppliers incentives to identify and resolve any errors quickly, reducing uncertainty around final liabilities.
“However, there are some uncertain dependencies. Smart meters play an integral part in the new model with their monthly read capabilities aiding the new Interim Run stage. However, the roll-out of smart meters is behind schedule which may hinder realising the full benefits of the model.”