Guidance AAHEDC Tariffs V2
Summary
NESO publishes updated guidance on the AAHEDC scheme, a flat-rate p/kWh tariff levied on all electricity suppliers to subsidise distribution costs in the Scottish Hydro Electric Power Distribution (SHEPD) area. The tariff is set annually by 15 July, applied retrospectively from 1 April, and calculated by dividing the Total Scheme Amount (assistance + Shetland assistance + administration + correction) by forecast total energy consumption. Invoices are quarterly in arrears with no reconciliation.
Why it matters
This is a reference document explaining an existing cross-subsidy mechanism, not a rule change. The scheme is a textbook socialised cost: all GB suppliers pay a flat charge so that one distributor in northern Scotland faces lower costs, with no price signal to drive efficient behaviour by either the distributor or its customers.
Key facts
- •Sole beneficiary is Scottish Hydro Electric Power Distribution (SHEPD)
- •Total Scheme Amount comprises Assistance Amount, Shetland Assistance Amount, Administration Amount, and Correction Amount
- •All amounts inflated annually by CPIH
- •Tariff is flat-rate p/kWh, does not vary by demand zone
- •Draft tariff published end of March; final tariff published by 15 July, effective retrospectively from 1 April
- •Quarterly invoicing on 15 Aug, 15 Nov, 15 Feb, 15 May with 28-day payment terms
- •No reconciliation — settlement is final at invoice date
- •Charge applies to Supplier BM Units and Non-Embedded Customer BM Units (since 1 April 2006)
- •Established under Energy Act 2004, Section 179
Areas affected
Related programmes
Memo
What this is about
The Assistance for Areas with High Electricity Distribution Costs scheme is a cross-subsidy baked into the Energy Act 2004. Every licensed electricity supplier in GB pays a flat p/kWh tariff on all metered demand — covering both embedded and non-embedded customers — so that Scottish Hydro Electric Power Distribution (SHEPD) faces lower distribution costs in the Highlands and Islands, including Shetland. NESO administers the scheme and sets the tariff annually.
This is a guidance document, not a rule change. NESO has published version 2 of its AAHEDC tariff guidance explaining how the scheme works, how the tariff is calculated, who pays, and on what timetable. The substance is unchanged from previous years. The value is as a reference for suppliers managing their charging obligations.
Key points
The mechanism is a textbook socialised cost. The Total Scheme Amount comprises four components: the Assistance Amount (paid to SHEPD), the Shetland Assistance Amount, an Administration Amount (retained by NESO), and a Correction Amount that trues up the previous year's over- or under-recovery. Both the Assistance and Administration amounts inflate annually by CPIH. The entire cost is divided by forecast total GB energy consumption to produce a flat p/kWh tariff. Every supplier pays the same rate regardless of where their customers are.
The tariff is set retrospectively. NESO must wait for final-quarter invoice values before calculating the Correction Amount, so the tariff cannot be finalised until after the scheme year begins on 1 April. The final tariff is published by 15 July, applied back to 1 April. A draft tariff is published at the end of March to give suppliers a working estimate. This creates a three-month window where suppliers are billing customers without knowing their actual AAHEDC cost.
Invoicing is quarterly in arrears with no reconciliation. Suppliers receive invoices on 15 August, 15 November, 15 February, and 15 May, with 28-day payment terms. Settlement is deemed final at the invoice date — there is no later reconciliation against actual demand. The charge applies to all BM Units where the supplier is lead party, including non-embedded customers connected directly to the transmission system (extended by Section 179 of the Energy Act 2004, effective from April 2006).
The tariff carries no locational or temporal signal. It is a flat rate across all GSP Groups and all settlement periods. A supplier serving industrial load in southern England pays the same p/kWh as one serving domestic customers adjacent to the SHEPD area. There is no incentive for SHEPD to reduce its distribution costs, no incentive for customers in the SHEPD area to manage demand, and no mechanism for the tariff to reflect actual cost drivers. The charge is calculated on gross demand, so behind-the-meter generation that reduces a supplier's metered volume reduces their AAHEDC liability — one of many reasons the growth of on-site generation erodes the base over which socialised charges are spread.
SHEPD remains the sole beneficiary. The scheme was designed to accommodate multiple "Relevant Distributors" but has only ever had one. The entire apparatus — legislation, licence conditions, NESO administration, quarterly invoicing across all GB suppliers — exists to subsidise distribution in a single licence area.
What happens next
The 2026/27 draft tariff should appear at the end of March 2026, with the final tariff published by 15 July 2026 and applied retrospectively from 1 April 2026. No changes to the scheme structure are proposed or under consultation.
The AAHEDC is worth watching in the context of Ofgem's broader Cost Allocation and Recovery (CAR) Review, which is examining how network and policy costs are allocated across the system. The CAR Review's scope includes whether flat-rate socialised charges remain appropriate as demand patterns shift, behind-the-meter generation grows, and new large loads (data centres, electrolysers) connect. The AAHEDC is a small charge in absolute terms, but it is a pure example of the design pattern the CAR Review is questioning: a cost caused by one party, paid by everyone, with no signal to drive efficient behaviour by either side.
The current AAHEDC Charging Statement is published on NESO's website. Suppliers seeking detail on the current tariff rate or historical values should refer to that document rather than this guidance, which explains only the mechanics of the scheme.
Source text
Public 1 March 2025 Guidance on: Assistance for Areas with High Electricity Distribution Costs (AAHEDC) Scheme Charging Public 2 Contents Contents ......................................................................................................................................... 2 Assistance for Areas with High Electricity Distribution Costs (AAHEDC) ................................. 3 Introduction .................................................................................................................................... 3 Who pays? ...................................................................................................................................... 3 Who Benefits? ................................................................................................................................. 3 How does it work? .......................................................................................................................... 3 What does that mean for electricity suppliers and their customers? .................................... 4 Which BM units are included in the AAHEDC Charge? .............................................................. 5 How is the Tariff calculated? ........................................................................................................ 6 Contact us ...................................................................................................................................... 6 Public 3 Assistance for Areas with High Electricity Distribution Costs (AAHEDC) Introduction A scheme implemented as part of the Energy Act 2004 and designed to reduce the cost of electricity distribution in ‘Specified Areas’. Who pays? Electricity suppliers The scheme amount is recovered in line with conditions defined in the electricity supplier licence. Who Benefits? Currently there is only one Relevant Distributor: • Scottish Hydro Electric Power Distribution (SHEPD) How does it work? The scheme ‘Assistance Amount’, ‘Shetland Assistance Amount’ and the ‘Administration Amount’ were introduced by the Energy Act 2004 and are inflated annually by the Consumer Prices Index including owner occupiers' housing costs (CPIH) published by the Office for National Statistics (ONS). National Energy System Operator (NESO) is the appointed scheme administrator. We have a licence obligation to set an annual tariff to recover the required Assistance Amounts on behalf of Relevant Distributors. The total amount collected under the scheme (‘Total Scheme Amount’) is made up of four parts: Total Scheme Amount Assistance Amount Shetland Assistance Amount Administration Amount Correction Amount Public 4 • Assistance Amount and Shetland Assistance Amount: paid to Relevant Distributors quarterly on 15 September, 15 December, 15 March and 15 June. (Inflated each year in line with CPIH). • Administration Allowance: retained by the scheme administrator to cover the costs of administering the scheme (inflated by CPIH each year). • Correction Amount: represents the difference between the Total Scheme Amount in the previous year and the income received in that year. What does that mean for electricity suppliers and their customers? The tariff is published annually on or before 15 July (i.e., one month before the first invoice date) and is effective retrospectively1 from 1 April that year. It is a flat-rate tariff and does not vary by demand zone. 1 Retrospectively because NESO must wait for the final quarter invoiced values to calculate the Correction Amount (under/over-recovery) in the previous scheme year. Note: The calculation of the tariff is based on a forecast of demand, and this is influenced by a number of factors, including economic factors and weather conditions. Public 5 Invoices are issued to electricity suppliers quarterly in arrears. The value is calculated using the sum of gross demand attributable to Licensed Suppliers across all GSP Groups in the previous quarter2 and includes all settlement periods across all GSP Groups. Suppliers are invoiced on 15 August, 15 November, 15 February, and 15 May with 28-day payment terms. There is no reconciliation; settlement is deemed to be final at the invoice date. Which BM units are included in the AAHEDC Charge? AAHEDC is chargeable on those BM Units for which the Supplier is the lead party: • Supplier BM Units (i.e., those comprising plant and/or apparatus registered in SVA Metering Systems) and • Any other BM Units relating to demand supplied by Licensed Suppliers Backing sheets showing details of consumption at each BM Unit and the settlement runs used in the calculation are issued along with each invoice. 2 Settlement metering data provided to NESO by Elexon in the SAAi014 and P0210 files. Note: NESO publishes a ‘draft’ tariff at the end of March to give industry a ‘forecast’ based on known invoice values and the latest available settlement metering data. Note: 3.3 Section 179 of the Energy Act 2004 has extended the definition of electricity supply to include electricity conveyed solely by means of a transmission system. Effective 1 April 2006, the energy consumption charge incurred by a Supplier also includes BM Units relating to Non-Embedded Customers. Public 6 How is the Tariff calculated? We are responsible for calculating and publishing the tariff in the AAHEDC Charging Statement - the document that sets out how the scheme operates.3 The AAHEDC Energy Consumption Tariff (in pence per kWh) is calculated by dividing the Total Scheme Amount (£) by the forecast of total energy consumption across all settlement periods during the relevant year. The final tariff is published by 15 July of the charging year. Further information, including the current scheme tariff, can be found in the relevant charging statement at https://www.neso.energy/industry- information/charging/assistance-areas-high-electricity-distribution-costs- aahedc Contact us For more information, please contact the TNUoS team at TNUoS.Queries@nationalenergyso.com 3 Licence Condition F8 of NESO’s Licence