All change for balancing charges

As part of the wider ongoing reform of network use of system charges, which we have reported on here and here, on 22 July 2020, the Second Balancing Services Task Force (the “Task Force”) issued its interim conclusions in relation to Balancing Services Use of System (“BSUoS”) charges (“Interim Report”).

Background

As part of its role as system operator, National Grid Electricity System Operator (“NG ESO”) ‘balances’ the supply and demand for electricity in each settlement period. It does this by predicting discrepancies in electricity production and demand, and then accepting bids and offers from market participants to increase or decrease their electricity generation or consumption, thus remedying the imbalance. Currently, NG ESO recovers costs associated with such balancing actions from generators and demand customers via BSUoS charges on their export and import of electricity respectively.

In January 2020, Ofgem established the Second Balancing Services Task Force (the “Task Force”) to consider going forwards:

1. who should be liable for BSUoS charges; and
2. how BSUoS charges should be recovered.

The Task Force considered these questions in light of the overarching principles of (i) reducing harmful distortions, (ii) fairness and (iii) proportionality and practicality, as established by the Targeted Charging Review.

The Task Force’s starting point was the conclusion of its predecessor, the First Balancing Services Task Force, which determined that BSUoS “[did] not currently provide any useful forward-looking signal which [influenced] user behaviour to improve the economic and efficient operation of the market”. This conclusion was reached due to:

• the unpredictable and increasingly volatile nature of the charges, as they are currently calculated on a half hourly basis based on the actual actions undertaken in that settlement period;
• other, more material, market signals taking precedence over BSUoS; and
• BSUoS charges applying equally to all eligible transmission system users.

The First Balancing Services Task Force concluded that it was not possible to charge for BSUoS so as to provide a more effective market signal, and that it should therefore be treated as a cost recovery charge.

Who should be liable to pay BSUoS charges?

The Interim Report concluded that BSUoS charges should only be levied on final demand customers, removing the charge levied on generators. In coming to this conclusion, the Task Force considered distortions created under the current charging system as between different types of generators, including as between generators located in Great Britain and interconnectors with mainland Europe. Currently, behind-the-meter generators and generators connected to the distribution system do not pay BSUoS charges on exports, while those connected to the transmission system do. Further, the Task Force found that comparatively lower charges were levied on interconnectors nationally as compared with transmission-connected generators in Great Britain. The Task Force concluded that these harmful distortions could be remedied by removing the levying of BSUoS charges on all generators.

The Task Force suggested that industry should be given at least two years’ notice of the reforms, should Ofgem decide to implement them.

How should BSUoS charges be recovered?

The Interim Report suggests that BSUoS charges should be recovered through a charge fixed ex-ante. Fixing BSUoS charges ex ante requires NG ESO to manage the volatility risk on behalf of payees for the duration of the fix period. A key driver in reaching that decision was increased cost certainty, meaning that pricing plans would not attract a ‘risk premia’ associated with unknown costs. The Task Force concluded that prices should be fixed for a minimum of six months in order for industry to enjoy an overall benefit.

The Task Force assessed the relative pros and cons of a fixed volumetric charge (£/MWh) and a charge per site against the bands to be established for the Targeted Charging Review (£/site/day), but did not determine which method should be used. This is one element that is being consulted on (see further below).

Other BSUoS changes

At present, energy storage is double-charged for BSUoS, i.e. both in relation to the import of electricity from the wider network and then again on the export of that electricity back to the network. This is a particular issue for storage given that:

• the amount of electricity imported by storage is much larger when compared with other generation technologies; and
• imported electricity will always exceed exported electricity due to round trip efficiency losses.

As a result, this double-charging caused a large market distortion for electricity storage providers.

The need to remove double charging for storage was identified in Ofgem’s Smart Systems and Flexibility Plan which was announced in July 2017. However, in line with Ofgem’s desire for industry led modifications, it took until in May 2020 for Ofgem to approve CMP281 Removal of BSUoS Charges From Energy Taken From the National Grid System by Storage Facilities. The Connection and Use of System Code modification will remove the requirement for storage facilities to pay BSUoS charges on the import of electricity, levelling the playing field. CMP281 will be implemented on 1 April 2021.

The disruption caused by COVID-19 was the subject of a recent, separate modification proposal (CMP 345), which proposed to defer the additional BSUoS charges caused by the lockdown, as reduced demand led to increases in the costs of balancing the electricity system. The modification proposes to allow additional BSUoS costs due to COVID-19 incurred in 2020/21 (between 1 May and 31 August 2020) to be deferred to the 2021/22 Charging Year.

However, another modification proposal, CMP 350, has subsequently been introduced, which seeks to:

• Reduce the cap imposed on high BSUoS charges from £15/MWh to £5/MWh;
• Extend the scheme from 31 August to 30 September; and
• Cap the amount of excess charges rolled over to the 2021/22 Charging Year at £100 million.

As with CMP 345, Ofgem decided that CMP 350 should be progressed on an urgent basis.

Next steps

A consultation forms part of the Interim Report, which includes various questions as to the notice period that should be provided ahead of any changes ultimately adopted by Ofgem, the basis on which any fixed charge should be determined and the length of time for which a charge should be fixed. Links to the presentation on the webinar which was hosted by the Task Force to launch the Interim Report and other useful resources can be found on this page. The consultation deadline is 26 August 2020. A further webinar will be held to discuss the industry feedback to the consultation, and to update on any further progress ahead of submission of the final report to Ofgem.

In light of the disruption caused by COVID-19, the submission of the Task Force’s final report has been delayed until September 2020, which means that the implementation of the Task Force’s recommendations will not take place before April 2022 at the earliest. The Interim Report recommends a period of two years between Ofgem’s decision and any subsequent implementation.