Friday May 10, 2019

In collaboration with the ESO (Electricity System Operator), Ofgem announced their decision to create a Balancing Services Charges Task Force in November 2018.

The main goal of the Task Force is to conduct investigation and analysis that can support decisions on the future direction of Balancing Services Use of System (BSUoS) charges. These charges recover the costs of ESO balancing actions that are necessary to handle the daily operation of the National Electricity Transmission System.

Whilst considering wider implications (i.e. Targeted Charging Review SCR, TNUoS, Electricity Network Access Project SCR, etc), the Task Force have delivered an initial Draft Report, providing three deliverables to assess whether Ofgem should attempt to improve cost-reflective signals through BSUoS, or whether BSUoS should be treated as a cost-recovery charge.

Deliverable 1 –
Does BSUoS currently provide a useful forward-looking signal?

Following assessment, the Task Force has found that BSUoS charge does not currently provide any useful forward-looking signal. This makes the charges hard to forecast, reducing the influence of the charge on user behaviour.

They believe reasons for this are that the current BSUoS charges are complex and becoming increasingly volatile. In addition, there are other market signals that are more noticeable to users, which then take priority. The Task Force also note that the charge is applied across the transmission basis equally.

Deliverable 2 –
Potential options for charging BSUoS differently, to be cost-reflective and provide a forward-looking signal

The Task Force assessed whether individual elements of BSUoS have the potential for being charged more cost-effectively and hence could provide a forward-looking signal. They identified four potential options:

  1. Locational Transmission Constraints
  2. Locational Reactive and Voltage Constraints
  3. Response and Reserve Bands
  4. Response and Reserve Utilisation

Deliverable 3 –
Feasibility of charging potentially cost reflective elements of BSUoS to provide a forward-looking signal

The Task Force assessed the feasibility of the four potential options from Deliverable 2. They concluded that whilst there are some theoretical advantages to all four potential options identified, the implementation of each would not or could not provide a cost-reflective and forward-looking signal to drive efficient and effective market behaviour.

An important constraint to consider is that BSUoS is based on total costs incurred by the ESO, which can see significant variation. The Task Force believes that an effective forward-looking signal should come from marginal costs, rather than the total costs, so that market parties face only the cost they impose on the system. Although they have determined that it is unclear how to accomplish this through BSUoS.

In addition to this, if a forward-looking BSUoS signal was to be developed the Task Force expects that this signal could end up being ineffective. Other signals already in place through the market and charging arrangements could lead to double-counting issues. This can create the risk of under or overestimation of charges, leading to market distorting signals.

Current Conclusion – Any change to customers?

The Task Force has so far concluded that it is not feasible to charge any of the BSUoS components in a more cost-reflective and forward-looking manner that would effectively influence behavior that would help the system and/or lower costs to customers. It is on this basis that the costs included with BSUoS should all be treated on a cost-recovery basis.

It is for Ofgem to decide, but the Task Force recommends that cost-recovery charges should aim to minimise market distorting signals, to benefit both the system and customers. They note that the current construction of BSUoS may inadvertently be sending signals that are detrimental to the system, but the structure of the charge is out of the scope of the Task Force.

The Draft Report has been framed as a consultation with a response date of 17 May 2019. Feedback received during this period will be considered in the final version of the report, expected to be published 31 May 2019, and submitted to Ofgem.

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