Constraint costs could rise to £2.5bn by mid-2020s

Payments made to generators to manage constraints on the transmission network are forecast to rise to between £1 billion and £2.5 billion per year by the mid-2020s, according to National Grid Electricity System Operator (ESO).

The ESO said the costs, which currently amount to around £0.5 billion per year, are then expected fall back down to similar levels by the end of the decade as major new transmission projects come online.

The projections have been released alongside the ESO’s Network Options Assessment (NOA) for 2020/21.

“The constraint costs arise from there being less capacity on the network than unconstrained market positions would seek to utilise, and the ESO needing to take action to maintain the limits of the system,” it explained.

“The costs of constraints are two-fold – the cost of turning down a generator ‘behind the constraint’ to relieve the constraint, and the cost of turning up another not-constrained generator to satisfy the energy balance.”

The ESO said the projected rise in constraint costs is the result of “the rapidly changing generation mix, with significant quantities of new renewable generation connecting, and the fact that the timescales required to make the large transmission investments to increase network capacity to fully accommodate all of this new generation can be much longer.”

Source: ESO

It acknowledged that the costs, which are recovered through Balancing Services Use of System charges, have “a real impact on consumers’ bills,” but emphasised that they are factored into investment decisions: “Paying constraint costs is critical to the development of renewable generation capacity in the short-term and is more than offset by optimising transmission investment and the long-term power price savings they enable.”

“Renewable generation produces electricity at zero marginal cost, therefore, connecting significant amounts of new renewable generation will drive down the power price element of consumers bills. Various industry analysts have identified the potential for significant reductions in wholesale prices in the longer term,” the ESO stated.

“While renewables drive down power prices, where there is also a requirement for additional transmission infrastructure this can add cost to consumer bills. Therefore, getting the timing of the investment right is critical.”

It continued: “An economically efficient network should ensure that transmission investment is well timed. Early investment in networks means additional costs to consumers through ‘stranded’ assets and late investment means higher constraint costs to consumers.

“The NOA performs a cost benefit analysis of the forecast constraint cost and the timing and options of transmission reinforcements, to produce an optimal strategy for reinforcements to minimise overall consumer costs.”

The ESO said the latest NOA has identified the need for £16 billion of transmission network investment over the next 20 years.