ESO may ‘snatch defeat from the jaws of victory’ over DFS penalty proposals

The Electricity System Operator (ESO) may “snatch defeat from the jaws of victory” if it is careless in applying proposals to penalise participants who fail to deliver for the Demand Flexibility Service.

That is the view of the founder and chief strategy officer of frequency response service Flexitricity, who has raised concerns over the ESO’s service design proposals for the future of the DFS, which it recently revealed will become a year-round service.

Specifically, the ESO proposes to introduce penalties for under-delivery and limit payments for over-delivery. This includes:

• No payments for delivery below 25% of procured values
• Reduced payments for delivery between 25% and 50% of procured values
• Delivery cap to be set at 120% of procured values

Source: ESO

Speaking to Utility Week Alistair Martin said: “Out of pocket penalties have always been a bad idea because the power of the negative, of the downside, is massively greater than the value of the incentive.”

Under the proposals opt-out type meter points could end up paying the ESO if they fail to deliver what is expected of them.

Martin said the ESO’s proposals could mean Flexitricity makes its customers opt-in to the DFS, meaning they have to fill out daily admin in order to participate. “That could result in some customers choosing not to participate,” he warned.

In his view, the correct way to penalise poor performance in a balancing service is initially rewarding participants with less money. If the problem persists, participants should not be allowed to continue to take part in the service.

The Flexitricity founder called for certainty around what is going to happen to opt-out capacity providers.

“If they’re careless on the matter of the application of penalties and don’t take an approach that is informed by the genuine concerns of potential participants at the consumer and business consumer level…ESO could make a mistake here that snatches defeat from the jaws of victory if they get the penalty point wrong,” he warned.

Also speaking to Utility Week was Alex Schoch, Octopus Energy’s global head of flexibility & electrification, who welcomed the move to implement penalties for providers failing to deliver what is expected.

He said: “Our initial reaction is that it’s an interesting first proposal…if we want demand flexibility, and we need demand flexibility to be an absolutely central part of balancing a net zero energy system, there has to be an incentive to make sure that service providers are accurately delivering what they say they are going to deliver.”

An ESO spokesperson commented: “Last week we announced our intention to evolve the Demand Flexibility Service, so that it could continue as a year round commercial service, furthering the participation of consumer flexibility in the electricity market.

“We welcome industry views on our initial design and will be engaging across the sector ahead of a formal consultation later in the summer. We welcome all members of the industry to contact us with their feedback and to participate in the formal consultation, once launched, so that we can deliver the most effective service that can further unlock the benefits of consumer flexibility.”