ESO raises minimum price for demand flexibility tests

National Grid Electricity System Operator (ESO) has increased the minimum price that will be paid to participants during periodic tests of the new Demand Flexibility Service it is introducing to help prevent blackouts this winter.

The ESO had originally proposed in September to set the Guaranteed Acceptance Price in line with the average unit rate for electricity under Ofgem’s price cap, which was then expected to be 52p/kWh from October.

However, the government subsequently announced its Energy Price Guarantee, reducing this rate to 34p/kWh, which the ESO said would make the service less attractive and reduce the volume participating.

It also received feedback from potential providers, who said a much higher price is needed to make the service viable this winter.

The ESO has therefore raised the minimum price for the tests to £3/kWh, which it said would unlock a majority of the available flexibility. It will take bids up to the marginal price it would have accepted in the Balancing Mechanism during the delivery period.

The body said it plans to hold at least 12 tests of the service this winter – four during the first month and two in each subsequent month.

The service, which will run from the beginning of November to March 2023, is open to half-hourly metered assets in unit sizes of between 1MW and 100MW that are able to respond for a minimum of 30 minutes. Assets that are dispatchable in the Balancing Mechanism, participate in ancillary or DNO flexibility services or have a Capacity Market contract will not be eligible to participate.

There will be no minimum price for tenders for utilisation of the service, which will be conducted on a pay-as-bid basis. The ESO will accept bids from lowest price to highest until it meets its requirement.

The ESO has also set outs its forecast requirements for the service this winter. In the base case scenario set out in its Winter Outlook report for 2022/23, the ESO said it expects to need up to 1.5GW of flexibility on up to five days, with the typical requirement being 1GW.

However, in its first alternative scenario, in which there are no imports available from interconnectors with France, Belgium and the Netherlands, reducing supplies by 3.9GW, the ESO expects to require up to 5.5GW of flexibility on between 10 and 35 days. It said the typical requirement in this scenario would be 2GW.

And in its worst-case scenario, in which 10GW of combined-cycle gas turbine capacity would be unavailable due to fuel shortages, the ESO said it would need up to 12GW of flexibility, with a typical requirement of 3.5GW. It said the service would also be needed on an additional 10 to 14 days.

The ESO has also stated it is willing to take “every available commercial and market action” to avoid blackouts this winter, even if the costs exceed the Value of Lost Load (VoLL) as stipulated in the Balancing and Settlement Code at £6000/MWh. It said it will only disconnect customers as a last resort measure when all other options have been exhausted.

For the first time ever, the ESO took balancing actions earlier this year which exceeded the administrative VoLL, accepting interconnector trades at prices of up to £9,725/MWh on 20 July due to significant network constraints in the south east of England. The body said it spent around £69 million on trades on the day, with more than £12 million being spent at prices that exceeded the VoLL.

Given the length of time since it was last considered, the ESO has called for review of the administrative VoLL, noting that even the current rate was based on analysis that put the true figure at £17,500/kWh but was adjusted down by Ofgem.

Commenting on the decision to increase the minimum price for tests of its Demand Flexibility Service (DFS), Sarah Honan, flexibility policy manager at the Association for Decentralised Energy, said: “The DFS will allow households to take back control of their electricity usage to safeguard the fate of the grid, and be rightly rewarded for doing so.

“The launch of the service will be a hugely positive development, one that is absolutely critical if the UK is to avoid blackouts and grid interruptions over the course of what is sure to be a difficult winter period.

She continued: “Alongside industry, we said the ESO needs to put more money into this and they have listened. It is only right that households will be paid for providing this essential service to maintain the security of electricity supply, and at the ADE, we are happy to hear that the amount of money being offered to participating households has been increased.

“A more flexible energy system provides a huge deal of value, and this should be reflected in what is paid to consumers.”

Octopus Energy and Flexitricity both recently announced they will provide access to the service to their customers, with the former stating that it expects them to earn £4/kWh on average for reducing their electricity consumption during periods of peak demand.