ESO’s Local Constraint Market disadvantages suppliers, Energy UK says

Suppliers would be “disadvantaged” by National Grid Electricity System Operator’s (ESO’s) proposal for a Local Constraint Market, according to Energy UK.

The trade association warns that ESO’s plan for an alternative price adjustment mechanism risks creating a price imbalance which will ultimately eat away at supplier profits.

The ESO’s Local Constraint Market is designed to manage transmission constraints during peak wind energy flows by creating a local marketplace that diverts extra wind power into local assets at times when southward flows are at capacity.

It also means wind turbines remain online longer, saving significant sums of money. Between 2021 and 2023, £1.5 billion was used to curtail over 6.5TWh of wind power, resulting in 2.5 million tonnes of emissions.

Implementation of the Local Constraint Market would effectively see consumers paid to “turn-up” domestic energy usage during times of surplus power.

However, Energy UK claims that domestic turn-up will have “unintended consequences” for suppliers.

“Whilst demand turn-up will entail the consumer consuming more units within the specified period, this demand, more often than not, will be time-shifted rather than additional,” Energy UK’s response to the ESO’s informal consultation states.

“Here the supplier may need to cover the cost of the imbalance without additional revenue from higher consumption.

“Even where demand is additional rather than time-shifted, the supplier could lose out.”

It adds: “The majority of domestic turn-up will come from larger automated loads such as electric vehicle charging. Tariffs for overnight charging can be very low and therefore any profit here may be outweighed by the cost of resolving any subsequent imbalance.

“Whilst the LCM is usually only called when there is excess supply (market long, low imbalance price), it can also be called when there is a local surplus (creating a thermal constraint) within a wider context of national shortage. This would risk a high imbalance price that could outweigh any profit from additional demand.

“In all of these scenarios, the supplier will be disadvantaged by the actions of another participant. As such, the proposal is not viewed to be neutral or fair for all participants, and so members opted not to back the specific proposal.”

In light of its concerns, the trade association has called for a strategic review by Ofgem or the Department for Energy Security and Net Zero “to resolve new kinds of imbalance between market participants and how/ whether these new flows can be accommodated within the current settlement process”.

It adds: “However, given the urgency of resolving this issue (for the LCM and other future services), members would support the ESO if it were to raise an Issue (rather than a Code Modification) with Elexon to facilitate wider industry discussion. Members are confident that, with the support of Ofgem, a solution could be agreed within six months (acknowledging that any solution may take longer to implement).”

In response to Energy UK’s concerns, an Elexon spokesperson said: “In 2020, BSC Modification P354 introduced arrangements for adjusting suppliers’ imbalance charges to ensure they are not affected by independent aggregators’ actions. But the P354 solution can’t operate in isolation, and the lack of an agreed industry approach to handling the broader commercial implications of such adjustments for Suppliers and independent aggregators is potentially problematic, especially in the context of demand turn-up services such as the local constraint market (LCM).

“In this context, we think the ESO’s proposed short-term fix (of using an alternative compensation method in place of the P354 solution) may well have benefits in unlocking access to the LCM.

“However we recognise suppliers’ concerns, and we don’t believe such ad hoc arrangements can form the basis of a long-term solution. We therefore plan to raise an industry issue group to develop an enduring solution that delivers a genuinely level playing field between electricity suppliers and independent aggregators.”

The ESO has been trialling its Local Constraint Market in Scotland alongside Piclo.

A trial carried out last year saw customers paid to turn-up their low carbon flex assets including heat pumps, electric vehicle chargers and electric heating.

Between May 2023 and June 2023, across 10 different days, a total of 3MWh of flexibility was contracted and dispatched, with flexibility service providers Orange Power and CUB UK.

Piclo and the ESO are now scaling up these initial trials, working alongside the distribution network operators covering the Scottish regions.

The ESO developed the Local Constraint Market in reaction to rapidly rising constraints costs, which surged from several hundred million pounds in 2014 to around £2 billion in 2022.

Speaking to Utility Week last week, chair of the energy security and net zero committee Angus MacNeil warned that grid constraint costs could be the next pinchpoint of public anger.