Ofgem approves temporary cap on balancing charges

Ofgem has approved a temporary cap on Balancing Services Use of System (BSUoS) charges to protect liable parties from an unexpected surge in costs this winter due to the ongoing energy crisis.

The cap of £40/MWh will apply until new BSUoS charging arrangements come into effect in April 2023. Balancing costs above this level, up to a maximum of £250 million, will be deferred to the 2023/24 charging year.

The cap was proposed by Saltend Cogeneration Company on 11 August through the Connection and Use of System Code (CUSC) modification CMP395.

The company, which originally suggested a much lower cap of £15/MWh, said exceptional market conditions have a led a significant increase in balancing costs, which have also become more volatile. It argued that the increase could not have been forecast by industry parties, which have had to add a significant risk premia into their commercial activities due to fluctuations in BSUoS charges.

Ofgem granted its request to fast-track the modification on 19 August.

The modification workgroup proposed five alternative modifications, which differed from the original proposal both in terms of the level of the cap and whether it should be reassessed during the deferral period, either by Ofgem or National Grid Electricity System Operator (ESO). The alternative levels proposed were £25/MWh, £30/MWh and £40/MWh.

Ofgem has now approved one of these alternative versions, WACM3, whereby the cap will be set at £40/MWh and there will be no reassessment during the deferral period.

Explaining its decision, Ofgem said whilst it accepts that BSUoS costs in 2022 have been significantly higher than in previous years and are expected to increase this winter, the cap should only cover “exceptional” costs that could not have been reasonably foreseen by industry parties.

The regulator said the lower levels proposed – £15/MWh and £25/MWh – represent costs that are high in relative terms but are “broadly consistent” with the ESO’s published forecasts and could therefore have been easily anticipated.

Ofgem said a cap of £40/MWh will provide the right balance between consumer cost and charge stabilisation. Given that all of the proposals included a limit on deferred costs of £250 million, the regulator said a cap at this level is also likely to provide protection for a longer period than the other options, which could see the limit reached sooner.

The cap came into effect on Thursday (6 October) and will remain in place until 1 April 2023, when the previously approved CUSC modification CMP308 will shift liability to pay BSUoS charges solely onto final demand, rather than both generation and demand. Ofgem is currently consulting on the related code modifications CMP361/362, which would also see BSUoS charges set three months in advance and fixed for periods of a year, starting in April 2023.