Ofgem backs fixed balancing charges on consumers

Ofgem has supported the recommendation of the Second Balancing Services Charges Task Force that balancing costs should be recovered through fixed per-megawatt-hour charges on consumers.

The regulator agreed with the taskforce that this would be the most efficient way to recover the costs, while removing the current disparities between different types of generation.

The first taskforce was launched alongside Ofgem’s minded-to decision for its targeted charging review – a significant code review looking at residual network charges – and concluded that Balancing Services Use of System charges do not provide a useful price signal for influencing behaviour. It said they should therefore be designed for efficient cost recovery.

The second taskforce, which was likewise led by National Grid Electricity System Operator (ESO), was asked by Ofgem to apply these conclusions to assess how the charges should be recovered and who should be liable to pay them.

In its final report in September, the taskforce recommended that balancing costs should be recovered through fixed volumetric charges on final demand. As an example, the report said charges could be set three months in advance and then fixed for a year.

Responding to the report, Ofgem said the taskforce has “presented a good case” for this model but qualified that “more work is needed to quantify the costs and benefits of reform”.

It agreed that levying the charges on final demand would be an effective way to bring an end the current disparity between transmission-connected generators, which are liable to pay the charges, and distributed and interconnected generators, which are exempt.

The regulator acknowledged this “could impact both positively and negatively on different network users, depending on their business model” but said the charges “were not intended as a policy support mechanism to incentivise certain types of generation.” It said if additional financial support for low-carbon generation is warranted, then it should be provided though “targeted policy measures.”

Ofgem said this element of the proposed reforms could be implemented by April 2023.

The regulator also agreed there are clear advantages to recovering balancing costs in “a more predictable way” than under the current “floating” charges. It said fixing them in advance would reduce uncertainty and financing costs for industry.

It said volumetric per-megawatt-hour charges would also be appropriate given the nature of balancing services and would avoid the “distortionary incentives” that form at the boundaries of charging bands, which it has nevertheless decided to adopt to recover residual network charges.

“The combination of volumetric BSUoS charges with banded fixed residual charges may be beneficial in terms of limiting avoidance and effectively serving as a form of hybrid cost-recovery charge,” it added.

Ofgem said it expects the industry to develop “refined solutions” in line with the taskforce’s recommendations through the code modification process.

The taskforce also recommended that the financial risk of over or under-recovery should be borne by the ESO. Ofgem noted that the ESO has expressed “strong concerns” over this proposal, claiming it would only be able to take on this risk if the liability is capped.

The regulator said: “We will carry out further work to explore the cashflow exposure of the ESO under a range of charging options for the ESO and any alternative options for which party bears this risk.”