Ofgem gives final go-ahead to fixed balancing charges

Ofgem has given final approval to a code modification that will replace variable Balancing Service Use of System (BSUoS) charges with flat fees that are fixed in advance.

The charges currently vary between each half-hour settlement period based on the costs incurred by National Grid Electricity System Operator (ESO) to balance supply and demand on the power grid, meaning they are highly volatile and difficult to predict.

The changes are intended to reduce the resulting financial risks to suppliers and allow them to accurately incorporate the charges in advance into the tariffs they offer to consumers.

In its minded-to decision in September, Ofgem approved an alternative version (WACM5) of the original Connection and Use of System Code (CUSC) modification proposed by the ESO (CMP361) that would fix BSUoS charges for 12 months, with a notice period of three months.

To minimise the risk of in-period adjustments, both the original proposal and WACM5 would create a ring-fenced £2 billion reserve fund to allow the ESO to manage the cashflow impacts of using a fixed charge to recover unpredictable balancing costs.

However, Ofgem has now decided to approve another version of the modification (WACM3) that does not include a reserve fund but has a shorter fixed period of six months. It also has a longer notice period of nine months.

(Note: P level represents the risk of in-period adjustments based on the number of years out of 100 that charges would be expected to remain certain.)

Explaining its decision, the regulator said building up the reserve fund (over a period of two years in the original proposal and five years in WACM5) would lead to additional costs to consumers of between approximately £400 million and £1 billion per year: “We find this level of cost to be unacceptable, particularly at this time when meeting energy costs is a challenge for many GB consumers.”

Ofgem said although it would prefer a longer 12-month fixed period, none of the eight total versions of the modification had a notice period this long without relying on a reserve fund.

The regulator has directed WACM3 to implemented for 1 April 2023 when BSUoS charges, which are currently levied on both large generators and demand, will also be shifted solely onto final demand through the CUSC modification CMP308 approved in April of this year.

Both changes were recommended by the balancing charges taskforces launched by Ofgem following its significant code review of residual network charges and embedded benefits.

Given the planned implementation date, Ofgem said the first two periods of fixed charges will have shorter notice periods of two months and eight months respectively.