Ofgem reviews regulation of ancillary service assets

Ofgem has issued a call for evidence on the regulatory treatment of dedicated assets for the provision of the ancillary services to National Grid Electricity System Operator (ESO).

The regulator said it is reviewing the arrangements following the emergence of several issues during the ESO’s pathfinder projects – its trials of new services including for grid stability and voltage control.

“There is a strong need for new sources of stability and voltage support to connect to the transmission system as the volume of traditional synchronous generation declines,” Ofgem explained. “It is important that the right regulatory and policy regime is in place to encourage innovation and support investment in the most efficient solutions.”

It continued: “We want to consider the different costs and charges providers face and the extent to which this could create an uneven playing field. This includes the costs and charges governed by industry and regulatory frameworks (such as use of system costs) and those governed by wider policy (such as final consumption levies).

“We are aware that unlicensed providers face different costs to licensed providers as the former may need to pay additional charges on the electricity they consume. Additionally, those that receive regulatory funding could face very different investment risks and costs to those that provide solutions to the ESO on a commercial basis.”

Ofgem said design of the final consumption levies (FCLs) used to pay for schemes as Contracts for Difference and the Capacity Market, for example, did not envision the commercial provision of dedicated assets for ancillary services: “The payment of FCLs by these providers could materially affect the outcome of pathfinders and any future competition for system services.”

The regulator said there are also questions over the licencing arrangements for these assets: “The legislation on licensing was introduced by the Electricity Act 1989 when stability and voltage services were typically provided by large generating sites or transmission network assets. There was therefore no need to specifically consider how assets dedicated to ancillary services should be classified.

“With the emergence of new providers, we believe there is a need to review if, and how, ancillary service technologies should fit within the licensing regime, particularly as their classification has knock on impacts on the costs and charges that parties face.”

Ofgem said it has previously taken the temporary position to treat synchronous condensers and shunt reactors as generation assets and, in the case of the former, will continue to do so over the short term. It noted that it has also previously granted a transmission licence to Mersey Reactive Power for the operation of a shunt reactor but this should not be seen as a precedent for its review.

The regulator said it wants to consider whether dedicated ancillary services assets should be licenced at all: “Given the critical nature of these services to system security, there could be benefit in having greater regulatory oversight. On the other hand, we do not intend to create a disproportionate regulatory burden through unnecessary processes, especially where parties may only own a single asset of this type.”

“If these solutions are licensed on an enduring basis, then there is a question of how they should be classified,” it added. “As discussed, we do not consider that any of the existing categories represent a perfect fit for these new dedicated ancillary service assets and there could therefore be merit in considering a new categorisation. There is also a relevant question of how these solutions should be incentivised and funded in the long run, as that could have implications for the type of licence the providers are granted.”

The deadline for responses to the call for evidence is 31 May.

The ESO recently awarded contracts worth £323 million to 10 projects in Scotland as part of its grid stability pathfinder, which includes the provision of inertia.