Taskforce recommends fixed balancing charges on suppliers

The taskforce commissioned by Ofgem to review Balancing Services Use of System charges has called for the fees to be fixed in advance for periods of up to a year and levied entirely on final demand.

The Second Balancing Services Charges Task Force, led by National Grid Electricity System Operator (ESO), said this would be the most appropriate arrangement given the conclusions of its predecessor that the charges could not be applied to users in a way that reflects their individual impact on balancing costs and should instead be designed to achieve efficient cost recovery.

Balancing Services Use of System (BSUoS) charges are currently paid by both suppliers and generators and are used to recover the cost of the ESO’s balancing actions and services. The ex-post charges are calculated for each half-hour settlement period on a per-megawatt-hour basis.

The taskforce said the charges should continue to take the form of volumetric per-megawatt-hour fees but should be calculated ex-ante for periods of up to a year and withdrawn from generators.

In shifting the burden entirely onto suppliers, its recommendations align with the planned overhaul to residual transmission and distribution charges confirmed by Ofgem in November last year as part of its Targeted Charging Review. However, the taskforce diverged from the regulator’s decision in rejecting the banded per-site charges it selected to recover residual costs.

Writing in the foreword to its final report, the taskforce’s chair and market delivery manager for the ESO, Colm Murphy said: “While to most, the economics and workings of network charging methodology is an exceedingly dry topic, it cuts to the very heart of some of the most fundamental questions we as an industry need to address in our pursuit of net-zero carbon: ‘Who should pay for our critical infrastructure and how should the charge be constructed?’”

Explaining the taskforce’s answer to the first of the two questions, the report said applying the charges only to final demand would avoid “the more complicated approach associated with passing costs through from generators, via multiple market mechanisms, to suppliers and ultimately to the end consumer.”

It would also “correct the existing market distortion”, whereby generators connected to the transmission network are liable to pay the charges but not those connected to the distribution network.

The taskforce noted that the charging base could be expanded to included distributed generators but said this would create a new distortion as behind-the-meter generation would remain exempt.

It did acknowledge that retaining volumetric charges would still allow for avoidance by behind-the-meter generators, but it said levying the charges solely on demand would also align Britain more closely with its interconnected or soon-to-be European neighbours.

On the second question of how the charges should be recovered, the taskforce said: “There was widespread agreement that fixing charges would provide a much greater degree of certainty over the balancing services charges bill that suppliers will expect to face for the duration of the fixed period.

“This would benefit customers as supply tariffs could be created that accurately reflect the balancing services bill and a risk margin would not need to be factored in. The supplier price cap may also be easier for Ofgem to set as there would be greater certainty over the balancing services charges component of a consumer’s bill.”

The consensus among members was that a 6-month fix period was the minimum required in order to unlock the touted benefits. The taskforce recommended a combined notice and fix period of 14/15 months, for example, a notice period of three months and a fix period of a year.

The members also agreed that volumetric fees would be easier to translate into tariffs than the banded per-site levies chosen by Ofgem for residual transmission and distribution costs. They accepted that per-site charges would be more difficult to avoid overall but said dividing them into bands could still create “cliff edges” at the boundaries and incentives to move between them.

The taskforce said the ESO should be able to manage to manage the cash-flow risks created by fluctuations in balancing costs more cheaply than suppliers due its regulatory authority to recover any shortfalls.

The ESO, for its part, noted it is a “standalone legal entity with a relatively small asset base.”

“This makes raising finance more difficult than for asset heavy businesses such as networks,” it added. “The scale of the current borrowing facilities for the ESO are only possible through implied support from the ultimate parent company.

“Whilst the shareholder may be willing to underpin the facilities required to provide a modest level of support to BSUoS tariff fixing, they could not be expected to support an uncapped liability with potentially significant impacts to group liquidity and short-term earnings.”

The ESO said it could support an ex-ante fixed charge if either there is a cap on its liabilities that is “proportionate to the financial standing of the ESO as an independent and legally separate entity from the National Grid group”.

However, the wider taskforce was not in favour of any cap on under-recovery, stating: “A cap creates uncertainty and removes any benefits of a fixed charge. The task force ultimately did not believe that the ESO’s assertion that BSUoS risk could not be financed at an acceptable cost to consumers was valid.

“The cost of managing the volatility of BSUoS is ultimately paid for by consumers and the task force believe that this cost will be lower if it is managed by a party with a regulatory guarantee of recovery, compared to if it is managed by parties with no such regulatory guarantee.”

As for further work, the taskforce recommended that the analysis undertaken to assess the Connection and Use of System Code modification CMP201 be repeated with new data and expanded to cover additional markets. The modification, which sought to shift balancing charging solely onto demand, was initially proposed by National Grid Electricity Transmission in 2011 and rejected by Ofgem in 2014.

At the time, the regulator concluded that the modification would increase costs to consumers by shifting the merit order between cheaper European imports and more expensive marginal domestic generation. The taskforce said a lot has changed since then and the analysis should be revisited.

It said a suitable combination of notice and fix periods also need to be identified and that there should be further consideration of distribution impacts of its proposed changes, particularly on vulnerable consumers and energy intensive users.