Re-balancing the balancing costs –BSUoS charges to be levied solely on suppliers from April 2023

Balancing the electricity system costs money. National Grid in its role as Electricity System Operator (ESO) takes actions in every half hour to achieve the remarkable feat of keeping supply and demand finely balanced on our national electricity system – maintaining a system which runs between 49.8 and 50.2Hz with very high reliability. Currently, the costs of balancing the system are recovered from suppliers and large transmission connected generators through Balancing Services Use of System (BSUoS) charges. BSUoS is levied on a £/MWh basis, based on the cost of balancing the system in each half hour divided by the total chargeable volume on the system in that half hour.

In November 2019, Ofgem issued its Targeted Charging Review (TCR) decision and requested that the ESO lead a Second BSUoS Task Force to explore who should pay the charge and how it should be recovered. This concluded that suppliers should pay all BSUoS charges subject to enough notice to industry before implementation, and that it should be a fixed, volumetric ex ante charge. Connection and Use of System Code (CUSC) modifications have followed this taskforce, and to facilitate removing BSUoS from generators, CMP308 Removal of BSUoS Charges from Generation was re-started (having previously been paused to allow the taskforce to reach its conclusions).

Ofgem issued its decision to approve CMP308 on 25 April. The regulator considered that implementing CMP308 removes a number of market distortions both within the GB wholesale market, and in regards to cross-border trade. Currently, distributed generators do not pay BSUoS charges meaning that they are able to offer cheaper wholesale power, due to transmission-connected generators needing to factor BSUoS charges into the wholesale price they charge. In addition, the fact that distributed generators do not face BSUoS means that they may be able to bid at a lower price into Capacity Market (CM) and Contracts for Difference (CfD) auctions. Ofgem considers that this could distort auction outcomes, or could distort balancing and ancillary services markets.

Currently, to help combat this potential distortion, transmission connected generators with a CfD are compensated for having to pay BSUoS. However, Ofgem notes that continuing this compensation following the implementation of CMP308 would be inappropriate and potentially lead to windfall gains for these generators of up to £400mn. The regulator has therefore been engaging with the Low Carbon Contracts Company (LCCC), and the LCCC is confident that the necessary contract amendments can be implemented to remove this benefit in good time before the implementation of CMP308.

From a financial perspective, modelling commissioned for Ofgem suggests CMP308 is forecast to benefit energy consumers by £320mn in the period running up to 2040, assuming a net zero compliant scenario. Ofgem also said that removing BSUoS from generation will see a reduction in GB energy system costs by approximately £400mn through more efficient dispatch and investment. While GB emissions are expected to increase under the change – given larger fossil-fuelled generators will no longer face BSUoS charges on their volumes and can better compete against distributed generators in the wholesale market – Ofgem said that emissions would fall by a greater amount in interconnected markets, leading to benefits to society of ~£810mn by 2040.

Implementing CMP308 is not a silver bullet when it comes to market distortions and Ofgem notes that moving BSUoS charges entirely onto suppliers will increase the distortion of behind-the-meter (BtM) generation offsetting demand BSUoS charges. Because the total share of BSUoS charges suppliers are liable for is increasing, the potential value in using BtM generation to avoiding BSUoS charges also increases. While Ofgem considers this to be distortive, it believes that addressing the other market distortions discussed above is more important.

CMP308 will be implemented on 1 April 2023 and, while an Ofgem decision is still awaited on the proposal to make BSUoS a fixed volumetric charge, transmission-connected generators now have clarity that they will no longer be liable for BSUoS costs from this date.

Our bespoke generator weekly report sets out the current open energy consultations and industry code modifications you should be aware of for your market position and offering. We provide an impact rating and explanation for each update to help prioritise your resources and understand the effect on your business. For more information, please get in touch with Tom Faulkner on 01603 542123 or via email t.faulkner@cornwall-insight.com.

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