Can Capacity Market costs be recovered via a ‘mirroring’ process in the Balancing and Settlement Code?

Elexon confirmed on Monday (10 December) that Issue 76 Using the BSC to support Suppliers and the Capacity Market Arrangements has been formed and the first meeting will take place next Monday (17 December).

The outcomes of this process have the potential to enable suppliers to collect payments from their customers for the eventual payment to Capacity Market (CM) agreement holders, should the scheme be granted State Aid clearance following the suspension of the programme on 15 November after a European court ruling (read our blog here on the Court’s ruling and its impacts) and that retrospective payments are allowed that cover the current ‘standstill’ period.

Within the Balancing and Settlement Code (BSC), which all Ofgem licensed parties must become signatory too, any license holder can request an ‘issue’ be raised for deliberation by industry where there is a problem or potential improvement to current arrangements identified, but with no immediately obvious solution apparent.

The issue is debated by an issue group, which compromises self-selecting interested parties from industry, to consider potential solutions to the problem. The group has no formal powers, but can recommend that a BSC modification (for example) be raised to change rules to accommodate the solution. There is no set timetable for issue groups to conclude their deliberations, although given the importance of the topic and the desire to ascertain if solutions can be found rapidly, the current thinking is that the group will meet only once, although a second meeting is pencilled in for 20 December.

Issue 76 was raised by VPI Immingham LLP and Saltend Cogeneration Company Ltd to explore if and how arrangements could be made to use BSC processes to ‘mirror’ the collection of revenue from suppliers so that if, and when, the CM is restarted it mitigates the risk for suppliers and their consumers should calls be made for retrospective payments to CM agreement holders.

The proposer’s rationale is that although the CM legal framework is wholly separate from the BSC, all suppliers charged with collecting CM payments from customers are also BSC signatories and it is BSC meters that are used to quantify CM payments due.

At first glance the proposal appears rationale and sensible, but the issue group will have numerous questions to resolve, such as those put forward in the proposal to raise the issue:

  • On what basis would revenue be collected?
  • Should the level of the charge be varied to match the payments required? (i.e. what is the gap between what has/ has not already been billed)
  • What would be the impact on supplier BSC credit cover?
  • Would funds raised need to be placed in Escrow?
  • Is it possible to a “lift and shift” clause to release payments collected when State Aid clearance is given?
  • If the EC do not sanction existing CM agreements, how are capacity market payments returned to Suppliers/ end consumers?

In addition to these important questions, the more pressing one is which of the current BSC related charges is most suitable, if any, for collecting revenues in line with those that would have been collected by the Energy Settlement Company (ESC) had the CM not been suspended?

There are many industry charges collected via the auspices of the BSC, including imbalance charges, residual cashflow reallocation charges, Supplier Volume Allocation (SVA) metering system charges, communication charges, BSC Funding Shares, and Notified Volume Charges (also known as trading charges). The issue group will need to assess the suitability of all of these, not least as some are levied on licensed generators and others are an embedded benefit (the cost of the CM is recovered from suppliers on a gross basis).

Our initial assessment is that to avoid running the risk of potentially introducing a further embedded benefit or levying charges on licensed generators (many of whom will have CM agreements) the focus should be on exploring if the SVA metering system charge (as set out in BSC section D) is the best fit for this purpose. This charge recovers some of the costs of providing the industry systems associated with supplier metering systems. The charge is levied on the number of meters registered to the supplier within a month and so would exclude licensed generators. As the charge includes import and export meters it can be argued it would not constitute an embedded benefit. The downside is that the charge is based on meter numbers, and not metered energy volume—the basis on which the ESC recovers CM charges for suppliers.

Other options are to introduce a wholly new charge, but we suspect the time and cost required to achieve this would mean its not a viable solution.

However, the deliberations could come to naught if it is found that the proposed approach does not meet BSC Objectives, which are framed around effective operation of the wholesale market and transmission system (and make no explicit reference to the CM), and more fundamentally if it is ruled that it is not legally enforceable to ask suppliers to recover revenues for a scheme that is suspended.

Elexon has asked that parties interested in joining the issue group should confirm attendance by emailing  by 5pm on Thursday 13 December.

Related thinking

Energy storage and flexibility

Off-peak electricity use and home generation could cut billions off energy costs

New analysis from Cornwall Insight and Smart Energy GB has revealed the substantial cost-saving potential of household flexible electricity initiatives such as time-of-use tariffs, smart meters, solar PV, and batteries. The has data revealed national wholesale and system electricity costs could be cut by an annual £4.6bn in 2030 and...

Regulation and policy

Capacity Market: Rule changes for upcoming auctions

The latest round of Capacity Market auctions is underway following the publication of the auction parameters on 18 July, with the prequalification window subsequently opening on 26 July. In this blog, we explore some of the changes made to the rules and regulations of the scheme ahead of this year’s...

Energy Market Design

How does REMA impact energy generation, flexibility and consumers?

The Review of Electricity Market Arrangements (REMA) is the largest review programme of GB electricity market arrangements for a generation. It comes at a time when European energy markets are suffering extreme turmoil. Depending on the outcome there could be significant implications for generators, flexibility providers, and, indirectly, consumers. REMA...

Energy Market Design

REMA: electricity market design choices

Electricity markets will serve as the foundation for the future GB energy system.  This article examines some of the market design decisions that will be considered by the Review of Electricity Market Arrangements (REMA). Market design goals At its most simple, a well-functioning market will attract enough potential “buyers” and...

Commercial and market outlook

Capacity, reform, and unlawful strategies: 5 things that happened yesterday

Capacity, reform, and unlawful strategies: yesterday was a busy day for energy geekery. The developments encapsulate the shorter and longer term challenges and uncertainties present in the energy market presently: Read the full article here

Business supply and services

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...

Low carbon generation

Reform in haste, repent at leisure: squaring electricity market reform with investor confidence

The review of electricity market arrangements (REMA) signalled by the energy security strategy could impact wholesale & balancing markets, & there could be a need to examine the capacity market rules & CFD contracts. It is too early to know what options will ultimately be adopted or when changes would...

Commercial and market outlook

Perspective | Is the design of the electricity market costing consumers money?

This article is from our Energy Spectrum publication which was published on 4 March 2022. It has become increasingly clear the existing market design is unfit for either a future net zero world or a period of fossil fuel price crisis, but what market design might be best for our...