Post: Ofgem publishes decision on CMP308 charging reforms

Ofgem publishes decision on CMP308 charging reforms

The energy regulator has published its decision on a proposed change to the way that the Balancing Services Use of System (BSUoS) charges are collected from electricity network users, following its Targeted Charging Review.

What are BSUoS charges?

BSUoS charges are the means by which the Energy System Operator (ESO) recovers costs associated with balancing the electricity transmission system. They recover several categories of costs, including:

• the costs of constraints;
• the costs of frequency response services;
• the costs of reserve provision;
• the costs associated with Balancing Mechanism actions; and
• the ESO’s internal costs.

BSUoS charges are currently recovered using a volumetric charge (£/MWh) from both demand customers and liable generators based on the amount of energy imported from or exported onto the network within each half-hour period.

Under current arrangements generators liable for BSUoS are those:

• connected to the transmission system, with charges based only on their exports
• distributed generation with capacity of 100MW or greater (large, distributed generation) based on their energy exports and imports
• Previously embedded generators received BSuOS as a benefit until this was removed as it was determined to distorting the system

Interconnectors and smaller distributed (<100MW) generators and storage do not face the charge. Demand BSUoS charges are levied on suppliers in relation to their gross energy imports and the costs passed through to end consumers.

The charges have become highly volatile on a half hourly basis in recent years and very difficult for businesses and suppliers to accurately forecast.

What’s changing?

On 25 April 2022, Ofgem published its decision to approve a Connection and Use of Systems Code (CUSC) modification proposal (CMP308), which will move the charging of BSUoS, which is a non cost-reflective charge, from generation and demand to “Final Demand” only. Final Demand is currently defined in CUSC as electricity consumed other than for the purposes of generation or export onto the electricity network. This means that BSUoS will be removed from generators and charged to end user customers only in the form of a flat volumetric £/MWh charge.

In its decision Ofgem said that the key reasons for the change were:

• Levying BSUoS charges on Final Demand only would reduce distortions between large generators who are currently liable for BSUoS charges and interconnectors and other forms of generation, in particular small, distributed generators, who are not.
• Expanding the charge base to include distributed generation would create a new distortion between network-connected and on-site generation, which could be avoided by charging BSUoS solely to Final Demand.
• Given BSUoS charges are cost recovery charges, it is not efficient to recover part of it via generation, because doing so means the costs are passed through into wholesale costs, which includes unnecessary risk premium and transaction costs.
• Price signals that are currently sent to generators through BSUoS charges are not cost-reflective and may lead to generation being dispatched “out of merit”, where more expensive generation is brought into the market before less expensive generation.
• The change would better align to the UK’s market arrangements with those within other EU member states, and to provide more effective competition and trade across the EU to deliver benefits to all end consumers.

What does this mean for I&C businesses?

As generators will no longer have to recover these costs, Ofgem expects wholesale electricity prices to reduce, offsetting the increased BSUoS costs to end customers. But if customers want certainty over these costs, they’ll need agreed upfront BSUoS for supply contracts with an end date beyond 31 March 2023.

What does this mean for generators?

• Remove a potentially volatile charge from generation investment that is only paid by certain parties
• Removes a complex charge that is often difficult for investors to model and understand.
• Impact strike prices awarded through CfDs – the strike prices of successful projects liable to pay these charges could be adjusted downwards after contracts are awarded. This would be done through the annual strike price adjustment

What does this mean for battery storage?

• Under current arrangements, reporting to NGESO includes metered data from some demand facilities which are to be treated as non-final demand
  • P419 will allow NGESO and Elexon to identify and exclude demand volumes associated with generation, storage and eligible services facilities (i.e. those which are not classed as Final Demand) when calculating liability for BSUoS charges –
  • P419 would expand the systems and processes introduced by P383 to allow Non-Final Demand Facilities to work with Suppliers to declare their Non-Final Demand metered data for the exemption of BSUoS charges and enable Elexon to provide NGESO with aggregated Non-Final Demand metered data via the P0210 ‘TUoS Report’ data flow.
  • As such, P419 would enable NGESO to exclude the declared Non-Final Demand data for the calculation of BSUoS charges and therefore facilitate CMP308.

How can GridBeyond Support you

Gridbeyond is a market leader globally supporting flexible assets to optimise market value via ESO schemes and traded energy markets. As a business we are well placed to support generators understanding the implications of changes to the UK regulatory regime and further support asset owners understand how these changes can impact your future revenues.