Rising BSUoS Prices Continue to Harm Consumers...

3 Jun 2020

Home Rising BSUoS Prices Continue to Harm Consumers...

Last year we wrote an insight called “Increasing Magnitude and Volatility of BSUoS Pricing Could Hurt Some Consumers”. Since then Balancing Use of System (BSUoS) pricing has continued to point upwards in both magnitude and volatility, becoming a major cost for consumers in some settlement periods. With this in mind, as well as National Grid forecasting BSUoS prices to reach averages of over £8/MWh for July and August 2020, it certainly seems time for an update on this unstable and increasingly expensive non-commodity cost.

Previously, we discussed how prices had moved up from the historical average of c. £2.50/MWh to around £3/MWh. Dwarfing that change is the fact that the simple average of BSUoS pricing in 2020 is £4.45/MWh. This is an uncomfortable rise for consumers on pass-through contracts, especially in a year that has seen unprecedented rises in CfD and FiT costs. The increase in volatility is clear with the variance of 2020 BSUoS pricing sitting 25% higher than 2019, suggesting a greater spread in pricing.

Evidently some deeper analysis is needed to unravel the potential drivers of this complex and erratic charge. The first key driver is lower demand due to COVID-19 lockdown measures, which will have an upwards effect on all charges recovering a fixed amount on a £/MWh basis. However, more interesting drivers are also at play. Figure 1 shows the average proportions of wind and solar outputs to national demand (INDO) for each half-hour from January 2019 to April 2020, whilst Figure 2 shows the shape of BSUoS pricing over the same period. It is clear that BSUoS prices are generally higher overnight, which aligns with the relative swell in wind output as a percentage of national demand. This suggests Grid are having to manage wind farm output via curtailment in the Balancing Mechanism (BM) relatively frequently, which is recovered from consumers via higher BSUoS pricing. This can be seen with Feb 20 pricing being amongst the highest in conjunction with standout wind generation outturn, both in terms of absolute output and output relative to INDO due to several storms. This also coincided with an outage of the Western HVDC Link, putting further pressure on constraints and hence support BSUoS pricing.

Figure 1:

Figure 2:

An interesting recent development in BSUoS Pricing is both the shape and level in April 2020. The BSUoS price shape shifted to showing a strong wind and solar shape with overnight prices supported by relatively strong wind and peaks supported by solar output. This change appears to be down to several key variables; firstly, the absolute level of solar output through April 2020 was stronger than any other month in the dataset, secondly the national demand shape has been lowered and smoothed by COVID-19 lockdown measures. The flatter national demand through April meant that the normal pick-up in demand to soak up this swell of supply was absent, further stretching constraints on the grid. Controlling asset output around these zero-marginal cost generators is expensive and is being passed through to suppliers, and ultimately consumers, through both increased policy costs and BSUoS.

Whilst it’s clear that the UK needs renewable energy sources to push to a low carbon economy, the current structuring of BSUoS and other policy measures are detrimental to consumers. One such perverse outcome of current BSUoS charging is that embedded generators often receive BSUoS prices as a benefit, being paid by suppliers for reducing their BSUoS exposure. This means that not only are BSUoS prices higher for consumers because of the lack of flexibility on the grid amidst high renewable penetration, but the source of some of this inflexibility is incentivised to continue generating at the disadvantage of consumers. However, this piece is not an assault on renewable generation, rather a reflection of the flexibility needed on the grid to support them. The System Operator (SO) reportedly offering to pay £56 million to a nuclear generator to reduce output for four months, as well as the fast-tracking of GC0143 to allow the SO to disconnect embedded generators as a last resort both point to an inflexible grid ill equipped for a future of high renewable penetration.

BSUoS costs have also been in the regulators spotlight, with two changes to policy concerning BSUoS being passed in recent months. Firstly, the Targeted Charging Review has been approved, this will remove the BSUoS benefit for embedded generators and recover balancing costs across a larger charging base. However, policy change CMP281 will see the end of double charging of BSUoS costs for licensed energy storage as it is removed from imported volumes. Whilst this will decrease the charging base a little, the slight improvement in the case for energy storage by competing on a more level playing field with other generation types, is evidently a positive step to building a more intelligent and flexible grid. With plenty of policy changes and a second working group set up to examine the cost, it certainly adds further uncertainty around the future pricing and structure of balancing charges.


For any further information or comments on this piece, please contact Sam from our Executions and Solutions Team on 020 787 04959 or at s.hill@brookgreensupply.com
 

Author - Sam Hill 

Executions and Solutions Team 

03/06/2020

Terminology: 

  • BSUoS - Balancing Use of System
  • CfD - Contract for Difference
  • FiT - Feed-in Tariff
  • HVDC Link - High Voltage Direct Current Link 
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The information provided in this insight article is intended for Brook Green Supply Limited clients and subscribers only. The content is provided and intended for general information purposes only. All pricing stated in this insight article is indicative, at the time of writing, and may not be attained in trading at any time after report publication. For the avoidance of doubt, Brook Green Supply Limited does not represent or endorse the accuracy or reliability of any of the information or content, expressed or implied, nor are we acting in any capacity as a fiduciary to you. Recipients of this insight article must not rely on the information and are advised to take any necessary steps to validate such information, independently assess the economic risks and merits and make your own assessment, or appoint appropriate advisors, on any legal or tax consequences before acting upon it. Under no circumstances will Brook Green Supply Limited have any liability for any loss or damage caused by dependence on any information contained within this insight article. Please contact our execution and solutions desk via tradingdesk@brookgreensupply.com for further information. 

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