A £15/MWh Balancing Services Use of System (BSUoS) costs price cap has been introduced following skyrocketing forecast prices.
Ofgem has approved the change, which came into effect yesterday (25 June 2020), after SSE Generation put in a request to the CUSC Panel to defer BSUoS payments.
This came after National Grid ESO's forecast from 15th May, which identified an additional £500 million increase in the cost of managing the electricity transmission system because of the impact of COVID-19.
A number of different solutions were put forward and debated by a workgroup, ranging from deferring costs by six months to deferring a set £62.5m per month as a proxy for COVID-19 related costs from 1 June 2020 to 30 September 2020.
SSE itself suggested spreading the cost of additional balancing equally across all the settlement periods during 2021/22, which it said would help suppliers and generators manage the unprecedented charges.
Ofgem decided on an option suggested by the workgroup and has implemented a £15/MWh price cap, which applies in each settlement period from now until 31 August 2020.
Any under-recovery of revenue from the cap will be recovered through BSUoS charges equally across all settlement periods in 2021/22, it said.
This is despite a vote from the workgroup that found the baseline - or no changes - to be the best option. The CUSC Panel also came to the conclusion that the baseline was the best option for facilitating the Applicable Charging Objectives (ACO).
However, Ofgem said it had decided on the price cap solution due to it best facilitating “the achievement of the applicable objectives of the CUSC” and it being “consistent with our Principal Objective and Statutory Duties”.
It said that it expects that "prudent market participants would have accounted for the possibility that summer costs may exceed the NGESO’s forecasts "and therefore doesn't agree that all increases should be considered exceptional."
However, it went on to detail how the price cap option would best facilitate the first ACO - with it having a positive effect on competition by enabling deferral of exceptional charges that prudent market participants couldn't have foreseen, without a significant risk of windfall gain - and have a neutral effect on the others, leading to its decision.
Ofgem continued to say that it doesn't expect the total amount of charges that are likely to be deferred under the price cap to exceed 5% of total BSUoS charges from 25 June until 31 August.
The change does mean that National Grid ESO will see a loss of revenue this year, however, which will be recovered in the following year. Whilst Ofgem is confident the level of deferred costs can be managed within National Grid ESO's current financial arrangements, it did say that if the costs approach £100 million it would consider "how to further mitigate" the ESO's exposure.