Annual BSC Meeting The challenges and changes facing Settlement 9 - - PowerPoint PPT Presentation

Annual BSC Meeting

9 July 2015 The challenges and changes facing Settlement Public

Health & Safety

Insert: Document title 2

ELEXON’s strategic priorities and performance against BSCCo Business Strategy

9 July 2015 Mark Bygraves Public

The Annual BSC Meeting – why?

Because the BSC requires us to Because it’s a great

• pportunity for

us to engage with our customers

Let me introduce the Executive team

5

Mark Bygraves, Chief Executive Officer David Osborne, Director of BSC Operations David Jones, Acting Director of Strategy & Delivery Nigel Smith, Chief Financial Officer

The BSCCo Business Plan

Strategy - approved by the BSC Panel Budget - approved by the Board

Our strategic priorities

• Actively manage, and continually improve, BSC services to ensure that we

deliver in an efficient, effective and economic way

Priority 1

• Drive efficiencies and savings in the operation of the BSC

Priority 2

• Improve the customer experience and develop richer customer relationships

Priority 3

• Develop balancing & settlement services to address industry challenges

Priority 4

• Invest in our people for the benefit of the industry

Priority 5

2014/15 in brief

360m Credit held at the end of the year

22 new

BSC C Par arties ies regist istere ered d

2500

Settlement Runs carried out

2.2 million

Energy Contract Volume Notifications (ECVNs) received

27 Change Proposals raised

79 Trading Disputes raised

20 Modification Proposals raised

12 approved Modifications and 20 approved Change Proposals implemented across three BSC releases

Re Resp sponded to to 16 16 ind ndustry co consult ltations

The BSC Audit was not qualified

Co Core re Se Sett ttlement Sys System pe perf rformance >99 >99%, , 10 100% 0% of the the ti time

Priority 1

Actively manage, and continually improve, BSC services to ensure that we deliver in an efficient, effective and economic way

Updating our reporting applications Supporting the BSC Panel Reviewing the Disputes Process Implementing a new BMRS platform BSC systems strategy

Priority 2

Drive efficiencies and savings in our operation of the BSC

Our activities are funded by BSC Parties We have a responsibility to ensure value for money through controlled financial management We aim to deliver innovation in partnership with our service providers

12 10 11 13 22 26 26 31 27 38 40 41 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Value For Money (%)

+1% vs 2013 +29% vs 2003

2014 customer survey showed that our customers’ perception of our value for money was higher than ever before

SCORE 8+ (Out of 10)

1 = Not At All Satisfied/ 10 = Extremely Satisfied 1 = Poor/ 10 = Excellent Value For Money

Priority 3

Improve the customer experience and develop richer customer relationships

Support for new entrants Introduction seminars Annual BSC Meeting Increased Exec-level engagement Website improvements Online training videos

Priority 4

Develop Balancing and Settlement services to address industry challenges

Horizon scanning and keeping the Panel informed Electricity Balancing Significant Code Review Smart metering: all aspects, including Smarter Markets and data quality/change

• f Supplier

Europe Support to the Competition and Markets Authority (CMA) investigation

Priority 5

Invest in our people for the benefit of the industry

Our people are

• ur most

important asset To continue to be viewed as an expert in our field Retaining existing expertise Investing in colleagues to develop their skills Recruiting new talent

In addition to our core BSC roles

EMR Warm Homes

Any questions?

■ mark.bygraves@elexon.co.uk ■ 020 7380 4137

Financial performance 2014/15

9 July 2015 Nigel Smith Public

FINANCIAL RESULTS FOR 2014/15

Insert: Document title 17

■ Final group report and accounts for the year show cost of sales of £32.9m ■ Costs relating to BSC activity (removing pass-through & EMR related) £29.5m ■ This compares to a budget for the year of £36.3m ■ Key points : – £1.4m under budget on Demand Led – £1.3m unutilised budget re System Strategy work – £1.9m unutilised budget re Market Development – Contribution of £1.6m due to EMR activity – Savings of £0.7m against our budgeted contracted costs – No controls deficiencies identified by auditor for the fourth year running and assurance from Deloitte regarding segregation of costs

FINANCIAL RESULTS FOR 2014/15

Insert: Document title 18

■ The table below shows the change in costs over time

■ These exclude NETA set-up costs ■ RPI has been applied to prior years to re-state these in “today’s money”

• 10,000

Costs of Regular ELEXON Activity Since NETA Go Live (in 14/15 money)

ISIS (Reprocurement) Project Demand Led Operational Costs Contracted £'000 £'000

Any questions?

nigel.smith@elexon.co.uk 020 7380 4295

Reflections of a governance groupie

Nigel Cornwall BSC AGM, 9 July 2015

What I will address …

• Over ten years on BSC panel, five
• n BSCCo board, but also active

engagement across industry governance

• CMA report confirms we are

entering a period of further significant change

– is industry governance up to it? – what can we learn from experience? – what can we expect next?

• CMA identify seven adverse

effects on competition (AECs)

– BSC is on critical path for 3 of these

• Dangers of not being responsive

to new technologies and business models

Flexible governance

• Sir David Currie’s remarks during Beesley lecture 2000 here

– “No system is perfect, so that any system of electricity trading is likely to need periodic adjustment and reform. The major virtues of NETA are twofold: that NETA moves the electricity market much closer to that of a normal market; and that it puts in place a governance structure that allows for relatively easy adjustment and change. In both respects, it represents a major advance on the Pool…..”

• NETA style governance

–

• bjective tests (applicable objectives)
• regulatory determination

– (mostly) independent panels and committees – hardwired processes

• Changes with Code Governance Review, especially:

– introduction of SCR – nod to self-governance – Code of Practice, including critical friend

BSC modification participants

100 200 300 400 500 600 Proposers Working group Assessment responses Report responses

Big Six Distribution Other Regulator Transmission operator/System operator Independent supplier Independent generator

Independent suppliers – 7% Independent generators 11% Independent suppliers – 8% Independent generators - 4% Independent suppliers – 13% Independent generators 9%

Independent suppliers – 11% Independent generators 9%

Two recent perspectives

• Ofgem reinvigoration of CGR:

–

• pen letter and post implementation review

– potential further reforms – closed out 26 June

• CMA has become increasingly focussed on code governance:

– can lead to inconsistent or delayed outcomes – creates material burdens on parties, in particular smaller ones, which could undermine incentives to promote changes – concern is Ofgem’s limited ability to influence development & implementation processes – AEC through stifling innovation and slowing change

Possible remedies

• Possible remedies:

– 18A: code administration a licensable activity

• monitoring performance, giving directions and imposing sanctions
• introduce consistency
• more efficient development

– 18B: give Ofgem more powers to intervene directly

• reserve power to intervene and at least set timetables
• ensure key mods developed and implemented in timely manner

– 18C: appointment of an independent code adjudicator

• more powers to project manage and set timetable
• Keep up with market developments and wider policy objectives
• Views by 31 July

A third perspective

• But need for more holistic

solution

• Last week’s Energy spectrum set
• ut wider thoughts - here
• Single code administrator

– don’t think its practical or desirable to combine as codes do different things, enabled under statute, with clear delegated authority from the regulator.

• Would best complement remedy

18A?

• Allow Ofgem to intervene less,

not more – not 18B?

• Would render 18C unnecessary?
• Common objectives, best practice

process, explicit responsibility for acting as a critical friend

Unfinished business

• Please that CMA took a look at electricity cash-out
• But it dismisses need to intervene on cash-out

– move to single price positive for competition – PAR50 fine, but:

• “should this demonstrate that there are real problems with further tightening, the mod can be revisited”
• “Ofgem should use the opportunity of the move to do a careful empirical analysis of the likely effects of a

further move to PAR1”

• no further issues with Reserve Scarcity Pricing
• But that shouldn’t be it:

– Issue 30 report (Nov 2007), P211 and P217 decision letter (Oct 2008), Issue 35 report (April 2009) and P282 decision (Jan 2013) – All flagged need to look at Gate Closure timing, contract notification processes and mechanisms to address volume exposure

• Of course Future Trading Arrangements Review:

– but this is suffering from the same process inefficiency that CMA has highlighted re code governance – electricity balancing SCR was actually a narrowly focussed look at imbalance price formation

A much wider picture

If the fully marginal and VoLL-based pricing is to be enforced, parties need ability to better manage volume risk arising from cash-out. GB only market in Europe to enforce dual notification with virtually no netting and establishes barriers to consolidation between parties. Crystallises artificial imbalances not seen by system.

More unfinished business …

• CMA served up wild card on electricity settlement:

– profiling masks cross-subsidy and distorts supplier incentives to innovate – £900mn potential savings from introduction of time of use tariffs – however currently no concrete proposals for using HH consumption for domestic settlement even after smart roll-out – gives rise to an AEC in the domestic retail market

• Elective half hourly settlement a prerequisite but other priorities include:

– optionality in settlements – other lower level changes to allow virtual trading units at GSP Group level – aggregation and netting – looking at distribution loss charging

• PRSG did not properly tackle this

– P272 has almost brought industry into disrepute with its regulator – new advisory group not in line with possible remedies – I have proposed a HH settlement club based on local pilots

• cost neutrality – socialise first mover costs

… and of course BSC governance

• Who owns the strategy and plan?
• In a world of reformed code

governance, current cohabitation model will be even more dysfunctional

• Strongly support emerging change

proposal:

– in the short term, transform Panel into a rules committee – Independent chair who would be a board member – management on board – dismissal of directors

• In the longer term would facilitate

separation between different functions under single code administrator

Postscript

• “…I think that in all of this the industry as whole missed a real

chance to initiate reform itself. Mired in the rigidities, politics and sectional interests of the Pool, the industry only saw the need for reform very late in the day and only after the regulator and the Government were determined to act. Those interested in virtual history may speculate what the reformed arrangements might have looked like had the industry been able to take the

• lead. As it is, we can all watch with keen interest over the next

year how the new arrangements are working. I am confident both that they will work well and that they will need to evolve. I am sure that future Beesley lectures will return to this fascinating subject…”

Thank you for listening …

Nigel Cornwall 07900092524 nigel@cornwallenergy.com @spectrumvoice

Then and now?

Eileen Marshall’s diagnosis of the Pool

• Limited demand-side participation
• Slow pace of needed reforms
• Prices too high and volatile
• Bidding/price setting is complex
• Capacity payments provide poor

signals

• Lack of competition in generation
• Does not respond to customer’s

concerns

• Compulsory membership

My diagnosis of NETA as is

• Limited demand-side participation
• Slow pace of needed reforms
• Prices increasingly volatile
• Rule book remains complex
• Capacity payments provide poor

signals

• Barriers to entry, including costs of

CME and credit

• Does not respond to customer’s

concerns

• Level of compliance for all licensees

Break

An update on European developments Mark Copley

36

To cover

1) A quick update on the status of network codes 2) Reflections on where we are 3) Looking ahead to the Energy Union 4) Some challenges for the next year and beyond

37

Network code status update

The IEM

1 code voted

• n in the last

week! 2 formally approved in total 9 recommended for adoption 8 still to be voted on 3 new stakeholder committees to be established

38

Stage Status

Development Approval Implementatio n Monitoring Amendment

A critique of where we stand

• On 15 July we can expect the Commission’s Energy Union/ Summer

package including proposals on:

• Electricity Markets and Governance
• Retail Markets
• Gas Security of Supply and LNG and storage
• Much touted package, including by the Commissioners.
• Likely to stimulate a debate which lasts several years and could lead to

some significant changes.

39

The Commission’s Energy Union

• Consultation will run from 15 July for 3 months.
• Will be followed by White paper by the end of the year.
• Commission has committed to amend existing regulations (“no 4th package”).

40

Electricity Market Design – An overview

Delivering the electricity market

• A focus on

delivering existing network codes.

• A big focus on

ensuring sufficient flexibility. Adapt market design to renewables

• A desire to bring

RES into markets.

• And phase out or

align support mechanisms. Stepping up regional cooperation

• Greater TSO/DSO

cooperation.

• A focus on RSCIs

and integrated system operation.

• Cooperation on

infrastructure.

• More powers for

ACER? A regional dimension to SoS

• Cross border

adequacy assessments.

• An attempt to align

CRMs/ promote cross border participation.

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Challenges for the next year (& beyond)

Coping with the volume of change Shaping an Energy Union Implementing multiple laws in parallel Finding a sensible ENC amendment process Maintaining influence as GB

ELEXON’s journey to EMR

9 July 2015 David Osborne Public

ELEXON’s role in EMR

■ What I won’t cover today: – The technical details and processes around EMR ■ What I will cover today – An overview of our role in EMR – How we’ve engaged with the industry throughout the EMR ‘journey’ – What are the benefits to BSC Parties of ELEXON’s involvement in EMR?

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First of all….cast your minds back to December 2012

The world reacts to royal baby news…

North Korea successfully launches a rocket…

DECC ‘minded to use ELEXON as the settlement agent on behalf of the CfD counterparty’ and intended ‘to proceed with a settlement agency payment model for the Capacity Market’ which ‘mirrors arrangements under the Balancing and Settlement Code (BSC), which have a proven track record that should provide investor confidence and provide a full reconciliation process’.

The road to EMR

Summer 2010 •The ‘threat’ of Electricity

Market Reform?

December 2010 – March 2011

• Consultation response to DECC:

involved experts from across ELEXON; offered practical advice based on our BSC experience

April 2011 – November 2011

• Responded to DECC

questions and implementation considerations

December 2011 & December 2012

• Government ‘minded

to’ use ELEXON statements

March/April 2013

• DECC issues European

notice proposing ELEXON as EMR settlement services provider

Key milestones since Spring 2013

December 2013

Successful passage through Parliament

• f Energy Bill

setting up EMR ELEXON’s appointment as Settlement Service Provider for CFD and CM formalised

August 2014

BSC changes needed for EMR directed by the SoS This gave ELEXON a framework to carry out the role as EMR Settlement Services Provider

October 2014

Our first EMR

• perational process

went live!

Key organisations in EMR?

DECC

Capacity Market Settlement Services Provider (EMRS) EMR Delivery Body (National Grid) Contracts for Difference EMR Delivery Body (National Grid) Settlement Services Provider (EMRS)

100% ownership

Electricity Settlements Company (ESC) Low Carbon Contracts Company (LCCC)

EMR Delivery Body (National Grid)

(ELEXON)

Settlement Services Provider (EMRS)

Ofgem

What does our role involve?

Calculate payments and liabilities Invoices / credit notes Credit cover Notices and communications Information and reporting

Regulations, rules and contracts Contract / auction parameters Metered data

How is EMR funded?

Funding arrangements for EMR Settlement Ltd: under different governance arrangements to the BSC

Implementation costs: Covered by a DECC grant to ensure BSC Parties are not shouldering implementation costs Operating costs: Funded via the contract for settlement services with the Low Carbon Contracts Company and the Electricity Settlements

• Company. Ultimately recovered

from electricity suppliers

EMRS governance: involving industry

The terms of DECC’s grant required a project board to be established Includes membership from LCCC, ELEXON and stakeholder users

Benefits to industry of ELEXON’s involvement in EMR

Reduction in BSC overhead costs

Synergies of knowledge and expertise: initial solution and

• ngoing

Opportunities for our staff

Any questions?

david.osborne@elexon.co.uk 0207 380 4199

Code consolidation and coordination: Opportunities for simplification

9 July 2015 Justin Andrews Public

■ Our business focus is our mission “To deliver the BSC effectively, efficiently, and economically, to the benefit of our customers” –Success in current operation

– Actively manage/improve services – Drive efficiencies and savings – Improve /Develop the customer experience

■ Living our vision –“To be a leader in the efficient transformation of energy markets – by providing shared solutions to address common industry problems” –Success is: EMR settlement, Profiling and Settlement Review, Smarter Markets

Our mission and vision

54

Panel Strategy to 2018

55

Lots happening: a selection…

56

Energy market

EMR P305 P272/P3 22 CoS Address data Smart Meter Rollout Reliable next day Europe Settlem ent Reform DSF

Lots of codes

57

Electricity Licence BSC MRA CUSC Grid Code STC DCUSA UNC iGT UNC SPAA SEC Gas Licence Code Managed By Code Managed By Both Licences Code Managed By

Industry governance: how do we solve issues?

58

Issues with change and cross code Lots of change Pace of Change - disjoint and delay Change processes vary by code Piecemeal change Transparency Issues with too many codes Creates confusion Barriers to entry - impacts competition Complexity and inefficient operation/change Different standards of service Excessive credit arrangements

CMA and Theory of Harm 5

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■ The broader regulatory framework, including the current system of code governance, acts as a barrier to pro-competitive innovation and change ■ ELEXON’s response –Different types of codes, different services –SCR not speed up change –Ofgem participation ■ Areas for improvement –Change co-ordination –Code consolidation ■ Parties –Streamlining, simplification, new cross code body

CMA provisional findings/remedies – industry codes

60

■ Existing governance lead to inconsistencies and delays ■ Ofgem not able to influence the development/implementation of change ■ Remedies –Code administration licensable activity –Ofgem more power to project manage or control timetable –Independent Code adjudicator ■ Plan for using domestic half hourly meter data for settlement

Ofgem’s recent open letter on Code Governance Review

61

Current issues and time to review the reforms and further improvements

We believe: Efficient and effective industry code governance supports timely market evolution and market competition ■ Need to Simplify – Multi-party agreements with clear rules – Reduce complexity ■ Better Engagement and Impartiality: – All stakeholders participate the processes in an efficient and impartial way – Challenge with unprecedented level of change

ELEXON response to Ofgem on need for a further CGR

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■ SCR Process – Not speeded up change – More efficiencies… – SCR process interacts with industry code change processes

• Don’t do the assessment twice
• Code Panels keep responsibilities for making recommendations

■ Code Administrators Code of Practice – Increased consistency – There is more to do…

New CACoP Principle 13

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■ Code Administrators will ensure cross Code coordination to progress changes efficiently where modifications impact multiple Codes

■ Better Reporting – Regular Report on cross code change (timetable and progression plan) – Matrix of all open Modifications with cross code impacts ■ Better Process – Administrators regularly meet – Joint workgroup meetings – Joint consultations – Administrators attending other Panels to drive change

Further improvements to Code Governance

64

■ How can we improve? – Code Panels more strategic and pro-active – Ofgem early engagement in the assessment of change – Industry Change Programme – Establish a Cross-Code Group to provide expert design advice cross-code issues – Consistency across industry code objectives – All Code Panels have consumer appointed members – Consolidate code administration – Consolidate industry code governance arrangements

An example: Cross Code Design group

65

■ Comprising industry design authority experts ■ Aims: improve cross code change –Advice and strategic thinking –Cross codes issues, implementation –Change programme ■ Other cross code work to date –Joint European work –Data quality work –Address Data Dual Fuel –EDAG for reliable next day switching

Improvements timeline

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CACoP 13: Improve current process Change Co-ord: Design group Change Co-

• rd:

Streamlining, simplification Code Consolidation: Next day switching, central registration

• Feb. to Aug. 2015

2015-2018 2019

2022-2025 HH settlement New Market: Demand Side Flexibility

Any questions?

■ justin.andrews@elexon.co.uk ■ 020 7380 4364

Thank you for coming

Refreshments will be served in reception