Balancing Services Charges 1 st Task Force 29 January 2019 Welcome - - PowerPoint PPT Presentation

1st Task Force 29 January 2019

Balancing Services Charges

Colm Murphy

Welcome and introduction

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Agenda

No Subject Lead Time 1 Welcome and introduction Colm Murphy 10:00-10:30 2 Scope, Programme and Ways of Working Colm Murphy 10:30-11:00 3 Engagement and Modelling Overview and Discussion Sophie van Caloen, Paul Wakeley 11:00-12:00 Lunch

• 12:00-12:30

4 BSUoS Overview and Wider Context Tom Edwards 12:30-13:00 5 Breakout Session on Deliverable 1 Mike Oxenham 13:00-15:30 6 Summary, Actions and Next Steps Colm Murphy 15:30-16:00

Colm Murphy

Scope, Programme and Ways of Working

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Drivers, Scope and Impact

Drivers

• Balancing Service Charges recover the efficient costs incurred by National Grid ESO in undertaking
• ur obligations in respect of operating the national electricity transmission system.
• As the energy system is changing, there are questions about how these charges work: charge not

viewed to be cost-reflective, increased volatility, does not assist in system operation, etc.

Scope

• The objective of Task Force is to provide analysis to support decisions on the future direction of

balancing services charges.

• In particular, we will examine the potential for and feasibility of some elements of balancing services

charges being made more cost-reflective and hence providing stronger forward-looking signals.

Impact

• The potential impact is significant and our wider aim is to ensure a more level playing field and to

facilitate competitive markets

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Deliverables of the Task Force

Deliverables Date Task Force document assessing the extent to which elements of balancing services charges currently provide a forward-looking signal that influences the behaviour of system users. Feb 2019 Task Force document assessing the potential for existing elements of balancing services charges to be charged more cost-reflectively and hence provide better forward-looking signals. The analysis should explore each of the existing components of balancing services charges and to what extent they have the potential to influence the behaviour of different parties. March 2019 Task Force document assessing the feasibility of charging any identified potentially cost-reflective elements of balancing services charges on a forward-looking basis. April 2019 (draft report) Based on the candidate elements of balancing services charges from the previous stage, assess the feasibility of charging these elements to influence user behaviour. This could include consideration of whether constraint signals are more effectively sent through balancing services charges or transmission use of system charges. It should consequently identify the extent to which the different elements of balancing services charges should be considered cost-recovery charges and therefore have potential for the TCR approach for cost-recovery charges to be applied. May 2019 (final report)

The new Balancing Services Charges Task Force will run from January 2019 and will deliver a final report in May 2019.

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Ways of Working - Responsibilities

TF Chair

• The TF will be chaired by ESO.
• Provide leadership to the TF,

ensure each meeting is conducted in accordance with the ToR and in an orderly and efficient manner.

• Ensure that all TF Members are

able to contribute their views.

• Coordinate with the Secretariat

to ensure effective management

• Ensure regular updates are

provided to Ofgem, the CDB, etc.

• Ensure sufficient wider industry

communication and engagement

TF Members

• Bring expertise and experience

to the TF.

• Be committed to making

improvements to delivering benefits to consumers.

• Be available to attend all

meetings and engage more widely with industry.

• Be able to work collaboratively

with others and seek to find consensus.

• Actively contribute towards the

work of the TF outside of TF meetings.

• Be expected to contribute

towards the milestones.

ESO Secretariat

• Provide secretariat services

(organise meetings, booking venues, send invitations, agenda, minutes, etc.)

• Maintain a list of TF actions.
• Produce and update a detailed

project plan.

• Manage stakeholder

engagement, i.e. act as first point of contact for stakeholders who wish to contact the TF.

• Update the Charging Futures

website, providing stakeholders with relevant information.

• Collate and publish the final TF

report on behalf of the TF.

Collaboration is crucial to ensure the TF delivers its objective in a timely manner

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Ways of Working - critical success factors

• The aim of the TF is to produce a report that answers the 3 questions (currently, potential, feasible) to

provide a set of conclusions that may lead to changes in the recovery of balancing services charges.

• The conclusion of the report should be supported by good analysis, including a reasonable qualitative

and, to the extent possible, quantitative assessment. This all must be concluded in tight timescales.

• The TF is committed to keep wider industry updated and engaged on its work throughout the process

through regular engagement and publication of agreed documents.

• The TF will aim to not duplicate work including in relation to other workgroups under the modification

process and where there is potential for overlap, the Secretariat will ensure that the TF is updated.

• The TF will be mindful of other views and arguments within and outside of the TF and will ensure that

these views and arguments are debated to ensure a more robust final report.

• Are there any other ways of working which we need to discuss and note to ensure that we collectively

and effectively work towards our common goal for the TF?

Sophie Van Caloen

Communication and engagement plan

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Session Objective

The objective of this agenda item is to discuss and agree on a communication and engagement plan. The aim is to ensure we provide industry with regular updates on progress and also give them the ability to engage and contribute. Content:

• Objectives
• Approach
• Draft programme plan

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Communication and Engagement - Objectives

Know Feel Do

• Understand the TF objective and the tight

timescales (draft report in April – final in May).

• We’re committed to inform ongoing progress
• f the TF and enable the possibility for our

stakeholders to engage and provide feedback.

• We are listening to feedback and will take it

into account in the TF process.

• Involved
• Able to contribute
• Confident in the TF

ability to reach a considered position

• Provide constructive input

and feedback to support the TF work programme

We want to ensure our communication and engagement plan enables the industry to have their say!

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Industry communication and engagement approach

Recurrence/date Channel Topic Lead Every fortnight, before Task Force Web TF agenda and ad-hoc pre-read ESO sec Every fortnight, after Task Force Email & web TF minutes and relevant presentations (through CF newsletter) ESO sec Every month (alternate/ad hoc) Podcast TF “informal” summary The objective is to distribute information to industry ESO sec host TF Members Every month (alternate) Webinar with Q/A TF deliverables (current, potential, feasible, report) The objective is to share more complex input and get feedback ESO sec host TF Members Ad hoc Email, call, etc. Targeted (bilateral) engagement + potential to invite to future task forces to present views or analysis, if applicable ESO & TF Ad hoc Report to existing groups Report TF work to Charging Delivery Body (CDB), code mods panels/workgroups, etc ESO & TF May Consultation Draft report ESO & TF May/June Event Final report ESO & TF

All the communication to industry will be coordinated through the Secretariat and the Charging Futures website.

Are we confident this will ensure we work collectively and transparently? If you weren’t in the Task Force, how would you like to be engaged?

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Deliverable TF Work Report Engage

Draft programme plan

Jan 19 Feb 19 Mar 19 Apr 19 May 19 ...

2nd TF 3rd TF 1st TF 4th TF 5th TF 6th TF 7th TF 8th TF 9th TF Current Potential Draft report Final report podcast webinar Feasible Other Event Potential Feasible Current

review

1- TF 29Jan 2- TF Feb 3- TF Feb 4- TF Mar 5- TF Mar 6- TF Apr 7- TF Apr 8- TF May 9- TF May

• TF plan
• Currently:

analysis actions

• Currently:

agree conclusion

• Potential:

define criteria + analysis actions

• Potential:

further analysis actions + draft conclusions

• Potential:

agree conclusion

• Feasible:

define criteria + analysis actions

• Feasible:

further analysis actions + predictability + other signals

• Feasible:

agree conclusion

• Report:

finalisation before consultation

• Report:

comments review and actions

• Final report +

event

analysis

Task Force Industry NG ESO

criteria analysis criteria analysis Ad hod review review review review draft draft draft draft draft draft prep prep prep prep Ad hoc updates to CDB, mod panel, etc.

Consult

Paul Wakeley

Modelling plan

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Paul Wakeley Future Markets Modelling Manager

T: 01926 655582 E: paul.wakeley@nationalgrid.com

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Modelling Approach

Understand the current product / costs

• Correlation to other

factors

• Patterns of volatility
• Are there signals on

different timescale Consider

• Are there any signals

that could drive behaviour?

• Should we use these

signals in the end product? Propose and Review

• What would a different

product look/feel like to Market Participants Informed by data

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Lots of components make up BSUoS

BSUoS is a half- hourly £/MWh product charged to transmission generation and demand to recover the cost of ESO activity

£ cost components of BSUoS CSOBM System Operator BM Cash Flow BSCCV Balancing service contract costs – Settlement Period specific IncPayExt Incentive Payment BSCCA Balancing service contract costs – non-Settlement Period specific ET Daily balancing services adjustment OM Cost associated with the Provision of Balancing Services to others BSC Black Start Costs SOTOC SO-TO funding allowance SOPU SO Opening Base Revenue Allowance SOMOD Incremental change from SO Opening Base Revenue Allowance SOEMR SOEMR Preparation Costs SOEMRCO SOEMR Preparation Costs Adjustment SOTRU Revenue Adjustment with respect to actual and assumed RPI values

These vary per settlement period

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What are we investigating

BSUoS Charge £/MWh per Settlement Period Half-Hourly Charge £ Chargeable volume MWh

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What are we investigating

BSUoS Charge £/MWh per Settlement Period External BSUoS Costs (per SP) Chargeable volume MWh Internal BSUoS Costs

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What are we investigating

BSUoS Charge £/MWh per Settlement Period CSOBM BSCCV Chargeable volume MWh SOTOC SOPU SOMOD SOEMR SOEMRCO SOTRU IncPayExt BSCCA ET OM BSC External Costs Internal Costs

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Modelling Step 1

Ahead of the next task force, we need to consider the historic BSUoS costs

• Correlation to other factors
• Are there any patterns of volatility
• Are there signals on different timescale

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Modelling Step 1

Ahead of the next task force, we need to consider the historic BSUoS costs Possible Correlation factors

System Outages Interconnector flows Generation mix Forecast constraints Market Wholesale Price System Demand External Weather – wind, solar Day/Date Time/SP Sunrise / sunset Geographic

Tom Edwards

BSUoS Overview and Wider Context

www.cornwall-insight.com

• A number of recent modifications have looked at the area of BSUoS charging and have

specifically referenced the TCR and BSUoS taskforce

• CMP 250 – Stabilising BSUoS over a 12 month period
• Considered the issue of cost reflectivity
• CMP 281 – Removal of BSUoS from storage facilities
• Referenced TCR and effects on embedded storage
• CMP 308 - Removal of BSUoS from Generation
• Has been designed to complement ongoing taskforce/TCR work

BSUoS – Wider Context

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www.cornwall-insight.com

• Raised by Drax on 28 August 2015
• Proposal to fix BSUoS for a 12 month period with a known value 12 months ahead -

under or overrecovery then recovered/returned in the following period

• Proposers views
• Argued increasing volatility makes it harder to forecast
• Volatility too high to accurately forecast and gain competitive advantage

– Aids in price discovery in short-term – Allow suppliers to forward contract – increasing longer term liquidity

• BSUoS is a cost recovery mechanism and does not provide meaningful market signal
• Reducing risk premia on BSUoS forecasts

CMP 250 – stabilising BSUoS

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www.cornwall-insight.com

• Workgroup/ consultation views
• Majority of respondees agreed BSUoS was becoming more volatile

– Noting interactions with future changes (i.e solar and transmission investment

• Respondents noted fixing BSUoS would provide certainty for fixing the

domestic pre-payment cap

• Respondents had mixed views on competition impacts of BSUoS
• Workgroup noted distributional impacts

– I.e portfolio players least exposed, while wind only generators more exposed

• Some members believed there was an effective signal and dispatch

decisions will be affected by moving to ex-ante pricing

CMP250 – Stabilising BSUoS (2)

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www.cornwall-insight.com

• The Workgroup Discussed BSUoS as a market signal or a cost

recovery mechanism

• The majority of the workgroup considered BSUoS as cost-recovery –

not a market signal

• Targeting BSUoS to HH partially achieved
• Constraint costs are smeared across market participants
• Only the following are allocated to specific half hours

– BOAs – Trading costs – STOR availability

• All other costs are computed daily and allocated to settlement periods

through volume weighting

• The workgroup noted fixing elements of BSUoS makes them

inherently less cost reflective

CMP250 – Stabilising BSUoS (3)

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www.cornwall-insight.com

• Ofgem decided to reject CMP250 on 25 October 2018
• Objective A (competition) – Ofgem noted there wasn’t enough evidence to

judge if the transfer or risk resulted in overall savings or improved competition

• Objective B (cost reflectivity) – Ofgem noted there was little analysis on the

components of BSUoS and their effect on volatility

– It noted any future assessment of BSUoS would “benefit from investigating the components that make up BSUoS in order to determine which are best suited to cost recovery and which are more suited to a cost reflectivity approach”

• Objective C (licences business) - Ofgem considered the change to not be

reflective of changes within the transmission licences business

• Objective E (efficiency of the methodology) - Ofgem's view was CMP250

would require change to licences and would be at odds without outcome of the TCR and FLC SCR

CMP250 – Stabilising BSUoS (4)

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www.cornwall-insight.com

• BSUoS volatility
• Majority of workgroup and respondents agreed that BSUoS volatility was increasing
• The workgroup found little or no pattern in overall monthly BSUoS costs
• Falling transmission system demand was a key factor in determination of BSUoS
• Increasing constraint costs and reducing inertia were also key cost drivers
• Strong relationship with wind volumes NOT established

CMP250 – Stabilising BSUoS (5)

29 Source: National Grid Source: National Grid

www.cornwall-insight.com

CMP250 – Stabilising BSUoS (6)

30 Source: National Grid

www.cornwall-insight.com

• Proposed by EDF on 12 October 2018
• This modification seeks to remove BSUoS charges from generation
• Similar to CMP201 which Ofgem rejected in 2014
• Ofgem was concerned about short-term price increases due to higher GB generation
• EDF notes CMP201 did not account for changes in CMP202 which removed BSUoS from interconnectors
• Due to increasing interconnector volume the G:D split is expected to be 47:53 by 2020
• Proposers views
• Aligns GB arrangements with other EU states, allowing more effective competition with EU generators
• Neutral consumer impacts as increase in BSUoS charge offset by change in generation BSUoS in

wholesale price

• Needs effective lead time of 2 years for market to adjust

CMP 308 - Removal of BSUoS from Generation

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www.cornwall-insight.com

• Raised by Scottish Power on 22 June 2017
• This modification aimed to remove the liability of offtaking BSUoS charges from generation facilities
• perated under a generation licence
• The proposer argued
• Storage paid for BSUoS on import and export and was therefore paying 2X the equivalent of other generation creating

a market distortion

• Workgroup views
• Concerns about the differential treatment of SVA and CVA storage – including the netting of embedded benefits
• May require appropriate changes to RCRC
• C26 of generation licence (socialisation of constraint costs)
• Withdrawn by Scottish Power on 13 November 2018
• Ofgem noted in its Open letter on Storage (23/01/2019) changes it expected the solution to work for both

SVA and CVA

CMP281 – Removal of BSUoS from storage

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www.cornwall-insight.com

CMP281 – Removal of BSUoS from storage (2)

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www.cornwall-insight.com

• Workgroup discussions
• Implementation timeframe may need to be aligned with longer-term

contracts

• How is BSUoS incorporated into different traded products

– How do risk premia change in relation to signals from balancing mechanism/TERRE?

• Overnight BSUoS higher than other periods
• Expected CMP308 paper to be complete ahead of taskforce

– Targeting H12019 Ofgem decision

CMP 308 - Removal of BSUoS from Generation (2)

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www.cornwall-insight.com

• Expected interactions with other workstreams

CMP 308 - Removal of BSUoS from Generation

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Mike Oxenham

Breakout Session

• n Deliverable 1

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Session Objective

Deliverable 1: assess the extent to which elements of balancing services charges currently provide a forward-looking signal that influences the behaviour of system users

45' Group discussion on scope of deliverable 1 Break-out session (3 groups of 6-7 persons) 10' Break Playback to the wider group 5' 90'

 Align on list of elements of balancing services  Deliverable 1 question  Does each element of BSUoS currently

provide a forward-looking signal that influences the behaviour of system users? Why do you think this is the case?  What modelling and analysis is required to evidence whether or not each element does or does not do so as above? Is this already available or does it need to be created; how could it be created?

 Each group to playback views and actions to the wider group  Actions to allow conclusion of Deliverable 1 at the next TF

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(based on 2018-2019 data; YTD)

Elements of Balancing Services

 ESO is responsible for the system operation of the GB transmission system. In order to do so in an efficient, economic and co-ordinated manner, ESO procures Balancing Services.  ESO recovers the related costs through Balancing Services charges (called BSUoS). The total cost of the balancing services charges are over £1b per year.  Based on the MBSS report, the cost includes various elements of balancing services (see table)  In addition, balancing services charges includes ESO internal costs.

Element % Constraints - Transmission 38% Constraints - Rocof 12% Response 12% Fast Reserve 7% Reactive 7% STOR 7% Operating Reserve 6% Constraints - AS 5% Black Start 4% Constraints - Voltage 2% Minor Components 1% Other Reserve 1% Negative Reserve 1% Energy Imbalance

• 2%

Do you agree with the proposed list of elements for assessment?

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Break-out (90’)

 Does each element of BSUoS currently provide a forward-looking signal that influences the behaviour of system users?

• Why do you think this is the case?

 What modelling and analysis is required to evidence whether or not each element does or does not do so as above?

• Is this already available or does it need to be created; how could it be

created?

Colm Murphy

Summary, Actions & Next Steps

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Task Force - Future Meeting Dates

Date Time Location Monday 11 February 10am – 4pm Warwick Tuesday 26 February 10am – 4pm The Strand Tuesday 12 March 10am – 4pm The Strand Tuesday 26 March 10am – 4pm The Strand Monday 8 April 10am – 4pm The Strand Wednesday 24 April 10am – 4pm The Strand Tuesday 7 May 10am – 4pm The Strand Thursday 23 May 10am – 4pm The Strand

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Thank you

If you have further views please contact ChargingFutures@nationalgrid.com.