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Ofgem eyes changes to UK electricity cash-out system

02 Nov 2011 14:46:53 | edem

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British energy regulator Ofgem has set the wheels in motion for changing the UK wholesale electricity market's cash-out price system.

The planned evolution of the UK electricity market has led Ofgem to suggest that the system needs a serious overhaul. The regulator has linked changing the cash-out price with its drive to increase liquidity in the UK wholesale power market.

The overhaul would alter the cash-outs paid by traders to transmission system operator National Grid when they have caused system imbalances.

The UK government's electricity market reform is one driver of the need for change. The potential introduction of capacity payments - which will pay generators to keep some plants running to be used as reserve capacity - needs to be considered side-by-side with the cash-out price, said Ofgem in its consultation published late Tuesday.

The government is due to publish the finer details of the makeup of the capacity mechanism at the end of the year, but it is possible that the cash-out price might have a direct role in it.

Increasing amounts of renewables generation coming onto the grid and the mothballing of older existing plants are also important drivers of change.

Possible changes

National Grid has already launched its own consultation on the balancing mechanism because of the effect of intermittent wind-generated power coming onto the system (see EDEM 20 September 2011).

Ofgem is looking at taking two approaches. The first the so-called "narrow scope" approach would introduce incremental changes.

The second the "wide scope" approach could potentially make substantial changes to the system, such as a new pre-gate closure balancing market to clear energy imbalances.

Potential changes to balancing could include the creation of a reserve market in the form of a day-ahead auction.

Ofgem mentioned that an alternative to the current system includes a centralised market for intermittent renewables, although the regulator ruled out a change to a pool-based system for the whole market, which was on the options set out in Ofgem's Project Discovery (see EDEM 3 February 2010).

Ofgem has launched a consultation on whether it should open a significant code review into the cash-out price − the next stage in making changes. The consultation ends on 24 January, which means that any code review can take account of the makeup of the capacity payments. It is expected that a code review could take about 12 months. FOR

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