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UK reform set to wipe £1/MWh off electricity curve from Summer ‘15

11 Oct 2012 17:30:32 | edem

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The UK wholesale electricity forward curve looks certain to see around £1.00/MWh wiped from its value from as early as Summer '15 outwards after a proposed reform to the balancing code cleared its latest hurdle on Wednesday.

The reform, which aims to transfer the bill for balancing charges to the supplier alone as opposed to the existing 50:50 supplier-generator spilt, was approved by the connection and use of system code (CUSC) modifications panel, overseen by transmission system operator (TSO) National Grid, as well as a working group that the panel assigned to study the proposal.

The group's final report was sent to British energy regulator Ofgem on Wednesday, and an indicative decision regarding the reform is due by 14 November.

The original proposal suggested implementation 24 months after final approval so, should Ofgem make the call on or before 31 March 2013, the bearish impact of the reform on the power curve would be seen from Summer '15 outwards.

The reform, known as CMP201, is designed to "create a level playing field" between generators in the EU internal market for electricity, where the supplier generally picks up the balancing costs, and UK-based generators.

This "should facilitate further cross-border trading of electricity and benefit [British] consumers in terms of the consequence of more competitive electricity prices," the CUSC report said.

Costs

Analysis by the TSO concerning the removal of the balancing services use of system (BSUoS) charge from generators based on 2010/2011 data said the wholesale price would be £47.29/MWh without, but £48.29/MWh with BSUoS included (see EDEM 16 August 2012).

"It makes sense," one trader said on Thursday. "Approximately £1.00/MWh off is where I would pitch it."

UK power traders polled by ICIS in August generally had not factored the potential change into curve pricing, suggesting a downward movement on future prices if the modification is approved - a move which looks increasingly likely.

According to the CUSC report, the average BSUoS charge in 2010/11 was £1.11/MWh, rising to £1.53/MWh in 2011/12, a 38% increase. The charge looks likely to be significantly more than this by 2015/16 as more intermittent renewable generation is introduced to the system, pushing up balancing costs across the board.

Any decrease in wholesale costs would be partially offset by an increase in exported volumes, because of the increase in competitiveness of UK generators, but the effect would not be enough to recoup the downward shift on the forward curve, National Grid's analysis suggests.

Controversy

The indicative time line could ruffle feathers across the industry. Both E.ON and International Power called for a three-year transitional period in their responses to a consolation on the matter. Others suggested that 18-24 months would be sufficient (see EDEM 12 September 2012).

The concern is that, where existing contracts between a supplier and a generator have been set based on a wholesale price that includes generator BSUoS, the supplier will be exposed to that share again following implementation.

"It was noted that in certain circumstances, the supplier may be able to renegotiate their contract with the generator to remove the BSUoS element, although this was understood not to be the normal arrangement," the CUSC report said.

But this was not sufficient to deter the panel from issuing its recommendation. "The workgroup generally understood that contract negotiations normally occurred in October and April and understood [those contracts] to generally be for one or two years in duration," the report said.

It was also suggested that fully vertically integrated utilities would be equally exposed to both the supplier loss and the generator gain, so it would have no net effect at a group level. JS

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