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Balancing reform impact slips down UK electricity forward curve

27 Feb 2013 17:57:53 | edem

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A reform to the UK electricity balancing code that is set to wipe £1.00/MWh (€1.16/MWh) from longer-dated products on the wholesale forward curve came one step closer on Wednesday, concluding a four-month hold-up.

However, the reform looks unlikely to hit contracts until nine months after originally estimated, with Summer '16 likely to be the first contract on the forward curve to reflect the change.

The reform, known as CMP201, aims to transfer the balancing services use of system (BSUoS) bill for balancing charges to the supplier alone, instead of the current 50:50 supplier-generator split.

Its progression is being overseen by power transmission system operator (TSO) National Grid, which announced the second consultation on the issue on Tuesday.

The original proposal suggested implementation 24 months after final approval, which British energy regulator Ofgem was due to grant before 31 March.

That would have made the reform's bearish impact visible from Summer '15 outwards (see EDEM 11 October 2012).

But, on Wednesday, Emma Clark, the National Grid connection and use of system code (CUSC) panel secretary, told ICIS that the regulator's approval will not see the light of day until after an impact assessment has been carried out. "We are not expecting any decision until some time around the end of the year," she said.

Feeling the pressure

The revised timetable, allowing for the two-year implementation gap, translates to adoption of the reform late in 2015, making Summer '16 the first seasonal contract to feel the bearish pressure.

However, a shorter implementation phase, which some in the industry have suggested is a viable option, would mean that contracts closer in, most likely Winter '15, could also be exposed to declines in value.

In mainland Europe markets, the equivalent of the BSUoS fee is charged almost exclusively to demand rather than generation. As a result, the wholesale electricity price in those markets does not factor in its cost.

Consultation launch

National Grid analysis based on 2010-2011 data said the wholesale price would be £47.29/MWh without BSUoS included but £48.29/MWh with it included (see EDEM 16 August 2012).

"Consequently, [British] generators are disadvantaged when compared with equivalent generators in other [EU] member states if they trade, or wish to trade, in those markets," the consultation document stated.

It said: "If the proposal does not proceed, there is a greater risk of higher future costs for UK consumers as a consequence of less competition, greater risk exposure for new investment, potentially reduced security of supply and a potential contraction in [the British] power generation base."

The proposal has passed its work group consultation stage and National Grid now has it under consultation as code administrator, a process that will run until 19 March. Final approval must come from British regulator Ofgem. Documents are available on the TSO's website. Jamie Stewart

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