UK balancing charge reforms suffer setback

Henry Evans

29-Oct-2014

Expected changes to cash-out prices paid companies that fail to balance contractual positions in the UK wholesale power market look set to be shelved for the upcoming winter, after the Gas and Electricity Markets Authority (GEMA) rejected two modifications proposed for setting the price.

Two suggested modifications to the process of calculating imbalance prices were presented to GEMA by transmission system operator National Grid, aimed at providing a more accurate price signal to companies to meet contractual generation and supply obligations instead of passing the duty to system operators.

Market participants had speculated that adjusting the price signal would lead to more volatility on the wholesale power prompt and futures market as counterparties attempt to mitigate the costs of being caught out of position ( see EDEM 22 October 2014 ).

But after months of consultation and discussion, which had been expected to culminate in a change to the pricing methodology at the start of November, GEMA has rejected the proposals on the basis that they would not result in a discernible change to balancing habits.

“The effects of the proposed modifications are finely balanced, modest at most, and may range from slightly positive to slightly negative,” the British energy regulator Ofgem said in a letter on Tuesday justifying its decision.

Ofgem originally launched the consultation on cash-out reforms in May this year in order to implement a schedule that would see a gradual increase in the costs that companies have to pay the system operator to cover a contractual imbalance.

Counterparties that end up in a position of imbalance currently have to pay a penalty that is calculated off an average of the most expensive 500MWh of bids and offers submitted by generators to balance the system.

But two modifications to this so-called price average reference (PAR) – one to bring the PAR down to 350MWh and the other down to 250MWh for this winter – have been rejected by Ofgem.

The energy regulator still has two proposals on the table to decrease the PAR to the most marginal level by the end of the decade.

A PAR of 50 is set to enter force at the start of winter 2015/16 while the ambition remains to reduce the PAR to 1MWh by the start of winter 2018/19, resulting in charges for imbalance being based on the cost of the most expensive balancing action. Henry Evans



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