Can Capacity Market costs be recovered via a ‘mirroring’ process in the Balancing and Settlement Code?

Elexon confirmed on Monday (10 December) that Issue 76 Using the BSC to support Suppliers and the Capacity Market Arrangements has been formed and the first meeting will take place next Monday (17 December).

The outcomes of this process have the potential to enable suppliers to collect payments from their customers for the eventual payment to Capacity Market (CM) agreement holders, should the scheme be granted State Aid clearance following the suspension of the programme on 15 November after a European court ruling (read our blog here on the Court’s ruling and its impacts) and that retrospective payments are allowed that cover the current ‘standstill’ period.

Within the Balancing and Settlement Code (BSC), which all Ofgem licensed parties must become signatory too, any license holder can request an ‘issue’ be raised for deliberation by industry where there is a problem or potential improvement to current arrangements identified, but with no immediately obvious solution apparent.

The issue is debated by an issue group, which compromises self-selecting interested parties from industry, to consider potential solutions to the problem. The group has no formal powers, but can recommend that a BSC modification (for example) be raised to change rules to accommodate the solution. There is no set timetable for issue groups to conclude their deliberations, although given the importance of the topic and the desire to ascertain if solutions can be found rapidly, the current thinking is that the group will meet only once, although a second meeting is pencilled in for 20 December.

Issue 76 was raised by VPI Immingham LLP and Saltend Cogeneration Company Ltd to explore if and how arrangements could be made to use BSC processes to ‘mirror’ the collection of revenue from suppliers so that if, and when, the CM is restarted it mitigates the risk for suppliers and their consumers should calls be made for retrospective payments to CM agreement holders.

The proposer’s rationale is that although the CM legal framework is wholly separate from the BSC, all suppliers charged with collecting CM payments from customers are also BSC signatories and it is BSC meters that are used to quantify CM payments due.

At first glance the proposal appears rationale and sensible, but the issue group will have numerous questions to resolve, such as those put forward in the proposal to raise the issue:

  • On what basis would revenue be collected?
  • Should the level of the charge be varied to match the payments required? (i.e. what is the gap between what has/ has not already been billed)
  • What would be the impact on supplier BSC credit cover?
  • Would funds raised need to be placed in Escrow?
  • Is it possible to a “lift and shift” clause to release payments collected when State Aid clearance is given?
  • If the EC do not sanction existing CM agreements, how are capacity market payments returned to Suppliers/ end consumers?

In addition to these important questions, the more pressing one is which of the current BSC related charges is most suitable, if any, for collecting revenues in line with those that would have been collected by the Energy Settlement Company (ESC) had the CM not been suspended?

There are many industry charges collected via the auspices of the BSC, including imbalance charges, residual cashflow reallocation charges, Supplier Volume Allocation (SVA) metering system charges, communication charges, BSC Funding Shares, and Notified Volume Charges (also known as trading charges). The issue group will need to assess the suitability of all of these, not least as some are levied on licensed generators and others are an embedded benefit (the cost of the CM is recovered from suppliers on a gross basis).

Our initial assessment is that to avoid running the risk of potentially introducing a further embedded benefit or levying charges on licensed generators (many of whom will have CM agreements) the focus should be on exploring if the SVA metering system charge (as set out in BSC section D) is the best fit for this purpose. This charge recovers some of the costs of providing the industry systems associated with supplier metering systems. The charge is levied on the number of meters registered to the supplier within a month and so would exclude licensed generators. As the charge includes import and export meters it can be argued it would not constitute an embedded benefit. The downside is that the charge is based on meter numbers, and not metered energy volume—the basis on which the ESC recovers CM charges for suppliers.

Other options are to introduce a wholly new charge, but we suspect the time and cost required to achieve this would mean its not a viable solution.

However, the deliberations could come to naught if it is found that the proposed approach does not meet BSC Objectives, which are framed around effective operation of the wholesale market and transmission system (and make no explicit reference to the CM), and more fundamentally if it is ruled that it is not legally enforceable to ask suppliers to recover revenues for a scheme that is suspended.

Elexon has asked that parties interested in joining the issue group should confirm attendance by emailing  by 5pm on Thursday 13 December.

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