The COVID-19 pandemic and subsequent lockdown restrictions have severely impacted the GB energy market with demand and prices at record lows. As market conditions have drastically changed, National Grid Electricity System Operator (NG ESO) has been much in the spotlight, with the current low demand scenario providing new operational challenges. In recent months activity in the Balancing Mechanism (BM), as well as other balancing services, has changed in response to these new challenges. This has had knock-on impacts for Balancing Services Use of System (BSUoS) charges.
Following on from our recent blog on rising BSUoS costs and the raising of CUSC modification CMP345 seeking to defer these, we look more closely at why costs are rising and how the BM is operating under lockdown.
In the BM, parties submit bids and offers to the ESO providing details on their availability to adjust generation or demand and the price at which they are willing to do so if required. During April and May 2020, the volume of accepted actions in the BM more than doubled compared to the same time last year.
Overall, across the two months of April and May 7.1TWh of actions were accepted compared to 3.3TWh in April and May 2019. Accepted bid volumes (to reduce generation or increase demand) in May rose from 0.80TWh in 2019 to 1.86TWh in 2020. However, a similar rise in accepted offer volumes (to increase generation or reduce demand) shows that actions have not purely been to reduce generation at times of low demand, with 1.92TWh accepted in May 2020 against 0.69TWh in May 2019.
Much of these actions have not been taken to purely match supply and demand, but also to manage an imperfect physical network and maintain stable operating conditions. For example, the ESO is often required to turn down output from Scottish generators on windy days due to insufficient transmission capacity to transport the electricity south. On similar days, with high levels of asynchronous generation and low demand levels, the ESO also needs to ramp up output from synchronous generators (typically CCGT plant but also potentially coal-fired assets) to maintain adequate levels of system inertia. This limits the potential for large and rapid deviations in frequency, with the frequency level needing to be maintained at very close to 50hz in order to keep the system stable.
As a result of these issues, actions taken on the BM can be classified as either an energy or system action. An energy action is made purely to match supply and demand while a system action is taken due to wider system requirements such as network constraints, inertia or voltage management. The increase in bid and offer volumes during this low demand period indicates that a higher proportion of actions are being taken to resolve other system issues too.
In May 2020, 2.43TWh of the total accepted volume of 3.78TWh were classified as system actions, representing 64.4% of total accepted BM volumes in the month. In contrast, May 2019 saw 0.55TWh of system actions against a total of 1.5TWh, equating to 39.7% of overall accepted volumes. This highlights the challenge of balancing a system with low demand and high penetration of renewables. It is not just about managing supply and demand at a national level (energy actions), but also maintaining system inertia levels and managing local network issues.
This increase in accepted volume on the BM is reflected in BSUoS charges. The average half-hourly BSUoS charge in April and May 2019 was £2.82/MWh and £2.56/MWh, respectively. This has risen to £4.93/MWh and £5.75/MWh in April 2020 and May 2020 (based on interim Information (II) settlement run data).
COVID-19’s impact on demand was expected to increase the £/MWh rate of demand-based industry charges, all things being equal. However, added to this rise has been the overall increase in BM volumes and other balancing services actions which have combined to push BSUoS even higher. This is reflected in the total daily BSUoS charge, which has increased from £2.9mn in May 2019 to £5.2mn in May 2020.
With exceptional market conditions and the ESO noting up to £500mn in additional BSUoS costs over the summer period, on 19 May SSE Generation raised CMP345 Defer the Additional COVID-19 BSUoS Costs. This seeks to defer the additional BSUoS costs arising from COVID-19 that are incurred in 2020/21 (between 1 May and 31 August 2020) to the 2021/22 Charging Year. The Code Administrator Consultation is open between 9-12 June, with implementation planned for 23 June 2020, to be backdated to be effective from 1 May 2020.
With increased BSUoS costs coming at a time of difficulty for the market, the deferment of additional BSUoS costs would be a welcome relief to suppliers and transmission connected generators alike.
Cornwall Insight provides a range of services covering GB flexibility markets and system operation. Our Balancing Mechanism Reporting Service provides monthly updates on BM activity, new entrants and imbalance pricing and cost trends. For more information please contact Lee Drummee at L.Drummee@cornwall-insight.com