Limiting the amount batteries can earn from helping to resolve constraints on the transmission network, as recently proposed by Ofgem, would take away a “big chunk” of their potential revenues, an industry expert has warned.
Adam Bell, director of policy at Stonehaven, said batteries located behind Britain’s main bottleneck on the Anglo-Scottish border would be particularly badly affected.
Bell was responding to a call for input by Ofgem in which the regulator suggested a series of possible changes the standard generation licence condition 20A. The transmission constraint licence condition (TCLC), as it is also known, stipulates that generators “must not obtain an excessive benefit from electricity generation in relation to a transmission constraint period.”
Ofgem imposed multi-million pound penalties on three generators last year for breaching the TCLC – Drax (£6.12 million), SSE (£9.78 million) and EPH (£23.63 million).
The regulator issued a consultation in December on updates to the accompanying guidance for the licence condition. The draft text for the updated guidance explicitly states that the TCLC “only applies to ‘reductions in generation’” and “does not apply to situations where generators are being paid by the ESO to import electricity.”
However, in the call for input published alongside the consultation, Ofgem suggested multiple possible changes to the TCLC, including expanding it to cover imports by storage. It said “even if a generator is not itself making the constraint worse via its expected level of output, it may still benefit from significant market power.
“To the extent to which generators take advantage of this by submitting expensive prices, this will push up the cost of managing constraints. The nature of the market may mean that barriers exist which prevent other providers from competing effectively for the constraint management services in question.”
Bell said expanding the TCLC to cover imports would have a huge impact on affected batteries, especially those in Scotland: “There’s a few hundred megawatts already built in Scotland with the intention of playing into different markets, including the BM and there are several gigawatts in the pipeline that will be looking to do something similar.”
“The numbers I have seen from various commercial players is that BM revenues from managing constraints represent about 30 to 40% of their revenue stack,” he added.
“It’s a big chunk. If you can no longer make money in the BM as a battery, then you just probably won’t build it in Scotland, if you build it at all.”
Bell said the market is functioning as it should by enticing batteries to locate behind constraints. As competition for constraint payments grow, prices should come down.
By reaffirming that the TCLC does not apply to imports on the one hand, but then raising the possibility that it should on the other, Bell argued that Ofgem is sending a contradictory message to the sector.
He said the proposal is “still at an early stage” and “there’s a lot of time to stop it” but in the meantime affected battery operators have been left with huge uncertainty over their future revenues: “If I’m a battery operator, I’m looking at this and thinking: ‘Should I even invest in Scotland now? What’s my revenue profile going to be? Is Ofgem going to randomly change things again if it chooses to do so?’
“It removes one of the more attractive features of the UK landscape, which is that to a degree the regulatory model is rational and easy to predict and just creates significant uncertainty for no particular reason.”
A spokesperson for Ofgem said: “The informal call for input was designed to collect views from industry on the future of the Transmission Constraint Licence Condition and to ensure its as effective as possible in keeping balancing costs down. The proposed guidance meanwhile covers the existing TCLC, and the two are not contradictory.
“In the informal call for input, a number of theoretical possible future changes to the TCLC were outlined to encourage sector feedback. No decisions have been made about whether any changes to the TCLC are needed and any that were taken forward would be subject to a formal consultation.”
The regulator issued the call for input in reaction to rapidly rising constraints costs, which surged from several hundred million pounds in 2014 to around £2 billion in 2022. The ESO has also been taking action to reduce these costs, including creating Constraint Management Intertrip Services in Scotland and East Anglia to enable more power to flow through network bottlenecks, and establishing a Local Constraint Market to deliver flexibility in Scotland.
Ofgem said it was considering the following possible changes to the TCLC:
- Expanding the TCLC to balancing services other than the Balancing Mechanism (BM) that are used to manage constraints
- Expanding the TCLC to offers (to increase generation or reduce demand), rather than just bids (to reduce generation or increase demand)
- Expanding the TCLC to bids to import or offers to export
- Replacing the TCLC with an explicit cap on prices or profits during constraint periods
- Expanding the TCLC to balancing service providers other than licenced generators
Responding to the call for input, Energy UK said in general it is “not convinced that changes to the TCLC would deliver benefits. It is unclear how these proposals would work in practice, which members have emphasised makes it difficult to properly understand the commercial impact they would have.”
The trade association said it was concerned that the proposals had been made “without sufficiently taking into account wider policy objectives or system needs, in particular the negative impact that some of the changes could have on investment and the development of flexibility.”
In particular, Energy UK said it had “serious concerns” over the proposal to expand the TCLC to imports by storage: “The effect of the proposed change to the TCLC is unclear but could be perceived by battery developers to reduce the value of their flexible assets with negative effect on investor confidence. It may act as a disincentive to invest in storage and could result in the stalling of much needed projects.
“Indeed, this appears to stand in contrast with the 10GW of battery storage connections being fast-tracked by the ESO. Moreover, members have raised concerns that this proposal could have a broader impact on the investment community.”
Energy UK said this proposal “goes much beyond the objective of the TCLC, targeting situations where a licensee is not causing or exacerbating a constraint, and we would urge Ofgem to conduct a cost benefit analysis before progressing it any further.”
In August last year, Ofgem gave the go-ahead to a new standard generation licence condition known as the Inflexible Offer Licence Condition (20B). The condition prevents inflexible generators from obtaining excessive profits by first signalling their intention to stop producing power during periods of scarcity, and then charging extortionate prices to continue generating.
The licence condition was proposed by the regulator after it uncovered instances of “immoderate behaviour” by generators following a sharp rise in balancing costs over the winter of 2021.