Ofgem has granted National Grid Electricity System Operator (ESO) a derogation from one of its license conditions to allow the body to limit flows across interconnectors to reduce the size of the largest potential loss on the power grid.
The ESO said the capability is necessary as the drop in frequency resulting from the loss of an interconnector could otherwise become too large to contain during a period of low inertia.
Ofgem has granted the ESO a derogation from its license condition requiring that balancing services be produced through transparent, non-discriminatory and market-based means to allow the body to temporarily impose capacity caps on specific interconnectors and compensate the operators accordingly.
The regulator agreed with the ESO that dealing with the issue using the market-based options available would not be economically efficient. It noted that Balancing Mechanism actions – one of the main methods normally used by the ESO to reduce the size of the largest credible loss – are not currently available for interconnectors.
The ESO said establishing a market for this service would not be beneficial given the locational nature of the problem, whereby only one particular interconnector – the one that poses the largest potential loss – can resolve the issue.
The body said holding enough frequency response in reserve to contain the loss of a large interconnector during a period of low inertia would be too difficult and expensive. It said maintaining inertia at a sufficient level to contain such a loss would likewise be too difficult and expensive.
Ofgem accepted that the ESO has “few feasible alternative actions” to limiting flows on interconnectors and those that are available are “often uneconomic due to the volume required to secure against large credible losses.” The regulator said it expects the ESO to use the caps as a “tool of last resort” and work proactively to develop a market-based alternative.
It said the methodology the ESO has developed to compensate interconnector operators seeks to ensure that they are kept “whole” and do not “lose or gain” from the caps. It said the methodology provides a “good estimate” of the value the market would place on the limits and will be more reflective than pre-determined fixed payments or adjustment factors.
The ESO’s draft methodology noted that the compensation, calculated based on the difference between the technical capacity of the interconnector and the limit imposed, could result in payments being made by the operator if it raised the market value of the remaining capacity under the cap.
Ofgem said the derogation is effective immediately and will last until 1 May 2023 or until a new methodology for calculating interconnector capacity is established under the UK’s Trade and Cooperation Agreement with the EU.