National Grid denied request to recoup black start costs

National Grid will be liable to pay £17.7 million towards the cost of a black start contract signed with Drax, after Ofgem denied its request to recover full the amount.

The system operator will be allowed to recoup the full cost of the contract it signed with SSE for its Fiddler’s Ferry plant. 

National Grid said it was forced to take on the contracts following the announcements in February that SSE would probably close three of the four units at Fiddler’s Ferry, and that Drax may mothball some of its coal-fired units.

After signing the contracts towards the end of May, it applied to Ofgem for an increase in its spending target for balancing services under the ‘income adjusting event’ process. The mechanism is designed to cover “unforeseen events beyond its control”.

National Grid argued that both announcements were unforeseeable, and that the costs of the black start contracts were incurred as a result.

However, Ofgem disagreed with respect to the Drax contract on the basis the company had only made a “statement of an intention to consider mothballing”. It did not lead to a consultation, as it did in the case of Fiddler’s Ferry. The regulator said the potential mothballing of the units was also foreseeable as the “deterioration in market conditions for coal units” was well known and looked likely to continue.

In particular, it noted the submission it received from National Grid in December for the black start mid-scheme review, which raised the possibility that Drax may not run its coal-fired units at all over the summer due to declining profitability.

In an open letter explaining its decision, Ofgem said: “This indicated in December 2015 that Drax would be unavailable for the provision of black start without significant payments for warming over the summer.

“This indicates that [National Grid Electricity Transmission] was aware that Drax was considering its options. In turn, this appears to indicate that the possibility of Drax mothballing – which would detrimentally affect black start capability and increase costs – was foreseen as a credible risk.”

The regulator said the declining profitability of Fiddler’s Ferry was similarly foreseeable, but said there were reasons why the announcement of the potential closure was not.  

The plant already had a black start contract running until 31 March 2020 and the unit for which closure was not announced had a supplemental balancing reserve contract for the following winter. The plant’s three other units also had capacity market contracts for 2018/19; reneging on the contracts would incur penalties of £33 million.

Ofgem said it was therefore “reasonable for the [system operator] to assume that Fiddler’s Ferry would honour its contract and remain available to provide Black Start services in 2016/17”.

The contracts are worth a total of £113 million: £59 million for Drax and £54 million for Fiddler’s Ferry. Following Ofgem’s decision, National Grid’s spending target will be increased £95.3 million, enabling it to recover the full cost of the Fiddler’s Ferry contract but by only part of the cost of the Drax contract.

Under the Balancing Services Incentive Scheme, the firm can keep 30 per cent of any underspend with respect to the target, but has to pay back 30 per cent of any overspend. On this basis, National Grid will be liable to pay the remaining £17.7 million.

A spokesman for National Grid said: “These contracts were awarded through an open process which ensured compliance with our obligation to maintain black start capability across the whole country. It is good news that Ofgem has understood this in the context of the Fiddler’s Ferry contract.

“We are disappointed by the decision in relation to Drax, but National Grid will only bear a maximum capped cost of £17.7 million, equivalent to 30 per cent of the maximum cost of the Drax contract.

“In addition, for the benefit of bill payers, National Grid has put profit claw backs into these black start contracts to ensure that money is returned to consumers in the event that market conditions improve.” 

Black start contracts are awarded to generators which can provide the capability to help re-energise the transmission system in the event of a national power outage. In order to be eligible plants must be able to start up without access to an external power source.