On Thursday afternoon Ofgem gave the green light for National Grid to propose steeper charges to call on stand-by capacity when demand threatens to outstrip supply, and significantly higher charges in the event of a supply disruption.
Ofgem explains that the current ‘cash out’ charges are based on the average cost of managing an imbalance between supply and demand, but its new reforms mean that National Grid will be able to charge based on the most expensive action that might be needed to prevent a shortfall in power.
Currently, the National Grid balances an over-supply by paying the generator for the ‘overspill’ at a price well below the prevailing market rate, and balances an under-supply by charging the company responsible at a significantly higher rate than it costs to buy from the market.
On Thursday, National Grid would charge a generator for an imbalance at almost £63/MWh while the amount it would pay a generators for an overspill of extra power would be just £30.50/MWh, compared to £41.85/MWh heard at yesterday’s close.
In both cases it would be more economical for market players to keep their supply-demand responsibilities aligned, which discourages the imbalances that threaten the stability of the grid.
In addition, Ofgem said it will allow National Grid to impose significantly higher charges in the event that an imbalance results in a disruption of supply to the customer. By early winter 2015/16 a generator would be charged £3,000/MWh if their imbalance resulted in a blackout, rising to £6,000/MWh by early winter 2018/19.
A spokesman for Ofgem added that currently the most a market participant would need to pay for National Grid to balance a shortfall of power would be £300/MWh.
But as UK generation capacity closes, with little new investment available to meet the shortfall, the regulator is supporting bolder measures to avert the higher risk of blackouts over the winter of 2015-16.
“Our reforms mean that generators and suppliers will face stronger incentives to deliver security of supply, which in turn will encourage flexible power plant such as gas fired stations to produce electricity, and investment in new flexible technology such as electricity storage,” Ofgem said.
Ofgem’s positive final policy decision paves the way for National Grid to propose higher imbalance costs, but the regulator will still need to approve the changes before they are implemented.