Ofgem is consulting on its minded-to decision to approve a code modification that would remove generators’ liability to pay Balancing Services Use of System (BSUoS) charges.
The decision aligns with the recommendations of the second Balancing Services Charges Taskforce, which said the charges should be levied entirely on final demand.
The modification to the Connection and Use of System Code (CUSC), designated CMP308, was proposed by EDF Energy in October 2018 to remove a disparity in the charges paid by domestic generators and competitors in the EU.
BSUoS charges are currently levied on both demand customers and large generators (more than 100MW) through variable ex-post per-megawatt-hour charges for each settlement period based on gross imports for the former and gross imports and exports for the latter.
The submission of CMP308 preceded the formation of the first Balancing Services Charges Taskforce, which was created following Ofgem’s minded-to decision in November 2018 for the Targeted Charging Review (TCR) – its significant code review looking at residual network charges and embedded benefits.
The taskforce was asked to examine whether the cost reflectivity of BSUoS charges could be improved but concluded they do not currently provide any useful forward-looking price signal and should instead be treated as a cost recovery charges.
The second taskforce was created following Ofgem’s final TCR decision in November 2019 and recommended that the charges be recovered solely from final demand through flat ex-ante per-megawatt-hour fees that are fixed for charging years.
Ofgem backed the findings of the second taskforce in December 2020.
In the consultation document for its minded-to decision on CMP308, Ofgem said the modification, which was unanimously approved by the CUSC panel in September, would be an appropriate vehicle for implementing the second taskforce’s recommendation that BSUoS charges be shifted entirely onto final demand.
The regulator said the other elements of the taskforce’s proposals will be implemented separately through the modifications CMP361 and CMP362.
Ofgem said CMP308 would distortions in the wholesale market between larger and smaller and domestic and foreign generators that may obscure other, more cost-reflective price signals and lead to inefficient dispatch.
It said the transfer of liability onto final demand may increase the incentive for demand-side network users to avoid the charges: “Where end users are incentivised to use less, this may exacerbate the network issues that are giving rise to high prices and so may form a counter-intuitive signal or perverse incentive.”
However, the regulator said this would be less significant than the existing distortion to generation dispatch as network users on the demand side are generally less price responsive, particularly in the case of domestic consumers who do not pay the charges directly.
Ofgem recommended that the modification be implemented in April 2023 and said the deadline for responses to the consultation is 19 January 2022.