The cash-out or imbalance pricing arrangements apply when companies selling or buying power do not fulful their contract – providing or using more or less power than planned. The system operator, National Grid, acts to balance the system and costs are passed through to those that are “out of balance”.
Ofgem says that cash-out prices do not reflect the real system cost. They do not reveal when there is scarity in the system and that means the right signals are not given for investment. That ultimately raises prices for consumers.
Ofgem has decided that it should review the arrangements, even though they will interact with a new capacity mechanism planned under the current Electricity Market Reform. The details of that capapcity market are unclear, and so are details of a “Target Model” for electricity markets that should ensure co-ordination across Europe.
The Target Model should be finalised in 2014.
With these issues in mind Ofgem has launched a broad consultation and asked for responses on its first consultation within three months.
The electricity cash-out consultation follows publication of Ofgem’s decisions on gas cash-out arrangements. The regulator has decided to allow prices to rise at times of shortage so that gas shippers have signals of supply tightness and incentives either to invest in capacity or to set up emergency arrangements like interruptible contracts.
Ofgem said the new arrangements would mean shippers instead of customers would bear the risk of short gas supplies.