On 2 April 2015 Ofgem introduced a single marginal cash-out price, significantly strengthening the bite of such imbalance charges and rejecting a competing modification from RWE Npower that sought a more incremental approach to cash-out reform and implementation.
This reform stabilises supply and facilitates a better deal for consumers, more culpability for energy suppliers and a greener energy mix. It is also an opportunity for the UK to take the lead on forward-thinking energy policy in Europe.
Cash-out reform is vital for the UK energy mix for a number of key reasons:
1) Security of supply
As National Grid seeks to guarantee our energy security in winter 2015, the reform gives the price signal necessary to provoke investment in technology and flexible smarter capacity – providing the stick to the capacity market’s carrot.
2) A better deal for consumers and culpability for suppliers
Although current cash-out costs are low, the overall cost of failing to provide power is much higher, and likely to be borne by the end user. By incentivising against failure, the consumer benefits from more stable pricing and fewer shocks down the line. It is also important for consumers to know that their suppliers are appropriately culpable for failing to provide the power they’ve promised.
3) A smarter, greener grid
As more intermittent generation comes online, we need flexible capacity options to provide a safety net. With a global drive to lower emissions and EU reduction targets, a greener mix is coming.
Cash-out prices provide incentives for generators and suppliers to be smarter when securing supplies to balance positions and meet energy demand when most needed. They are central to the delivery of a secure, smart and competitive electricity market.
Some incumbents have understandably been resistant to the change. Higher potential for penalties places the onus on suppliers to deliver. The upside is that companies operating efficiently and effectively will benefit.
Cash-out reform is a key part of energy policy to support Electricity Market Reform. It is important to minimise the market’s reliance on subsidises. Cash-out reform is a mechanism that rewards flexible capacity for keeping the lights on and is a step in the right direction to developing a purer energy market.
Tim Emrich, chief executive, UK Power Reserve