Ofgem has rejected a code modification proposal which would have effectively capped the amount the UK spends on buying energy from other countries.
The proposal – tabled by Saltend Cogeneration Company – urged Ofgem to amend code P443 to cap interconnector trades at the Value of Lost Load (VoLL).
However, in its final ruling Ofgem states that introducing such a cap would weaken Britain’s energy security.
The VoLL is an assessment of the value that electricity consumers attribute to maintaining security of supply. There is no single, unique VoLL across the UK energy system. Within the Balancing and Settlement Code, VoLL is currently administratively set at £6,000/MWh.
However, the Electricity System Operator (ESO) can currently accept interconnector trades above £6,000/ MWh at times of high constraint as VoLL does not act as a cap.
As such, in July 2022 system constraints in the South East led the ESO to accept interconnector trades above the VoLL to maintain system security. On one occasion, the price of some of these actions was up to £9,500/MWh due to scarcity on the continent driven by the unavailability of the French nuclear fleet.
This led Saltend Cogeneration Company to submit its proposal for a cap. The company argued that the cap was needed to “limit the exposure of GB parties to tight margins across European energy markets, limit the impact of high prices on consumers and oblige NGESO to pursue other means of balancing the system”.
However, Ofgem has knocked back the proposal, stating that introducing such a cap would “supress efficient imbalance price signals, which could weaken system security during periods of scarcity”.
Ofgem’s final decision document adds: “The imbalance price (and market expectations of the imbalance price) provides an important signal to compel parties to balance their position and take all reasonable steps to make generation capacity available during times of scarcity.
“Capping the imbalance price would weaken this important signal and result in market prices that were less reflective of system conditions.”
It continues: “When the system is short and requires additional electricity to balance it, the proposed solution of a cap on the System Buy Price would create a perverse incentive by lessening the penalty for parties with a short position who contributed to the system imbalance (by under-generating or over-consuming compared to their contracted volume), while lessening the reward for those parties with a long position who acted to minimise the system imbalance (by over-generating or under-consuming compared to their contracted volume).”