‘Watershed moment’ as aggregators granted access to wholesale market

Ofgem has given the green light to allow independent aggregators to sell flexibility on the wholesale market.

Sarah Honan, flexibility policy manager at the Association for Decentralised Energy (ADE), described the long-awaited decision as a “watershed moment” for the sector.

Customers who are willing to raise or lower their demand in exchange for payment are currently only able to access the wholesale market through their supplier.

Ofgem has now approved a proposed modification to the Balancing and Settlement Code (BSC) that would also allow customers to do so through a virtual lead party. The modification, designated P415, was proposed by Enel X more than three years ago in September 2020.

The virtual lead party role was originally created to enable independent aggregators to sell flexibility in the Balancing Mechanism by allowing them to create aggregated units without becoming the registered supplier for the sites they are combining. Flexitricity became the first virtual lead party to trade on the Balancing Mechanism in April 2020.

As a reduction in demand by virtual lead parties would leave suppliers unable charge customers for electricity they had purchased based on their expected consumption, two potential solutions were proposed for providing compensation.

Under the first, the costs of compensation would be mutualised among all suppliers, and under the second, virtual lead parties would be individually liable for the costs resulting from their actions.

Under both proposals, compensation would be paid at a price representing average supplier sourcing costs based on Ofgem’s price cap methodology.

At a meeting in June, the BSC panel unanimously agreed that the modification should be approved and that the second solution is a better way of compensating suppliers. Panel members expressed concerns that the first solution would require suppliers to cover the costs of a risk over which they have no control.

Ofgem has nevertheless opted for the first solution, primarily on the basis that virtual lead parties will have more incentive to enter the wholesale market if they are not required to pay the compensation costs. The regulator said their participation in the market will unlock a series of benefits.

The Electricity System Operator will have more options for balancing and operating the power grid, improving the efficiency of its actions and lowering its costs.

Virtual lead parties will also be able to increase consumer demand to absorb excess renewable output when prices are low or even negative. Their presence will additionally reduce the need to dispatch fossil fuel generation, cutting carbon emissions.

Furthermore, the flexibility provided by virtual lead parties will reduce spot prices on the wholesale market, lowering sourcing costs for all suppliers.

Ofgem said its chosen option for compensating suppliers will encourage them to compete with virtual lead parties to access their customers’ flexibility. It acknowledged that this could lead to an “uneven market” as the costs of virtual lead parties’ actions will be borne by suppliers but not by themselves. However, the regulator said this concern is outweighed by the wider benefits of greater market participation.

Ofgem also acknowledged that any baselining methodology for calculating the volume of flexibility delivered by virtual lead parties will be “imperfect when applied to a heterogenous set of consumers.”

It said the cost benefit analysis for the modification identified the potential for virtual lead parties to “beat the baseline” and get paid without actually delivering any flexibility by better forecasting consumers’ demand.

The regulator likewise recognised the potential for suppliers to game the system by acting as virtual lead party for their customers’ flexibility and then receiving compensation from the mutualisation fund.

“In light of this potential risk, we will carefully monitor the implementation of P415 and its impacts,” it stated. “If we believe that suppliers are not acting within the best interests of consumers, we will not hesitate to intervene.”

Ofgem said the industry should similarly keep the baselining methodology under review to identify and resolve any problems that emerge.

The modification is scheduled for implementation on 7 November 2024.

Sarah Honan from the ADE said: “Today is a watershed moment for the UK flexibility sector. Thanks to a decision by Ofgem, the wholesale market – where the vast majority of electricity is bought and sold – will open its doors to participants beyond suppliers, generators, and financial traders.

“Independent aggregators of demand flexibility, who will play a crucial role in decarbonising our electricity system, will be able to participate in our largest market. It is likely that we will look back on this decision as heralding a step-change in how we consider electricity market trading both in the wholesale market and beyond.”

Elexon chief executive Peter Stanley said: “We recognise the important and growing role flexibility has in electricity markets. Approval of P415 is an important breakthrough as it will give flexibility providers access to wholesale markets to realise the value of flexible assets.

“In 2019, Elexon opened up the Balancing Mechanism to independent aggregators by creating the virtual lead party role. Since then, we have delivered successive changes to the BSC which create more opportunities for these companies to compete in the provision of balancing services.

“We are excited to be implementing P415 on the Elexon Kinnect platform. In parallel, we will continue to work with industry and Ofgem to progress proposals for the associated compensation mechanism in the Balancing Mechanism for suppliers and VLPs, in cases where suppliers’ volumes are adjusted by VLPs.”