Ofgem recently approved Balancing and Settlement Code (BSC) modification proposal P415, a significant move that aims to facilitate access to the wholesale electricity market for flexibility dispatched by Virtual Lead Parties (VLPs). Below, we briefly summarise the changes that will now be implemented, as well of the intended benefits.
In simple terms, flexibility is the ability of generators and consumers of electricity to reduce or increase their generation or consumption, usually in exchange for payments. The VLP 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 aggregate.
However, currently VLPs are not able to access the wholesale market, which is distinct from the balancing mechanism. Consumers of electricity who can be flexible in terms of their consumption cannot currently obtain the value from that flexibility within the wholesale market unless they enter into arrangements with their supplier to do so (i.e. they need to have a flexible tariff with their supplier). This is because the BSC currently assigns all flexibility delivered by a consumer to their supplier (with the exception of flexibility instructed by the Electricity System Operator (ESO) in the balancing mechanism).
When it is implemented in November next year, P415 will change this. VLPs will be able to trade 'deviation volumes' on the wholesale electricity market on behalf of customers, and VPLs will be able to offer new flexibility products to consumers. Deviation volumes will represent the difference between what is forecast to be consumed (or generated) and what was actually consumed (or generated), where the difference can be attributed to VLP action (e.g. an instruction to a consumer to turn up or turn down demand).
Ofgem has recognised that suppliers will be commercially impacted where VLP actions reduce anticipated consumer demand. Each supplier will buy volumes of electricity in accordance with its expectation of what consumers will use, not accounting for any VLP actions. Therefore, suppliers may purchase excess electricity. To address this, suppliers will be compensated where they are commercially impacted by VLP actions and the compensation costs will be mutualised amongst all suppliers. Compensation will be paid at an electricity price that represents the average supplier sourcing costs, based on Ofgem's price cap methodology.
In considering the proposal, Ofgem determined that VLP access to the wholesale market would lead to an increased amount of flexibility, providing the ESO with more options to balance and operate the transmission system. Ofgem also expects the changes to result in supply and demand being matched more closely, optimising energy usage and reducing curtailment of generation. For example, in periods of high renewable generation (when prices are typically low or negative), VLPs may be able to increase demand to absorb excess generation. The closer matching of supply and demand is also likely to reduce the need to dispatch fossil fuel generation assets to deal with imbalances.
Ofgem also expects the changes to increase competition in the wholesale market by introducing new market participants in the form of VLPs, potentially resulting in decreased market prices and lower bills for consumers. Whilst Ofgem accepts that the cost of mutualisation will result in additional costs for suppliers, it expects these to be outweighed by the benefits arising from increased competition brought about by the changes.
The approval of P415 appears to be a significant change, which could have widespread impacts on the wholesale electricity market and consumers. We will be monitoring developments closely as the implementation date approaches. However, only time will tell whether the impacts are as intended by Ofgem.
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