Electricity balancing charges to fall – but for how long?

The cost of balancing the UK electricity system is perhaps a useful barometer of the wider energy market.

Prices have dramatically increased from the steady £2 to £3 per megawatt-hour (MWh) we saw in 2016-19, and we are also witnessing far more volatility.

But one piece of good news for consumers is that there is some reprieve on the horizon from the increasing cost of Balancing Services Use of System (BSUoS) charges.

National Grid ESO – the electricity system operator responsible for system balancing in Great Britain – has published its final fixed tariff for April to September 2024, and at £7.63 per MWh, it’s a lot less than expected.

Why is this?
There are several reasons – mostly a fall in the cost of energy on the wholesale market. But also a drop in winter security of supply contingency costs due to the unavailability of standby coal-fired plant, plus a rebate of funds over-recovered from earlier periods.

What does the wholesale market have to do with balancing costs?
A key driver of balancing costs is the wholesale electricity price because the ESO has to pay a competitive rate to electricity generators to provide standby power to balance the system, should it be required. As the alternative is for generators to sell their power to consumers via the wholesale market, ESO has to offer them a more attractive rate to make participating in balancing costs worthwhile.

So wholesale electricity costs are falling?
Over the last few months, there has been a significant change in the forward curve of wholesale electricity for next year. For example, since January, wholesale electricity prices for 2024/25 have dropped by around 43%.

But the overall trend is for BSUoS costs to increase?
Yes. As explained in our previous blog, the cost of procuring balancing services has been higher due to the increase in energy prices we’ve seen over the past two years. Also, from April 2023, generators no longer pay towards BSUoS, which means that consumers bear the full cost, resulting in an approximate 60% increase in charges. And with more renewable generation in the mix, balancing supply and demand becomes more complex and therefore costs more.

Why is there less money allocated for security of supply in winter 23/24?
For past winters, ESO has been instructed by the government to “undertake enhanced actions to ensure ongoing security of supply across the winter period.” So it collected £175 million in earlier BSUoS charges to fund standby generation contracts for winter 2023/24. But two coal-fired plant have now decided to decommission, and a third has returned to the main supply market. Without these options, ESO has decided to return £150 million of the money to consumers.

Without coal-fired generation on standby, is there a risk of the lights going out?
Hard to say for sure. Certainly, there are now fewer continuous standby power options to draw on. ESO says it will allocate the remaining winter contingency money (£25 million) to its Demand Flexibility Service (DFS), whereby consumers agree to reduce consumption during periods of stress on the system. And it does include a caveat that should the government ask again to secure spare capacity for winter 2023/24, “additional money could need to be recovered through Fixed Tariff 4 [October 2024 to March 2025], assuming that plant was available.” Currently, the draft tariff for period 4 is also lower than expected at £7.60 per MWh.

Why do these latest tariffs include a rebate – and what is it for?
Now that BSUoS has moved to a fixed-rate model, ESO has to forecast costs ahead of time which, it says, “results in potential for both significant over and under recovery of revenue vs costs”. For the first fixed tariff period (April to September 2023), ESO estimates that £429 million will be over-recovered. And for the second tariff period (September 2023 to March 2025), it’s estimating £436 million will being over-recovered. So this money will now offset charges for fixed tariff period 3 (April to September 2024) and the draft tariff for period 4 (October 2024 to March 2025).

If National Grid gets it sums wrong, what then?
The way that BSUoS charging methodology now works means that if National Grid underestimates costs – or events occur in the market which cause a big increase – then it can increase BSUoS charges part way through a tariff period. So consumers could see a rise in charges.

Why is there a need for balancing costs?
To ensure the grid remains operational, supply has to be matched with demand in real time. This means if there is too much supply, generators have to switch off when asked to do so (and be compensated for loss of revenue). Or consumers are incentivised to draw more power. And when there is insufficient power to meet demand – for example due to an unexpected outage at a generator, or because the wind drops – then additional standby generation has to kick in. Or consumers are incentivised to reduce demand. This all costs money – and this money is recovered from consumers via the BSUoS charge.