When it comes to energy costs, we’ve had more than our fair share of uncertainty. But while all eyes have been on turbulent wholesale commodity prices, less focus has been given to ongoing volatility among the various non-commodity charges added to invoices.
The thing is, these two bill elements – which prior to the recent hikes in commodity costs made up an approximate 50/50 share of the final invoiced cost of electricity – are often closely connected.
Tracking the wholesale market
Certainly, anyone tracking the increasing cost of Balancing Services Use of System (BSUoS) charges added to invoices will have noticed a corresponding hike in price since September 2021. (If you pay a fixed rate for your business electricity, this increase is reflected in rises to your Standing Charge.)
This is because National Grid, in its role as electricity system operator, has to pay generators market-reflective rates to be on standby to provide power should we need it. And as we all know, the market has become much more expensive.
So, for example, if UK wind generation drops or France experiences nuclear outages and stops exporting its spare power to us via our undersea interconnectors – both of which have happened recently – other generation is ready to kick in to pick up the slack and ensure the lights stay on.
Cost more than doubled since 2021
In 2021, the average BSUoS charge was £6.07 per MWh. This jumped to £9.19/MWh in 2022. From April 2023, it will increase again to £13.41/MWh – and rise to £14.03/MWh from October (although there is another factor contributing to an increase in costs – of which more below).
The more savvy among you may wonder how I can share these advance costs with you, when BSUoS has always been such a tricky charge to forecast – and one that can jump about from month to month.
The reason is that the way this charge is billed to business customers is changing. Following the conclusion of three years of industry task forces and working groups to look at how to recoup BSUoS in a better way, a new charging methodology is being introduced from April.
Fixing BSUoS costs
National Grid is being asked to fix BSUoS charges for six-month periods, with the value of that charge advised nine months in advance. (Although for this April, the notice period has only been three months, as firming up the initial details took longer.)
The aim is to then adapt charges in the following charging periods to take into account any shortfall or over charge.
However, due to the huge volatility of BSUoS costs, the BSUoS working group is being asked to look at some other options to provide National Grid with more of a contingency. This follows Ofgem rejecting an initial plan to build a £2-billion sink fund to meet any shortfall, as this was deemed too much to ask consumers to contribute to.
Generators to no longer contribute to BSUoS costs
The other big change in BSUoS charging – and the reason for an approximate increase in the charge by a third – is that from April, generators will no longer be expected to contribute.
Currently, BSUoS costs are split between both demand customers and generators.
The thinking is that the share generators pay then adds cost to the wholesale price of the energy they generate. Like suppliers, generators also have to factor in a risk premium to ensure they can meet their share of volatile BSUoS charges. So removing this charge – and the associated risk – should mean wholesale prices reduce slightly.
Energy imported via our interconnector network is not subject to BSUoS charges, so removing it from home-grown generation also helps to level the playing field. (For more on interconnector flows, download our latest Focus on UK Energy Supply report.)
But the impact on consumers is that the total cost of BSUoS will only be met by them – hence the approximate 30% uplift.
An important caveat
So in short, these changes to BSUoS mean more certainly for consumers – but also higher cost.
It’s important to note too, that until some sort of safety net can be put in place that limits National Grid’s exposure to balancing costs, the regulator (Ofgem) is allowing National Grid the right to amend a price that’s already been set with a six-month period, if costs spiral.
So we’ll have to wait and see how this pans out…
For more information about how changes to BSUoS impact your electricity costs, speak to your Client Lead or Account Manager (for existing customers). Or get in touch with us via Contact us | npower Business Solutions