Balancing System (BSUoS) Costs hit record highs for large business energy users

In the first of our Non-Commodity Costs blog series, Mark Cox, Strategic Account Manager and host of our Non-Commodity Costs webinars looks at the record high BSUoS costs for I&C business electricity customers and the potential changes ahead to BSUoS charging.

BSUoS is the Balancing Services Use of System cost, essentially the cost of balancing and operating the transmission system. In our latest Non-Commodity Costs webinar, presented to customers earlier this week, industry pricing expert, Alex Walmsley and I discussed the sharp rise we’ve seen in our 12-month rolling average for BSUoS since Summer 2021.

The main message to take away here is that the 12-month rolling average BSUoS price has increased steeply since July 2021 to December 2021, pulling the annual average up significantly which tells us just how volatile balancing costs have become. Q4 2021 outturned at record highs, with November 2021 hitting £12/MWh, that’s double our rolling yearly average recorded for December 2021.

These volatile balancing costs over the more recent winter months have been driven by the unprecedented rise in gas and electricity costs and unseasonably low wind load factors that have significantly increased the cost of balancing the grid. National Grid ESO has had to procure generation from ordinarily idle power stations at exceptionally high offer prices in the Balancing Mechanism to meet demand. Balancing costs doubled to £1 billion between September and November 2021 when compared to 2020 and as a result BSUoS outturn charges have considerably exceeded National Grid ESO’s forecasts.

CMP381 is an Ofgem modification that has recently been approved as a short-term measure to help mitigate this, deferring exceptionally high winter 2021/22 BSUoS costs to 2022/23. The modification has set a price cap at a settlement period level of £20/MWh applicable from 17th January to 31st March 2022 and any BSUoS charges above this cap will defer to 2022/23 up to a maximum deferred level of £200million.

In 2020, under the CMP345 modification, Ofgem approved a cap of £15/MWh to BSUoS charges from 25th June until the 31st August 2020 following the increased costs of balancing the system due to the reduced demand throughout the Covid-19 pandemic. These deferred charges were scheduled to be recovered in 2021/22. A second modification was also approved in August 2020 to reduce the existing BSUoS cap of £15/MWh to £10/MWh until 25th October 2020, limiting the total deferred BSUoS charges to £100 million under the CMP350 modification. 

Future BSUoS cost forecasts
Our long-term trajectory suggests BSUoS costs will become even more expensive in the future, particularly as more wind generation is deployed, leading to the possibility of increased constraints on the network. Furthermore, Ofgem have recently published their minded to position on CMP308, which proposes to remove BSUoS charges from generators connected directly to the transmission network, meaning the cost falls to a much smaller charging base of only Final Demand users. We expect this change alone could increase BSUoS costs for Final Demand users by approx. 80% and we can expect this to be implemented from April 2023.

Could BSUoS become a fixed rate on your energy bill?
A great question we received on our webinar was whether BSUoS may become a fixed charge on the business energy bill to help minimise exposure to BSUoS volatility for demand users. This question stems from the code modifications CMP361 and CMP362 introduced by a second BSUoS Task force a couple of years ago.

CMP361 seeks to introduce an ex ante fixed volumetric BSUoS tariff set for an April year and notice period of 15 months, while CMP362 facilitates the implementation, by introducing and updating required definitions from CMP308 and CMP361. Ofgem's draft final modification report was issued last week to determine whether it will go ahead and any suggested alternatives to the initial proposal have until the April 2023 implementation date. We’ll look to provide any further update on this in our next Non-Commodity Cost webinar in the Spring.

Stay tuned for the next instalment of our Non-Commodity Costs blog series covering environmental costs such as Renewable Obligation (RO) and Contracts for Different (CfD). In the meantime, please feel free to contact your Account Manager directly or use our ‘Contact Us’ form with any related questions about our price forecasts and your energy bill.