Posted on: 16/06/2020
In the first of a two-part series focusing on how Covid-19 has impacted Non-Commodity Costs (NCCs) Head of Pricing, Tom Putney takes a look at why the value of BSUoS has risen so much, as well as what industry is doing to mitigate the effects for consumers.
Since the introduction of lockdown conditions in the UK, significant reductions have been seen in demand. Across April demand was down 18% on the previous year, with reductions continuing across May. Beneath those headline figures, we have seen large variances across sectors, with significant reductions in the industrial and commercial sector, whereas demand in the residential sector has increased (to a lesser degree) as more people worked from home and schools were shut.
In this context, changes in non-commodity costs fall into three broad categories. Firstly, there are those where the rates are fixed for the current charging year, and hence there is no impact. Secondly, there are those where the total cost has not changed, but the lower charging base is likely to result in a higher £/MWh charge – for example Feed-in-Tariff (FiT) costs, where lower demand could lead to increases in the £/MWh supplier charge. The charge I’m going to address in this blog -- Balancing Service Use of System Charge (BSUoS) -- falls in to the last category; costs that are impacted beyond there simply being a lower charging base.
The combination of large demand reductions due to the introduction of social distancing measures coupled with increasing renewables penetration on the energy system is making it harder for National Grid to balance the system and maintain frequency stability. In response to this, additional actions have been taken to introduce the Optional Downward Flexibility Management (ODFM) product, a new scheme to give Grid access to flexibility not currently available through the Balancing Mechanism. On top of this, National Grid are expected to have to make even more Balancing Mechanism actions, including turning off renewable generation. The System Operator has also put in place an agreement to reduce Sizewell B to half load in order to cope with the new demand landscape.
And of course, this all comes at a cost. National Grid published a forecast in May, suggesting that the cost of this over the summer could be in the region of £500m, which is a staggering amount when you consider that the previous view for the whole year was in the region of £1.5bn. This remains just a forecast, but it needs to be taken seriously when viewed in context; over the second May bank holiday weekend, BSUoS averaged over £14/MWh across a 4-day period, reaching a peak of £27/MWh. By way of comparison, the same period last year saw an average BSUoS value of £4.50/MWh.
Despite these rises in BSUoS, there is the potential for relief for end users. Industry are assessing a proposal to defer up to £500m of additional Covid-19 related BSUoS costs until 2020/21. The proposal is currently going through the industry work group process, with an expectation that a proposal will be put to Ofgem for decision later in June. This would help in reducing energy bills in the short-term, providing businesses with more capital to concentrate on restarting operations.
Ofgem have also recently announced a scheme to allow some suppliers an extended period to pay their network charges, albeit with restrictions to suppliers without an investment grade credit rating and at an interest rate of around 8%.
All-in-all then, it’s clear to see that National Grid, like us all have had to learn to adapt to this ‘new normal’, and the circumstances created by it have led to an increase in the value of BSUoS. Whilst this represents an unwelcome added-cost for end users, industry is doing what it can to help businesses at this time.