3 September 2020
Balancing Services Use of System (BSUoS) charges have come into the spotlight this year.
Covid-19 is largely to thank for this fame, as low demand over lockdown caused significant increases to the cost of balancing the electricity system, leaving energy companies to deal with the consequences. LCP explains how this is impacting market participants and why accurate BSUoS forecasting is essential in today’s market.
For those who aren’t familiar with BSUoS, this is a charge that recovers the cost of day-to-day operation of the electricity system, covering everything from network constraints (where there’s too much power to flow down a cable) through to paying for services that keep the system stable. BSUoS is charged on an ex-post basis to both suppliers and generators. The value changes every half hour depending on what actions National Grid has to take to manage the system. As market participants pay BSUoS on their usage, they will add an estimate of what the BSUoS charge will be when selling power, effectively locking in that forecast onto their balance sheet.
Looking at how BSUoS charges have changed, we can see that in 2019 the average BSUoS charge was £3.36/MWh. This has increased to £5.43/MWh from the start of lockdown until the end of July this year. The higher average charge is primarily due to a lower charging base (i.e cost is spread over less demand) and more expensive actions being taken by National Grid, which has a knock-on impact for the market (LCP covered the reasons for this this in more detail in our Impact of Covid-19 Analysis). Companies that had already sold power in forward markets would have priced in a lower BSUoS charge, meaning that the higher charge will have to be absorbed by the company’s bottom line.
The other issue that has impacted the market is the increase in the range of BSUoS prices we’ve seen over the past few months. During lockdown, BSUoS charges have ranged from £1.17-29.97/MWh, while in 2019 this range was nearly £10/MWh less at -£0.75-19.37/MWh. With this increased volatility comes greater risk exposure, so companies are forced to place higher risk premiums on their BSUoS pricing. This premium is a bit of a Goldilocks problem. Too high and they become uncompetitive, while too low and they face a potentially expensive spike in BSUoS, wiping out profits or even causing losses.
As such, the need to forecast BSUoS charges has become crucial to trading decisions. For example, on the 28 July at 3am National Grid's published BSUoS charge forecast was £5.54/MWh while LCP’s live forecast was £21.13 MWh. As it turned out, the BSUoS charge this period was £23.78MWh. In this simplified example, if the generator had only used the published BSUoS forecast in its price, it would have been making £18.24/MWh less than it expected, more than enough to push a profitable decision into a loss-making action.
Industry recognised the problem of BSUoS volatility at the start of lockdown, resulting in Ofgem approving a CUSC modification which came into effect on the 25 June that capped BSUoS at £15.00/MWh for each period. This has been superseded by another change that came into effect on the 14 August which now caps BSUoS at £10.00/MWh until the 25 October. This also comes with a £100m limit to the amount deferred, with the under-recovery to be recouped uniformly across 2021/22.
LCP provides a live BSUoS forecast which is used by clients to manage their market position. In July, National Grid’s half hourly BSUoS forecast was within £2/MWh of the actual outturn 71% of the time, while LCP’s live BSUoS forecast was within £2/MWh of the actual outturn 94% of the time.
Whether you’re an independent generator, supplier or a large industrial user, volatile BSUoS charges will have an impact on your business. Although the impacts of Covid-19 on the energy system are forecast to reduce over the winter, the increase in BSUoS prices is expected to re-materialise in the future as more renewables connect and National Grid needs to take action to manage this volatile system. Understanding the driving forces of BSUoS, factoring them into decision making and having accurate forecasts will help companies manage BSUoS in the future, which will be key to a successful business.
LCP Enact is a data integration, analytics and forecasting platform for the GB energy market. Enact helps traders, analysts and managers navigate an increasingly competitive market with ease, make better decisions, and monitor performance. LCP Enact provides forecasts for NIV, wind, demand, system price and BSUoS forecasts.
Find out more about Enact by click here.