Select Committee on Environmental Audit Appendices to the Minutes of Evidence

Annex B

  Annex A deals with fundamental design issues in the NETA system and Annex C discusses a number of specific proposals for modifications to NETA. This Annex discusses a number of other matters that are of significance to the economic operation of NETA and the success of small and renewable generators, which arise from the manner in which NETA has been implemented.


  The Balancing Reserve Level (BRL) is a parameter that may be set by the BSC Panel with the agreement of the Authority. The BRL determines the maximum volume of Balancing Mechanism acceptances that may be included in the smaller of the stacks of bids and offers that are to be included in the calculation of the imbalance prices. The BRL should be set at the expected volume of equal and opposite acceptances that NGC would need to make in order to provide reserve for energy balancing reasons. In principle, if the BRL were set at the correct level in each half hour, actions taken for system balancing (short-term fluctuations and transmission system constraints) reasons would be likely to be excluded from the calculation of imbalance prices.

  The value of BRL was originally set at 180MWh as this was the expected level of NGC reserve holding, but operational experience has provided overwhelming evidence that the appropriate level is 0MWh. The BSC Panel has recommended a significant reduction in the level of the parameter, but this change has been vetoed by the Authority. The excessive level of BRL is, almost certainly, contributing to the penal level of the spread of imbalance prices.


  The responsibility for ensuring an economic and practical system of electricity trading is split between a number of bodies and there are no formal (and few informal) routes for ensuring that the work and decisions of each of these bodies is consistent with each other, except through the powers of the Authority. This type of split responsibility is illustrated by examining the governance of the balancing transactions that NGC undertakes before gate closure. The costs and volumes of these transactions feed into the imbalance prices through BSAD and have significant effects on the imbalance prices, but the BSC Panel has no vires over how the transactions are undertaken and does not even have the vires to study the practicalities of the transactions in order to inform its own deliberations. The BSC Panel must rely on the Authority to ensure consistency. The practical result is that the Authority may cause significant changes in the calculation of imbalance prices without reference to the BSC Panel.

  Further, the BSC Panel is able to make very few decisions without the explicit agreement of the Authority. The effect of this structure is that, although the Authority cannot propose changes to NETA, it effectively decides on the design of NETA and the values of the operating parameters rather than these being determined by the governance processes managed by the BSC Panel. The decision of the Authority not to accept the BSC Panel's recommendation on BRL (see above) is one case in point, but is certainly not the only example.

  The combination of split governance and the power of veto of the Authority over the actions of the BSC Panel place an unhealthy degree of power over the detailed design and administration of the trading arrangements in the hands of the Authority and the Authority has demonstrated that it is prepared to exercise this power. This over concentration of day-to-day and design control in the Authority creates significant regulatory risk that discourages new entrants.

  Two other practical effects of this detailed control by the Authority should also be noted:

    —  There have been significant delays in receiving decisions from the Authority on modification proposals once the BSC Panel has made its recommendations.

    —  Parties have been unwilling to submit modifications that deal with the fundamental design flaws in NETA because there is an expectation that those modifications would be rejected by the Authority. This has led to a series of modifications designed to ameliorate the symptoms created by the flaws rather than modifications that deal with the root cause.

  Thus, although the Dti Consultation Document on small and renewable generation notes in paragraph 13 that "Ofgem also notes in its report on the first three months of NETA operation generally that BSC rules have had to evolve in response to issues that have arisen in the markets.", the evolution of the rules has not addressed the root cause of these issues because of the degree of regulatory risk and the problems created by the heavily circumscribed vires of the BSC Panel.


  Paragraph 14 of the Consultation Document notes "the rapid emergence of a strong and liquid forward market is important in contributing to the UK's longer-term security of energy supply." Ofgem in its report on the first three months of NETA note a sharp increase in the volume of trading in the forward markets following the introduction of NETA and a large increase in the number of products available.

  However, the level of trading in the forward markets prior to the introduction of NETA, the base from which Ofgem is measuring the increase, was significantly depressed by uncertainty over the timing of NETA go live. Further, the standard products available in the forward markets are not sufficiently disaggregated to allow parties to balance their contractual and physical positions half hour by half hour. Consequently, parties must rely on the spot market for this degree of balancing, but the spot market is very illiquid and there are many periods when no trades occur. Forward curves are not available sufficiently far into the future to allow new entrants to make investment decisions on new generating plant and it is unlikely that a forward curve of such a length will emerge with any liquidity.

  The lack of liquidity in the forward and spot market remains a significant issue for small generators and suppliers seeking to minimise their imbalance exposure.

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