High Balancing Costs - Ofgem announces reviewThis period saw the onset of COVID-19, as well as record high renewable output and saw the ESO incur balancing costs of £718mn between March and July, 39% higher than the normal expected costs for this period.

This past month Ofgem set out that it is to undertake a review of the high balancing costs that were experienced during the spring and summer period, with the aim of identifying areas that need to be explored in order to reduce costs for consumers.

Balancing is carried out by National Grid Electricity System Operator (ESO) to keep the commercial electricity system working – the balancing costs are filtered down into all types of consumer electricity bill.

This period saw the onset of COVID-19, as well as record high renewable output and saw the ESO incur balancing costs of £718mn between March and July, 39% higher than the normal expected costs for this period.

Over the spring and summer, the ESO introduced three changes to the existing GB balancing arrangements to enable it to better manage the system:

• Contracting with Sizewell B nuclear power station to reduce its output by 50%.
• Designing and introducing a new Optional Downward Flexibility Management service to turn down distributed generators which do not normally provide balancing services.
• Clarifying the emergency arrangements for the disconnection of distributed generation if necessary.

These extra actions resulted in an increase in costs for balancing the system and as such Ofgem will assess how well the market responded to the challenges faced during this period and any lessons that might be learnt.

Specifically, the review will focus on three areas: the extent to which the challenges faced were foreseeable and how much of a cause COVID-19 was to these increased costs; an assessment of the crisis management and response, focusing in particular on how well the ESO met its expected standard and how it engaged with the market; and the identification of any lessons that can be learnt for the future, including any further amendments to the system that might need to be made.

Ofgem intends to hold industry roundtables in early September to gather stakeholder views on these three areas. It is the regulator’s intention to finish the review by the end of October, which will coincide with the ESO Performance Panel’s mid-year review of the ESO.