Day-ahead procurement for energy reserves goes live

On 9 February 2024, Ofgem approved a new Balancing Reserve (BR) service which went live last week. BR allows the Electricity System Operator (ESO) to respond to instant system demand by securing reserve energy a day in advance, rather than buying it on the day in real-time through optional bids and offers. An analysis from the ESO showed that in a best case scenario, the new BR service could deliver up to £821 million of savings for consumers over the next four years. 

The ESO released a statement that the new BR service will allow the ESO to address system demand in real time, which is expected to reduce consumer costs. By procuring energy reserves a day ahead, this will help to reduce balancing costs (the cost of correcting energy imbalances between energy generation and energy demand) and provide improved system security. With access to guaranteed headroom (increased generation) and guaranteed footroom (reduced generation), this will improve the efficiency of the grid, leading to less electricity waste. 

The first BR auction involved ten providers, 47 units and over 5,500 bids. There were volumes of up to 428MW Positive Balancing Reserve (PBR) and 271MW of Negative Balancing Reserve (NBR) clearing. Average day one clearing prices were £9.46 for PBR and £0.98 for NBR. 

Second consultation on wholesale zonal electricity pricing is launched 

Energy Secretary Claire Coutinho has launched the second consultation into the Review of Electricity Market Arrangements (REMA), announcing proposed measures which introduce a zonal pricing system in Britain. The announcement on 12 March 2024 confirmed that the Department for Energy Security and Net Zero (DESNZ) is considering stronger locational signals in the wholesale market through zonal pricing, and has invited market participants to respond to the consultation. Through zonal pricing, wholesale market participants would be sent both locational investment and operational signals. In effect, responsibility for managing the risk of local supply and demand would transfer from consumers to generators. 

The consultation document notes that a locational pricing system should lead to a more efficient system through real-time locational operational signals and lower consumer bills. Coutinho suggested around £45-per year could be saved from the average British household’s energy bills from the change. A joint report commissioned by Ofgem and produced by FTI Consulting and market researcher Energy Systems Catapult, found that consumer savings could range between £15 billion and £31 billion between 2025 and 2040 if a zonal market mechanism was implemented. 

However, some of the risks of the zonal pricing model include potential long-term impact on liquidity, and difficulties ensuring zonal boundaries accurately reflect system constraints. Further, the consultation rejected nodal pricing as an option, citing potential jeopardy to the UK’s 2035 decarbonisation targets and impact on investor confidence from greater revenue uncertainty. 

There has been a mixed reaction to the announcement from the industry; in summary, the rejection of nodal pricing has been widely welcomed with remarks from UK utility SSE Energy Solutions on the importance of “clear, consistent and predictable policy” which nodal pricing would impact. However, industry association RenewableUK commented that the efficacy and impact of zonal pricing would likely be limited. 

Stakeholders are encouraged to submit responses to the consultation by 7 May 2024. In addition to zonal pricing, the consultation is also seeking responses to the DESNZ’s proposals to support the building of new gas power stations and to retain a Contracts for Difference-type scheme to drive investment into renewables.