- Elexon has implemented a change to the Balancing and Settlement Code (BSC) to ensure a fairer and clearer compensation process for electricity suppliers when independent flexibility providers deliver services in the Balancing Mechanism.
- The change will help create a level playing field and contribute to progress towards the UK's Clean Power 2030 goals.
Elexon has implemented Modification P444 to introduce a new compensation mechanism for suppliers when independent aggregators, known as Virtual Lead Parties (VLPs), deliver flexibility actions in the Balancing Mechanism (BM).
Independent aggregators play an important role in enabling flexible energy use by coordinating customers who can adjust their consumption at short notice.
This helps the system stay balanced as more renewable power is used.
However, under previous rules, when an aggregator delivered flexibility by adjusting energy volumes, suppliers could incur costs that they were unable to recover through the settlement process.
This created a risk of suppliers being left out of pocket, even where they had accurately planned and bought energy for their customers.
For example, if a supplier has accurately hedged for a demand-side customer’s expected usage, and an independent aggregator responds to a NESO request for demand reduction, the customer’s metered consumption may be lower than anticipated, leaving the supplier ‘long’ (meaning that it the supplier has more electricity than its customers are currently using).
Under previous BSC rules, the imbalance settlement process - managed by Elexon - returns the supplier to a ‘balanced’ position but does not account for the costs of procuring the missing energy in the wholesale market.
That financial uncertainty acted as a barrier to the growth of flexibility services, making it harder for suppliers and aggregators to compete fairly.
Last November, Elexon opened the wholesale market to independent aggregators, allowing them to compete directly with suppliers.
Following implementation of Modification P415 “Facilitating access to wholesale markets, for flexibility dispatched by Virtual Lead Parties”, owners of flexible assets, including batteries, EV chargers, generators and heat pumps, used a system that let them appoint a separate company, not just their energy supplier, to trade their flexibility in the wholesale electricity market.
A compensation mechanism was also introduced to reimburse suppliers for actions by independent aggregators (known as Virtual Trading Parties in the wholesale market). It ensures that suppliers are paid at a price approximating their expected sourcing costs, calculated using Ofgem’s Price Cap Methodology.
The new arrangements will compensate suppliers for these costs, ensuring that flexibility providers can continue to support the system without creating unintended losses for other market participants.
The mechanism uses a price that reflects suppliers’ expected energy sourcing costs, so it supports fair competition and efficient system operation.
Flexibility will be essential to meeting Government targets, including Clean Power 2030, by helping to balance supply and demand as more renewable generation connects to the grid.
Creating clear and fair market rules is key to unlocking that growth.
Elexon Chief Executive, Peter Stanley, said: “As the energy system evolves, flexibility will play a critical role in balancing supply and demand, as we move towards a cleaner, more decarbonised power system.
“Elexon has a responsibility to ensure that all participants in the Balancing Mechanism operate on a level playing field while supporting competition.
“This step is essential to unlocking the full potential of flexibility services, which will be vital to achieving the Clean Power 2030 targets and delivering a secure, efficient, and low carbon energy system for all consumers.”
Claire Addison, Head of Regulation at Flexitricity, said: “We proposed P444 to make delivering flexibility in the Balancing Mechanism fairer and more competitive.
“We are delighted that there will be more accurate incentives for flexible assets, including battery energy storage and consumer-led flexibility, to turn up their demand and put green energy to work.”