Balancing Services Charges 6th Task Force 8 April 2019
Welcome and introductions Colm Murphy
Purpose of today • The focus of the task force meeting today is: • To socialise the pre-work created by each of the 3 sub-groups on the other 3 Potential Options • To continue to discuss the advantages and limitations of each of those potential options. No Subject Lead Time 1 Welcome and Introductions; Review Actions and Colm Murphy 10:00-10:30 Minutes 2 Does locational BSUoS have any economic rationale? Frontier Economics 10:30-11:30 3 Locational Reactive and Voltage Constraints: James Kerr 11:30-12:15 Playback and Discussion 4 Lunch - 12:15-12:45 5 Response and Reserve Bands: Playback and Mike Oxenham 12:45-14:15 Discussion 6 Response and Reserve Utilisation: Playback and Nicholas Gall 14:15-15:45 Discussion 7 Summary and Next steps Colm Murphy 15:45-16:00 3
Programme plan Jan 19 Feb 19 Mar 19 Apr 19 May 19 ... 1 st TF 2 nd TF 3 rd TF 4 th TF 5 th TF 6 th TF 7 th TF 8 th TF 9 th TF Deliverable Feasible Current Potential Final report Draft report Current analysis Potential analysis TF Work Feasible criteria analysis Ad hod NG ESO draft draft draft draft draft draft Task Force Report review review review review Industry review podcast Engage webinar prep prep Other Event Ad hoc updates to CDB, mod panel, etc. Consult prep 1- TF 29Jan 2- TF Feb 3- TF Feb 4- TF Mar 5- TF Mar 6- TF Apr 7- TF Apr 8- TF May 9- TF May • TF plan • Currently : • Potential : • Potential : • Feasible : • Feasible : • Report : • Report : • Final report + • Currently : agree progress finalise further assessment finalisation comments event analysis conclusion analysis - options and analysis options before review and • Potential : actions review decide options consultation actions agree scope options progression 4 + analysis towards Feasible actions
Action log No Action Owner Open/Closed 1 Ensure feedback received from the wider industry is Sophie van Caloen (ESO) Open/Ongoing taken on-board by Task Force 2 Give consideration to analysis, questions and data All TF Members Open/Ongoing sets required and provide this to the taskforce where possible 3 Live Data Sets/Dashboards to be looked into Mike Oxenham, Paul Wakeley Open/Ongoing 4 Liaise with Elexon in regards to Data Provision Mike Oxenham (ESO) Open/Ongoing 5 TF Members to feed in thoughts to MO on which All TF Members Open/Ongoing data from Elexon may be helpful. GS to attend next TCMF – Secretariat to arrange 6 GS, JH Open 7 PW to Circluate Slides to TF Paul Wakeley Open 8 ESO to speak to PW re: constraints and locational ESO Open signals being double counted in TNUoS 9 ESO to speak to PW re: Plexos usage ESO Open 10 GS to formulate definitions for "short term" and "long GS Open term" 5
Engagement - Feedback Feedback from previous engagements: • Ops Forum – 26th March • EIUG – 27th March Next engagements: TCMF – 10 th April • DCMDG – 11 th April • • Consultation and Webinar end April / early May – see next slide 6
Proposed plan – Report & Consultation Draft report to be published - by end of April: ESO to draft report and circulate to TF next week (at the latest Thur 18 th April) • TF members to review and send comment for Wed 24 th April (Task Force meeting) • ESO to circulate final draft report Friday 26 th April for validation • Consultation & final report - by end of May: 10 working days consultation, to close on Wednesday 15 th May • Webinar on draft report and consultation, proposed on the 7 th of May (current TF meeting to be • cancelled) • Collection and review of consultation responses – proposal to have a add a placeholder for additional TF meeting on Wed 22 nd (current TF only 23 rd ) • Finalised report by end of May 7
Frontier Economics Sam Street, Dan Roberts
Does locational BSUoS have any economic rationale? A presentation to the Balancing Services Charges T ask force 8th April 2019
Contents 1. What are the relevant principles and what has Ofgem said about them? 3 2. What are the right ways of sending locational signals? 6 3. (How) does locational BSUoS fit in? 10 4. Key takeaways 15 frontier economics 10
1. What are the relevant principles and what has Ofgem said about them? 3 2. What are the right ways of sending locational signals? 6 3. (How) does locational BSUoS fit in? 10 4. Key takeaways 15 frontier economics 11
Ofgem has made clear that cost reflective charges should be based on a concept of marginal cost… Minimising total system costs Cost reflective network charges ▪ To internalise costs in the decisions of market ▪ Market participants should face the costs that they participants: impose on the system ▪ forward looking costs must be reflected: these can be ▪ They then take these costs into account in all of their changed by future behaviour; and investment and operational decisions. ▪ incremental or marginal costs, not average costs ▪ In other words, charges should be cost reflective ▪ No meaning to ‘cost reflectivity’ in relation to historic costs “ Economic theory indicates that users will make the most efficient decisions about where, when and how to use the network when they are facing the incremental or marginal cost of their behaviour. Ofgem, 2017 TCR consultation frontier economics 12
… and has stated that charges recovering any excess of total cost over marginal cost should be set to minimise the risk of distortions Cost reflective charges won’t recover sunk costs Cost reflectivity not relevant ▪ Sunk cost recovery charges not intended to generate ▪ Natural monopoly networks: average cost > marginal incentives, but to recover irreversibly incurred costs cost ▪ Correct approach is to recover them in a way which ▪ Marginal cost tariffs will not recover total costs minimises change in behaviour ▪ The residual needs to be recovered in the most ▪ Recover charges from those who are not sensitive to price… efficient way possible ▪ … but fairness considerations also apply “ Economic theory indicates that residual charges should be set in such a way to prevent the signals from the forward- looking charges from being distorted, so that users take account of the forward-looking signals to the greatest extent possible. Ofgem, 2017 TCR consultation frontier economics 13
1. What are the relevant principles and what has Ofgem said about them? 3 2. What are the right ways of sending marginal cost based locational signals? 6 3. (How) does locational BSUoS fit in? 10 4. Key takeaways 15 frontier economics 14
In relation to congestion, marginal costs can be reflected in zonal prices (SRMC based signals e.g. market splitting)… Nodal or zonal prices mean that generation and load are incentivised to produce in an optimal way to minimise congestion*. Price differentials will also send a signal to invest in transmission. In this stylised two zone example: ▪ All investments considered fixed (short run) Northern zone Southern zone Southern zone Northern zone ▪ Cheaper generation in the North D north + exports D south - import exported to the South at the maximum capacity of “interconnector” S south ▪ Prices can’t be fully equalised due to S north congestion on interconnector. P south ▪ Price differential reflects short run cost of transmission – it represents the value (or cost) of a MW of additional transmission P north Short run value i.e. incremental capacity would save (or cost) of a customers the difference in prices MW of transmission ▪ The price differential sends locational signals for generators and load. Wide recognition in Europe that market splitting has both pros and cons * Note: In the GB market losses (which are also short run marginal costs of transmission) are already allocated locationally frontier economics 15
… or can reflect incremental investment costs ( LRMC basis e.g. locational TNUoS) Incremental generation In this stylised two zone example: Incremental connection ▪ Investments can vary (long run) Entry charge ▪ Incremental generation results in new investments in transmission* Acceleration of ▪ Cost ideally measured by considering next expansion acceleration of transmission investment (PV investment in effect) MITS ▪ Sometimes approximated to cost incurred if next investment happened now ▪ Investment cost annuitized to derive annual cost, which is then divided into entry and exit charges which send locational signals to Exit charge generation and load Incremental ▪ Energy price is then national, so redispatch connection required Incrementa l load * Note: Since investment costs relate principally to congestion, it may be considered reasonable to accompany long run marginal costs with locational allocation of the short run marginal costs of losses frontier economics 16
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