Primary Consideration: Single or separate accounts Workshop 3 03/10/12 These slides are initial thoughts to aid discussion only. They are not in any way meant to signify the views of GEMA, which for the avoidance of doubt has not made any decisions on this particular issue.
Contents • Background – SCR Objectives – Interactions with the Target Model • Key considerations – What are the options? • Impact on imbalance charges • Impact on incentives to balance • What are the wider impacts of consolidating imbalances? • Interactions with other SCR considerations • Key questions 2
Background • Under the existing rules, parties are required to keep their licensed production and consumption separate – each party is assigned a Production and Consumption account • Parties are required to balance each account separately – is it more efficient to allow parties to combine imbalances? • We want to consider the merits of allowing participants to combine imbalance exposure across production and consumption accounts 3
Background (2) • Separate trading accounts were originally introduced under NETA to: – prevent parties on both sides of market from having an undue advantage – prevent parties from continually adjusting physical positions to self- balance without instructing SO – avoid the possibility that allowing netting could encourage vertical integration • Separation was implemented with consideration that commercial freedom should not be unduly restricted without good justification • Proposed BSC Modification P282: ‘Allow MVRN’s from Production to Consumption or Vice Versa’ – raised 2012 and currently going through BSC modification process – proposer suggests that larger players have found ways around separation and current arrangements are preventing smaller parties from managing imbalance risk in most efficient way 4
Where does this fit with the SCR Objectives? • Incentivise an efficient level of security of supply – incentivise optimal level of investment (through appropriate price signals) – pay firm customers appropriately for the DSR service they provide if their demand is involuntary interrupted – incentivise plant flexibility and DSR • Increase the efficiency of electricity balancing – minimise market distortions due to the need for the system operator (SO) to balance the system – incentivise participants to balance their position as far as is efficient – appropriately reflect the SO’s costs for balancing in cash -out prices • Ensure our balancing arrangements are compliant with the TM and complement the EMR CM – align GB balancing arrangements with EU balancing and capacity allocation and congestion management framework guidelines – work closely with the DECC to ensure cash-out arrangements and the EMR CM complement each other 5
Interactions with EU target model • So far it appears that no clear direction has yet been set on how imbalance volumes will be calculated or settled – these will be set out in the next stage which is to draft the network codes ‘The Electricity Balancing Network Code(s) shall define harmonised principles for calculating imbalances. All imbalances shall be subject to compensation via the imbalance pricing.’ ACER (2012); ‘Framework Guidelines on Electricity Balancing: Draft for Consultation’ 6
Key considerations • Does original rationale for separation ensure vertically integrated parties are not unduly advantaged? – proposer of P282 suggests parties have found ways around separation • contract notification (ECVN) between accounts • consolidation of imbalances across portfolios into single production and single consumption accounts (using MVRNs) • use of licence-exempt generation • Does the separation of accounts prevent parties from managing their imbalance risk in the most efficient way? – removing separation may provide more options for parties to better balance their positions • Strong interaction with single/dual cash-out price SCR consideration – if there was a single cash-out price, would single trading accounts still be an important consideration? Does the original rationale for separation of accounts hold? Does the separation of accounts prevent parties from managing their imbalance risk in the most efficient way? Would a single trading accounts still be an important consideration under a single cash-out price? 7
Options • Option 1 : Maintain separation of accounts – may not allow parties to balance their positions in most efficient way – parties may have found ways to circumvent separation which undermines original rationale • Option 2 : Single trading accounts – parties would operate through a single trading account per party to which all energy and imbalances would be allocated • Where changing to a single trading accounts could imply large administrative costs, or where other reasons exist such that separation of accounts remains desirable, an alternative option could be considered – e.g. arrangement such as that being considered currently under P282 - allow parties to consolidate imbalances across accounts Are there any alternatives to the options considered above? What are the advantages/disadvantages of each option? What are the administrative costs of implementing single account? 8
Impact on imbalance charges • Under a single account parties could offset opposing imbalances – parties would only be exposed to net imbalance – smaller volume is exposed to cash-out risk, reducing total imbalance charges – but cost to SO of balancing has not changed and total imbalance charges have Source: Analysis supporting P282 modification - Elexon Are imbalance charges made more or less cost-reflective? 9
Impact on imbalance charges (2) • Netting imbalances under a single account would reduce imbalance charges – reduces amount redistributed through Residual Cashflow Reallocation Cashflow (RCRC) – Reduction estimated as part of analysis supporting modification P282 • £19m in 2010; £15m in 2011 – impact relatively small in comparison to gross value of imbalance charges (around 3%) but is more significant relative to net imbalance charges – i.e. RCRC (around 56%) • Implementing a single trading account would: – benefit parties which use both accounts and have wide spread or large variations in imbalances or; make errors in cross-account trades – would not benefit to same extent parties using both accounts but which have low spreads of imbalance, or; use which only one account 10
Impact on incentives to balance • Currently parties hedge long to avoid risk of SBP. Where parties hedge long on both production and consumption accounts, a single account may reduce extent to which parties hedge long overall – however, a single account does not change inherent volatility associated with either consumption or production volumes – could reduce headroom provided to SO through hedging • may increase uncertainty for SO, requiring SO to procure more reserve • Under a single account, parties may have a reduced incentive to resolve all imbalances close to gate closure – where parties have opposing imbalances on different accounts, parties would have no incentive to resolve these imbalances – parties have an incentive to spill to maintain a balanced position across their portfolio – may create uncertainty for SO if parties revise PNs close to gate closure – also an incentive to take action to self-balance after gate-closure in contravention of Grid Code What impact would being able to consolidate imbalances have on the incentives for parties to balance? 11
What are the wider impacts of consolidating imbalances? • Under a single account, parties may no longer be required to submit some contract notifications for volumes traded, which may reduce transparency – parties may only be required to submit contract notifications for net volume • e.g. analysis supporting P282 suggests that some ECVNs may be replaced by the use of MVRNs under this option – this reduces volume against which notified volume charge is applied • additional cost for parties operating on one side of market • Using a single account will also impact on calculation of funding shares for industry charges • Separation of accounts is currently used in calculation of credit cover arrangements for parties What would be the impact on the visibility of trading and the notification of the SO of volumes? Are there any wider impacts on trading arrangements of operating under a single account? 12
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