Cost of keeping energy market in check quadruples to near £1bn as winter crisis deepens
The cost of maintaining the UK’s pricing system for the country’s energy sector has quadrupled over the past two years, exacerbating issues in an industry already suffering from the embroiling chaos of the Covid-19 pandemic and soaring wholesale costs.
New analysis from LCP Energy Analytics (LCP) reveals the cost of The Balancing Mechanism (BM) has skyrocketed to £967m over the three months from the start of September.
This an increase of 294 per cent on last year’s £337m costs over the same window, and over four times higher than the pre-pandemic price of £236m.
BM is the within-day mechanism that National Grid uses to balance electricity supply and demand in real-time for each half-hour trading period.
When the expected generation and demand for electricity is not balanced, participants submit bids or offers to either increase or decrease generation.
The National Grid announced this week it will investigate the mounting balancing prices.
The crisis has contributed to 24 energy firms collapsing over the past three months.
The high costs have largely been driven by high offers – with the price to turn units up or on to provide additional power.
In the period between September to November, 13 stations made accepted offers at over £3000 per megawatt hour.
LCP’s analysis also reveals that the top 10 most expensive days in the UK’s BM of all time have occurred over the past three months.
The all-time peak was breached again on the 24th November, where the cost to balance the UK’s electricity network totalled £63.3m, a leap of £18.6m from the previous most expensive day recorded on the 2nd November.
For November alone, the average daily cost of the BM was £16.4m.
This is an increase of 192 per cent from 2020 (£5.6m average per day) and 756 per cent from 2019, when the average daily cost was £1.92m.
The eye-watering price spikes have been compounded by a trebling of Balancing Services Use of System (BSUoS) charges.
Balancing costs a ‘perfect storm’ in chaos-ridden energy sector
The BSUoS charge refers to BM costs that are redistributed to generators and suppliers and ultimately charged to consumers.
LCP estimates that the cost of BSUoS charges for November will reach around £600m, from £203m in 2020.
This has intensified since September, as BSUoS charges for the three months have reached £1.25bn.
This is more than double the £524m in 2020 for the same period.
This exacerbates already established issues in the market – such as wholesale gas costs rising five-fold over the year – with customers locked into cheaper tariffs and protected by the domestic consumer price cap.
Over four million customers have been affected, with the country’s seventh biggest provider Bulb falling into administration and de-facto nationalisation last month.
Rajiv Gogna, partner, LCP Energy Analytics argues the crisis “has torn apart the sector”, predicting more suppliers struggling to cover costs over the winter. He pointed to a “perfect storm” of low renewable generation and increased demand for gas.
He explained: “This has resulted in record high balancing costs, which will feed through to suppliers via BSUoS charges at the worst time. With no mechanism to pass the increased cost onto customers, suppliers have had to tackle this huge cost increase from their already stretched balance sheets.
Forecasting the future, he added: “Coming down the line, we expect to see further instances of high pricing to balance the system. With proposed changes of moving BSUoS entirely onto suppliers in 2023, unexpected hikes in prices could add further pressure to their balance sheets.”