Utility Week

14 | APRIL 2023 | UTILITY WEEK Electricity Analysis costs fall, renewables continue to expand and gas generators become the marginal price-setter in fewer settlement periods, bal- ancing costs will grow in relative value. He stresses that "we cannot take our eye of the ball", warning: "If we're not ready as a whole energy industry – the participants, the ESO and soon-to-be FSO [Electricity Sys- tem Operator and Future System Operator], and the control room especially, we will not be looking at the cost reductions we should be seeing." Schoch says the Balancing Mechanism "was „ t for purpose when we had a much less volatile generation stack and a much smaller number of participants". The current infrastructure "simply can- not keep up" with the growing volatility and number of individual participants. He says National Grid ESO has recognised that over- hauling the Balancing Mechanism systems and processes as a top priority and acknowl- edges that "substantive progress has been made" but says "we must go faster". For example, Octopus notes that the ESO has yet to update its metering standards for the Balancing Mechanism, meaning small domestic EV chargers must have the same speci„ cations as a large gas power station to participate. The supplier says it faces a similar prob- lem in the Capacity Market, which has also been set up with conventional power sta- tions in mind. "This poses various challenges, for instance the need to provide a long list of information per asset," says a company spokesperson. "When you're talking about thousands of cars, the administrative pres- sure really adds up. We need to try to strip back these processes to help allow for cars to contribute to the market." One big uncertainty in terms of where the most value will be accessible is the gov- ernment's ongoing Review of Electricity Market Arrangements (REMA). Among the changes being considered are the de-linking of gas and renewable power prices, possibly through market splitting, or the introduction locational wholesale prices on either a zonal or nodal basis. Zonal or nodal pricing would result in "much stronger incentives throughout the day, recognising the actual physics of the grid", and therefore "create more opportuni- ties to save", says Tom Lu• , senior adviser for electricity markets and policy at Energy Systems Catapult. Jack Presley, deputy director for energy systems management and security at Ofgem, says the regulator is working with the gov- ernment to assess market reform options but appears to be supportive of locational pric- ing in theory. He says that in the absence of these price signals, the ESO has to "actively intervene to balance the system, paying to stop power generation in constrained areas and turn it on where it is needed". "Exposing retailers and other third par- ties to more dynamic and accurate locational signals could create the commercial incen- tives needed for them to drive a step-change in ˜ exibility-focused consumer o• erings," he™adds. Schoch would like this approach to be taken even further with more dynamic use- of-system charges at both the transmission and distribution levels: "DUoS [Distribution Use of System charges] with the red, amber, green pricing – the problem with that approach is it kind of sets a very blunt shape for whole areas of the network which is not truly cost re˜ ective." "The challenge is that now red, amber, green has been instituted, there's a big chunk of industry that then wants to sit on its laurels," he says. "The reality is di• erent networks across the UK, they cannot build network fast continued from previous page enough to keep up with load growth and that's where a big chunk of cost is going to hit consumers over the coming years." He says half-hourly use-of-system charges would enable networks to maximise their usage of available capacity, particularly at the lower voltages where most of the load growth is happening. However, change on this front looks far less likely, according to Presley. In Novem- ber, Ofgem paused work on its signi„ cant code review (SCR) of DUoS charges, which was spun o• from its earlier SCR of for- ward looking charges and network access arrangements. "We consider that the methodology underpinning DUoS charges could be made more cost-re˜ ective, and that it war- rants a review. However, given the longer term nature of these changes, we intend to defer this work in the immediate term," he explains. "Our work to date, ruled out dynamic real-time pricing in DUoS charging, which would e• ectively be sending short-run mar- ginal cost charges, as we have concerns of the ež ciency of this approach due to the diž culty in accurately setting real-time charges. We will re-visit this when the DUoS work is restarted, but have no evidence to show that this will change." Getting buy-in Although there remain a number of obstacles to progress, Schoch is optimistic about the prospect for smart tari• s in the near future. He says the energy crisis has "signi„ cantly accelerated awareness around electricity use, gas use, and combined with the electri- „ cation of more and more parts of our lives, make this a very opportune time". "I expect we will see signi„ cant growth in smart tari• s over the coming years," he remarks. He says for the growing number of EV drivers especially, the potential savings have "We know smart tariff s are continuing to be an incredible draw to consumers but diff erent off erings are suited for diff erent types of customers." Alex Schoch, head of flexibility, Octopus "We know smart tariff s are continuing to be an incredible draw to consumers but diff erent off erings are suited for diff erent types of customers." Alex Schoch EVs are expected to be the main driver behind consumer demand for smarter tariffs

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