28 July 2023

The Urgent need for Balancing Mechanism Reform

Reforming the Balancing Mechanisms and reducing costs for consumers.

Arenko has a strong working relationship with National Grid ESO and we have overcome challenges together over the years, an example being delivering a successful Reserve from Storage Trial in 2020 – (https://arenko.group/national-grid-eso-announce-highly-successful-results-of-arenko-pioneered-reserve-from-storage-trial/). More recently, during a visit to the ESO Control Room in May, our team had the opportunity to gain a deeper understanding of the challenges the control room engineers face while managing the Balancing Mechanism (BM). If you aren’t familiar with the BM, it is the primary tool for ensuring supply and demand are in perfect balance on GBs network, in real time. It’s become clear that the out of date IT systems being used by ESO to run the BM is slowing down Net Zero progress and could cost customers over £150m in 2023, according to our forecasted analysis.

On 26th July, the Energy Storage Network (ESN), representing over 80 organisations in the storage sector, published a formal letter to Fintan Slye, Executive Director at National Grid ESO, on BM ‘Skip Rates’. ‘Skip Rates’ simply refers to the percentage of times a cheaper unit is skipped over in favour of a more expensive unit in the BM. The letter highlighted that outdated IT systems and manual processes in the Control Room are resulting in smaller, cleaner and cheaper batteries consistently being skipped over in favour of larger, carbon intensive and more expensive assets, like fossil fuel gas turbines. Arenko’s analysis shows that in June this year this was happening, on average, around 80% of the time. A high percentages of skip rates creates a more carbon intensive grid but also means customers are paying more, as the increase in cost of energy on the grid is ultimately passed to the consumer.

An industry letter was the first action I called for after chairing the ESN Markets and Revenues Working Group meeting in June. It’s been great to see over 80 players in the battery storage industry come together to start dramatically escalating what has been a very painful and long standing issue for our sector.

The letter from the ESN calls for the following actions to speed up the necessary reforms to the Balancing Mechanism:

  • Greater urgency and a step up in engagement between ESO and the storage sector, with meetings designed to build collaborative solutions.
  • More accurate data on the dispatch of storage vs other technologies, including making the Dispatch Transparency dataset, which states ESO’s reasons for skips, more transparent.
  • Better performance monitoring from Ofgem.

It is clear that electricity storage has a critical role to play in decarbonising our power system. However, investment decisions in new storage are underpinned by a well functioning BM as a crucial part of the revenue stack. With potentially up to 8 GW of batteries due to come online by 2025, all of which require private investment, inefficient BM dispatch is causing uncertainty in business models and putting billions of pounds of investment at risk.

We understand the scale and breadth of the challenge ESO faces, IT upgrades to ensure more efficient BM dispatch being one of them. We also welcome some of the work already underway to tackle this through the Balancing Transformation programme. However, much greater urgency is essential when considering the bigger picture of the challenges we face. We must keep in mind our country-wide target to have a decarbonised power sector by 2035, as well as ESO’s much closer target to be able to operate a Net Zero system by 2025. Just as importantly, we must take into account the the unnecessary cost this is adding to consumer bills, at a time where many are struggling.

At Arenko we are ready and eager to work with ESO to rapidly accelerate progress in this area and create a level playing field so battery storage technologies can be utilised to their full potential.

I’m very much looking forward to seeing how National Grid ESO responds to our letter and am hopeful that it may spark some positive progress in this space.

By Iona Penman, Senior Energy Markets Regulation Manager at Arenko Group.

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