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UK's National Grid ESO to review 'very high-cost' balancing mechanism

Highlights

External consultants to carry out review

October record as costs exceed GBP300 million

BM exclusivity for Drax, West Burton coal units

The UK's National Grid Electricity System Operator is to review the balancing mechanism after observing excessive costs in recent times, the ESO said in a brief statement Nov. 26.

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Monthly balancing costs rose above GBP300 million for the first time ever in October, with National Grid ESO warning of similar levels of expense for November.

"In recent weeks there have been some very high-cost days in the balancing mechanism. As those costs are ultimately borne by consumers it is important to fully understand the factors driving the market," National Grid said.

A review of the market would be be run by the National Grid ESO Market Monitoring Team and carried out by external consultants, the ESO said.

"There are many issues that can, and will, have contributed to the high costs. Our review will seek to ensure that, at a time when households' budgets are under strain, consumers can continue to have confidence in the market," it said.

October BM costs of GBP314.30 million ($421.75 million) were 31% higher than in September and 109% up year on year.

"Prices on the Balancing Mechanism have climbed above GBP3,000/MWh on a number of occasions in the last few months, including this week," said Glenn Rickson, head of European power at S&P Global Power Analytics.

A major factor in the spikes was the ongoing unavailability of 3 GW of ex-Calon gas plant, and the exclusive availability in the BM of coal units at Drax and West Burton.

Unavailable in the wholesale market, these coal units have priced themselves at very high levels in the BM to meet their Capacity Market commitments, Rickson said.

"These plants' loss has removed a lot of mid-merit flexibility in the wholesale market. But while there have been some periods of tightness, there have so far been no margin warnings or capacity notices issued this winter (unlike in Winter-20/21) and while gas prices are high, the extreme prices being achieved in the BM go well beyond the uplift versus previous years implied purely by higher fuel or carbon costs," he said.

Meanwhile when the wind blows, the ESO is having to pay increasingly large constraint payments to generators to turn output up or down, depending on which side of a grid bottleneck they are located.

Synchronizing machines for voltage support and inertia are also adding to balancing expenses as old coal plants close, taking valuable spinning reserve with them.

In all, constraint costs totaled GBP153.60 million in October, up from GBP37.60 million in September and well above a previous monthly high of GBP138.80 million in November 2020.

For the first 10 months of 2021, UK balancing costs totaled GBP1.76 billion, up 24% year on year.