Annex A deals with fundamental design issues
in the NETA system and Annex C discusses a number of specific
proposals for modifications to NETA. This Annex discusses a number
of other matters that are of significance to the economic operation
of NETA and the success of small and renewable generators, which
arise from the manner in which NETA has been implemented.
The Balancing Reserve Level (BRL) is a parameter
that may be set by the BSC Panel with the agreement of the Authority.
The BRL determines the maximum volume of Balancing Mechanism acceptances
that may be included in the smaller of the stacks of bids and
offers that are to be included in the calculation of the imbalance
prices. The BRL should be set at the expected volume of equal
and opposite acceptances that NGC would need to make in order
to provide reserve for energy balancing reasons. In principle,
if the BRL were set at the correct level in each half hour, actions
taken for system balancing (short-term fluctuations and transmission
system constraints) reasons would be likely to be excluded from
the calculation of imbalance prices.
The value of BRL was originally set at 180MWh
as this was the expected level of NGC reserve holding, but operational
experience has provided overwhelming evidence that the appropriate
level is 0MWh. The BSC Panel has recommended a significant reduction
in the level of the parameter, but this change has been vetoed
by the Authority. The excessive level of BRL is, almost certainly,
contributing to the penal level of the spread of imbalance prices.
The responsibility for ensuring an economic
and practical system of electricity trading is split between a
number of bodies and there are no formal (and few informal) routes
for ensuring that the work and decisions of each of these bodies
is consistent with each other, except through the powers of the
Authority. This type of split responsibility is illustrated by
examining the governance of the balancing transactions that NGC
undertakes before gate closure. The costs and volumes of these
transactions feed into the imbalance prices through BSAD and have
significant effects on the imbalance prices, but the BSC Panel
has no vires over how the transactions are undertaken and does
not even have the vires to study the practicalities of the transactions
in order to inform its own deliberations. The BSC Panel must rely
on the Authority to ensure consistency. The practical result is
that the Authority may cause significant changes in the calculation
of imbalance prices without reference to the BSC Panel.
Further, the BSC Panel is able to make very
few decisions without the explicit agreement of the Authority.
The effect of this structure is that, although the Authority cannot
propose changes to NETA, it effectively decides on the design
of NETA and the values of the operating parameters rather than
these being determined by the governance processes managed by
the BSC Panel. The decision of the Authority not to accept the
BSC Panel's recommendation on BRL (see above) is one case in point,
but is certainly not the only example.
The combination of split governance and the
power of veto of the Authority over the actions of the BSC Panel
place an unhealthy degree of power over the detailed design and
administration of the trading arrangements in the hands of the
Authority and the Authority has demonstrated that it is prepared
to exercise this power. This over concentration of day-to-day
and design control in the Authority creates significant regulatory
risk that discourages new entrants.
Two other practical effects of this detailed
control by the Authority should also be noted:
There have been significant delays
in receiving decisions from the Authority on modification proposals
once the BSC Panel has made its recommendations.
Parties have been unwilling to submit
modifications that deal with the fundamental design flaws in NETA
because there is an expectation that those modifications would
be rejected by the Authority. This has led to a series of modifications
designed to ameliorate the symptoms created by the flaws rather
than modifications that deal with the root cause.
Thus, although the Dti Consultation Document
on small and renewable generation notes in paragraph 13 that "Ofgem
also notes in its report on the first three months of NETA operation
generally that BSC rules have had to evolve in response to issues
that have arisen in the markets.", the evolution of the rules
has not addressed the root cause of these issues because of the
degree of regulatory risk and the problems created by the heavily
circumscribed vires of the BSC Panel.
Paragraph 14 of the Consultation Document notes
"the rapid emergence of a strong and liquid forward market
is important in contributing to the UK's longer-term security
of energy supply." Ofgem in its report on the first three
months of NETA note a sharp increase in the volume of trading
in the forward markets following the introduction of NETA and
a large increase in the number of products available.
However, the level of trading in the forward
markets prior to the introduction of NETA, the base from which
Ofgem is measuring the increase, was significantly depressed by
uncertainty over the timing of NETA go live. Further, the standard
products available in the forward markets are not sufficiently
disaggregated to allow parties to balance their contractual and
physical positions half hour by half hour. Consequently, parties
must rely on the spot market for this degree of balancing, but
the spot market is very illiquid and there are many periods when
no trades occur. Forward curves are not available sufficiently
far into the future to allow new entrants to make investment decisions
on new generating plant and it is unlikely that a forward curve
of such a length will emerge with any liquidity.
The lack of liquidity in the forward and spot
market remains a significant issue for small generators and suppliers
seeking to minimise their imbalance exposure.