Small suppliers asked to estimate costs of shift to half-hourly settlement

Ofgem has asked small suppliers for new estimates of the costs they will face when the industry moves the way customers are charged for their electricity to a ‘half hourly’ basis.

The price of power varies dramatically over a 24-hour period depending on how much is being used and what power generayion is required to meet the need. Wholesale markets are priced for each half-hour period but that is not reflected at customer level. Instead customer bills are calculated on the assumption that the amount of power using at different times of the day fits into one of a handful of typical patterns. That means first that the supplier has to absorb customer variations that do not reflect real prices – and add a ‘risk premium’ to its bill as a result. Second, customers cannot take advantage of more sophisticated versioins of ‘economy seven’-type tariffs that offer ‘off-peak’ prices to consumers. Half-hourly pricing would change that and, from a system point of view, it could mean consumers help reduce the need to call on more expensive and dirty plant to meet demand at peak times, because they would have an incentive to shift their usage.

The change comes at a setup cost for both suppliers and the central bodies that transfer payments across the industry and settle bills.

Ofgem wants an updated view of the costs expected by suppliers – especially the small market players – so that in has the information before making a final decision to go ahead with the structural change. Data is needed by 7 Octiber and suppliers are told to base their answers on the assumption of a decision on market-wide settlement reform in Q3 2020.

See the request for information here

 

Further reading

The CMA, P272, and why consumers can’t take the full benefit of smart meters

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