Written evidence submitted by Electricity System Operator’s (WIN0049)
As the Electricity System Operator (ESO) for Great Britain, we welcome the opportunity to submit a response to your inquiry. Our role is to operate the national electricity transmission system, whilst building a secure, clean, and fair system for tomorrow. We move electricity around the system, procuring services to balance demand and supply second by second, 24/7. We do not generate or sell electricity, or own and maintain any infrastructure, as the system operator we ensure fairness is at the heart of how we manage the system by remaining impartial and basing our decisions on consumer outcomes.
We work in partnership with Government, Ofgem, industry and consumers to guide Great Britain (GB) on the energy resources, markets and networks required to securely accelerate the transition away from fossil fuels. The ESO will make net zero carbon operation of the electricity system technically possible for short periods by 2025. By 2035, providing the market supplies a 100% renewable generation mix, we will operate a net zero carbon electricity system all the time.
We are currently transitioning into an independent public body, with responsibility for advising government across the whole energy system as it transitions to net zero, from strategic network planning across electricity and gas to new vectors such as hydrogen. The intent is for the Electricity System Operator to be at the heart of the FSO, which will build on the ESO’s track record and world-leading expertise.
Why are we submitting evidence
In the last decade, working with Government, industry and Ofgem, we have helped GB decarbonise its electricity system, with the pace and scale of decarbonisation amongst the fastest in the world. The scale of change needed to deliver a decarbonised energy system, demands urgent and collaborative action. Building a secure, clean, and fair system for tomorrow is of high importance for the ESO, and we have provided a summary of our views below regarding winter 22/23.
- The ESO developed additional contingency measures during winter 2022/23 to help ensure there was enough electricity to meet demand through tighter periods.
- One of the measures introduced by the ESO during winter 2022/23 was the Demand Flexibility Service (DFS). The DFS incentivised consumers and businesses to reduce their power consumption at peak times, if needed, to help balance the national network.
- 1.6million households and businesses participated in the 2022/23 Demand Flexibility Service, as consumers and businesses did their part to reduce demand at key times, delivering in total 3,300MWh of electricity reduction.
- Reducing energy bills was cited by respondents as the main motivation for signing up to the Demand Flexibility Service.
- Following a request from the Government, the ESO agreed contingency coal contracts for winter 2022/23 with Drax, EDF and Uniper to extend the life of coal fired power plants – generating up to 2GW of electricity if needed as a last resort.
- The costs that the ESO incurs to balance Britain’s power system typically contribute around 2% to consumers’ electricity bills and is largely driven by wholesale prices.
- Balancing Market (BM) costs in winter 2022/23 were down from the previous winter but remain historically high.
- The key driver in BM costs during Winter 2021/22 and 2022/23 was high gas prices, which increased the operating costs for gas generators and reducing competitive pressures on other fuel sources.
What are balancing costs and what role do they play in consumer’s bills?
- As the ESO our core objectives are to minimise consumer costs whilst providing a secure electricity system and enabling the energy transition. The ESO has an obligation to co-ordinate and direct the flow of electricity onto and over the National Electricity Transmission System (NETS) in an efficient, co-ordinated, and economic manner. We do this through procuring balancing services that are subject to transparent, non-discriminatory, and market-based procedures. The BM is our primary tool to balance supply and demand in real time and ensure security of supply.
- Through the BM, we ask electricity generators and storage to increase or reduce electricity output (based on the bids, offers, they submit) to continually ensure that supply and demand are balanced and appropriate security margins (e.g., reserve) are in place.
- In the latter part of 2021 costs in the BM rose significantly. While the costs in the BM typically only make up a small element of the average energy bill, it is important that these costs are minimised as they are ultimately borne by consumers. At a time when electricity bills remain high, consumers need to have confidence in all elements of the energy market.
- For electricity generators, increasing electricity output is known as an ‘offer’ and decreasing electricity output is known as a ‘bid’. We take actions using the most competitively priced bids and offers, however operational and locational factors can sometimes result in more expensive bids and offers being accepted to solve a specific network issue. All the costs incurred by ESO to operate the NETS are recovered through Balancing Services Use of System (BSUoS) charges. At present, generators and suppliers are liable for these charges, which are calculated daily depending on the cost of the ESO’s balancing actions. From April 2023 generators will no longer be liable to pay BSUoS charges and instead, suppliers will be solely liable for all BSUoS charges.
Drivers that led to high balancing costs
- BM costs in winter 2022/23 were down from the previous winter but remain historically high. The total cost of bids, offers and trades accepted through the BM for winter 22/23 was £1,235m, down 20% from the peak of £1,546m in winter 21/22. This does not include ancillary service markets which were out of scope for this analysis to allow analogous comparison between wholesale energy markets.
- The key driver in BM costs during winter 2022/23 was high gas prices, which increased the operating costs for gas generators and reducing competitive pressures on other fuel sources. When the gas price is higher, costs are higher for gas units to produce more generation, and these costs are passed onto the ESO via increased offer prices. During winter 2022/23 £756M in BM and trade acceptance costs had been from units which use gas to generate electricity.
- Alongside this, there were high costs associated with maintaining required reserve; when tighter system margins occur, scarcity pricing can dominate the overall action costs. During winter 2022/23, £310M of BM acceptance costs were due to maintaining sufficient reserve.
Actions taken to secure the system during winter 22/23
- The winter of 2022/23 has been one of the most challenging in the System Operator’s history. With energy security threatened by Russia’s illegal re-invasion of Ukraine, additional contingency measures were used to help ensure there was enough electricity to meet demand through tighter periods and ensure GB had the energy supply it needs.
- Given the scale of uncertainty and risks associated with the current geopolitical situation we developed a range of tools, which included publishing an early view of winter to help the market understand risks, contracting to retain approximately 2GW of coal fired generation that would otherwise have closed and introducing an innovative Demand Flexibility Service to incentivise customers to reduce consumption at periods when margins are tight.
- Our contingency coal contracts with Drax, EDF and Uniper extended the life of several coal fired power plants. This generated up to 2GW of electricity if needed as a last resort and was negotiated following a request from the Government for additional non-gas-powered generation across the winter.
- The Demand Flexibility Service is the largest demand response scheme to have taken place on Great Britain’s electricity network to date. The service ran from November 2022 - March 2023, with 20 test events and two live events taking place. 1.6 million households and businesses participated, delivering in total 3,300MWh of electricity reduction.
- The test events comprised 2 onboarding events for all providers (the aggregators and electricity suppliers who contracted directly with the ESO) as well as 2 monthly tests, for each month the provider participated in. This approach was taken to both test various elements of the service (different usage times etc) and to provide an incentive for providers and their customers to participate, given the likelihood that live events might not be called.
- Reducing energy bills was cited by respondents as the main motivation for signing up to the Demand Flexibility Service. This was chosen by 65% of households who were ‘finding it quite or very difficult’, and 43% of those ‘comfortable or doing alright’. This highlights that the financial benefits (savings or rewards) were the main driver of motivation for consumes participating in DFS, playing a role in consumer savings.
 Ofgem, Responding to high balancing costs in winter, 2022.
 Electricity System Operator, Balancing Services Use of System Charges, 2023.
 Ofgem, CMP308: Removal of BSUoS charges from Generation, 2022.
 Electricity System Operator, Winter Balancing Costs Review, 2022.
 Electricity System Operator, Demand Flexibility Service, 2023.