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Ofgem decision on National Grid’s request to recoup spending on power station contracts

Ofgem has yesterday published its decision on National Grid’s request to recover the costs of two contracts for grid services that it agreed with SSE (for the Fiddler’s Ferry power station) and Drax worth £113m in total. The request was made as an ‘Income Adjusting Event’ where National Grid applies for an increase in its cost targets to cover unforeseen events beyond its control.

Such contracts are awarded to generators to help re-energise the high voltage grid following a partial or total loss of power on the network (commonly referred to as ‘Black Start’). This is an insurance policy for the unlikely event that National Grid needs to re-energise the system. 

Ofgem sets National Grid cost targets for its role in balancing the network and managing provision of Black Start services. These costs are paid for by generators and suppliers via balancing charges.

National Grid will spend significantly more under the two contracts than the agreed target and in May it applied to Ofgem to be able to recover these costs in their entirety. Ofgem has decided that costs National Grid incurred under the Drax contract did not meet the test for an Income Adjusting Event. Ofgem has allowed the claim for the Fiddler’s Ferry contract in full (£54m) as it met the criteria for an Income Adjusting Event and the costs were deemed outside National Grid’s control.

Under the costs targets if National Grid spends less than the target it receives 30 per cent of every pound saved. If costs are above the target National Grid has to pay 30 per cent of every pound overspent. 

As a result of Ofgem’s decision, National Grid will bear up to £17.7m in costs itself, which is 30 per cent of the costs of the Drax contract, and will recover at least £95.3m via balancing charges on suppliers and generators. *

Notes

  1. Ofgem’s decision document is available here: Balancing Services Incentive Scheme Income Adjusting Event decision letter
  2. Ofgem’s consultation on National Grid’s Incoming Adjusting Event submission is available here: Notice and Consultation on a Proposed Income Adjusting Event submitted by National Grid Electricity Transmission plc in relation to the 2015-17 Electricity System Operator Incentives Scheme
  3. *Ofgem sets National Grid financial incentives for managing system operator costs. These include costs for Black Start. The current balancing services incentive scheme for all these costs runs from 2015 to 2017.  The full impact of the decision on NGET’s financial performance under the scheme will not be known until all the costs and targets for the scheme have been agreed and reconciled in around 12-14 months’ time.  

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