The Ofgem decision letter illustrates that most respondents to the consultation believed the potential closures of the plants should have been forseen, and several respondents indicated their belief that the costs were a result of National Grid having failed to take sufficient action in the past to secure adequate black start services. Various respondents also raised a number of other issues, notably around valuation and process.
National Grid’s valuation methodology was criticised by respondents in two key ways. First of all, despite the circumstances that would give rise to a black start being extremely unlikely, National Grid does not apply any probability weighting to its assessment of customer value. Secondly, in arriving at its value assessment, National Grid uses a Value of Lost Load (“VOLL”) that several respondents felt was overstated, by as much as an order of magnitude.
In terms of process there were numerous concerns relating to the lack of transparency and the absence of an open competition for the contracts. A number of respondents raised the fact that SSE and Drax, in knowing that the value of their own contracts would give rise to significant increases in BSUoS, were party to market sensitive information that benefitted them at the expense of other market participants. The delay in releasing the cost information to the market denied other participants the ability to update their cost models in a timely fashion, which could have impacted their hedging programmes.
“During the process of assessing the IAE request several issues were brought to our attention. These relate to, among others, compliance with REMIT; potential competition law issues; alleged deficiencies in the long term Black Start policy; and national and regional security of supply concerns. The Authority also notes that industry code modifications have been raised in relation to IAEs.”
– Ofgem decision letter
It’s difficult to argue against some of these views, and indeed, Ofgem has indicated it intends to explore the various issues raised. The process by which National Grid secured the contracts with Drax and SSE lacked transparency and the costs were unprecedented. It is to be hoped that Ofgem will take note of these responses and consider steps to ensure increased transparency and better customer value in the procurement of ancillary services, particularly as such services may well form an increasingly important part of generator economics in a decarbonised energy market.