Ofgem’s decision to reform cash-out rules following its Electricity Balancing Significant Code Review could see supply contracts with industrial and commercial customers reopened, and result in more expensive power purchase contracts (PPAs) and potential penalties for small power generators, New Power has learned.
The cash-out reforms are intended to sharpen imbalance price signals, encouraging players to provide power at peak times and when there is scarcity. The measure is also intended to incentivise companies to ensure they are “in balance”, matching supply and demand, reducing the cost of balancing the system at  the time of dispatch.
However, market participants told New Power that the change woud introduce uncertainties that could affect small players and customers.
Independent generators could be affected because suppliers have to minimise the financial risk of being out of balance. One small supplier said it would now be stricter in applying contract clauses that require notification from generators that they will be off-line, for example for maintenance.
Generators as small as 1MW would face penalties if they were repeat offenders, he said.
In future independent generators are also likely to face more onerous conditions in power offtake contracts, New Power heard. As well as stricter penalties for generators that fail to supply, PPA prices could be priced to allow for more more risk on the buyer’s part. Alternatively, they are more likely to include provisions that allow the purchaser to vary the generation level and take short term actions to manage their position, or pass through the risk of being out of balance. Generators may need more active control equipment.
Industrial and commercial customers will be affected by the reform because of a potential change in law that could see supply contracts reopened if some system costs are passed through. That is because the reform will see two separate balancing prices paid by the System Operator – the System Sell Price and System Buy Price – replaced with a single cash-out price. Although not all suppliers thought that represented a change in law, Good Energy said it was “confident” that was the case and it was reviewing all its contracts.
The first changes following on from EBSCR are due to take effect on 5 November, with a second reform in 2018.

Subscribers can read more on the effects of the cash-out reform. Log in here to read EBSCR: setting the agenda for the next six months