26 Jun 2024
Wendel Hortop

Balancing Mechanism: How P462 could impact Batteries

At the end of 2023, the Electricity System Operator (ESO) proposed a change to the Balancing Mechanism via P462. P462 is designed to alter how subsidized generators price their Bids in the Balancing Mechanism, potentially saving consumers £518 million through to 2030. However, this proposed change may come at a cost to batteries and other storage technologies.

In this article we explain what P462 is, why its being introduced, and how it could impact battery energy storage.

What is P462?

P462 is a Balancing and Settlement Code modification formally titled “The removal of subsidies from Bid Prices in the Balancing Mechanism”. It aims to remove the cost of losing subsidies from the Bid prices of technologies like wind power in the Balancing Mechanism.

Generators reduce their output when receiving a Bid in the Balancing Mechanism. The main renewable subsidies, the Renewable Obligation (RO) and Contracts for Difference (CfD), are paid on metered generation. Therefore, when subsidized generators receive a Bid, they lose their subsidy.

This means these generators factor in the loss of these subsidies by pricing their Bids negatively. This means they receive a payment for a Bid, offsetting any loss of their subsidy.

P462 proposes to settle these subsidies via a new methodology, breaking the link to metered generation.

Why is P462 being introduced?

The primary goal of P462 is to reduce the system's total balancing costs. By increasing Bid prices of subsidized generators, the ESO believes this would force other units to increase their Bid prices. This would create an overall saving for the consumers.

Subsidies currently distort Bid prices

The effect of subsidies on Bid prices is evident when examining the average accepted Bid prices of different technologies in 2024.

  • Fuelled power plants such as CCGTs include savings from fuel and carbon in their Bids, leading to positive Bid prices.
  • Subsidized renewable generators, such as wind, price their Bids negatively to compensate for the loss of their subsidy.
  • Batteries, which do not face these subsidy losses, typically have Bid prices that fall somewhere in between.

If P462 is implemented, Bid prices for wind should become less negative, as they would no longer need to account for the lost subsidy value. These generators currently have a range of Bid prices linked to the subsidy they receive.

This change would, in turn, increase the minimum Bid prices that batteries and pumped storage receive, especially during periods of high wind generation. So far in 2024, this would save an estimated £92 million in Balancing Mechanism costs, offset by an increase of £ 74 million in subsidy costs.

The introduction of P462 could therefore save consumers money. However, many storage projects have been built based on forecasts of lower Bid prices, especially for those in Scotland. The change would therefore impact the viability of these projects.

Next Steps for P462

Currently, P462 is in the working group phase, with stakeholders evaluating its potential impacts and benefits. A final proposal is expected to be submitted to Ofgem, the energy regulator, in April 2025. The outcome of this proposal will determine whether the changes proposed by P462 will be implemented and how they will reshape the pricing dynamics within the Balancing Mechanism.

The potential cost for battery energy storage is largest in Scotland

The proposed modification would impact batteries as they would need to either increase Bid prices at times of high wind or face lower Bid dispatch volume. Currently, batteries significantly reduce Bid prices during periods of high wind.

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