Now that the October contracting round is over, suppliers need to turn their attention to the package of changes related to Balancing and Settlement Code (BSC) modification P272.
This modification had a hotly debated and interesting three-and-half-year journey through the modification process, but in the end, Ofgem directed the BSC to implement it despite the BSC panel’s recommendation to reject it.
Simplistically, it means that since November suppliers have had to change their customers who are in profile classes 5 to 8 (non-domestic customers, ie. commercial and industrial) to half-hourly settlement within 45 days of acquisition or contract renewal.
Strategy 1: If you’re not already a Half Hourly supplier, start the process to become one
The rationale for this change gives some clues to suppliers about the strategy they need to consider.
Profile- based settlement means that everyone gets the same shape of consumption over the meter reading periods. For some customers this may be split by day and night, weekdays or weekends, but the basic shape is the same for all customers in the profile class.
This means that a customer whose energy consumption is going full blast at peak times is settled the same as one using next to nothing at peak times - they all get a share of the peak demand related to their overall consumption, as typically measured by a monthly meter reading.
Half Hourly settlement changes this so that each customer pays for what they use every half hour. This means that some customers are more costly in energy purchase terms than others are; or more importantly more profitable – we now have cherry picking!
Strategy 2: Look carefully at your pricing algorithms
Ofgem recognised this trading risk and thought that its presence would encourage suppliers to use new products. Time of use tariffs mean that the customer pays a different price, related to the wholesale prices at different times; this matches the costs and revenue and so reduces risk and sends the customer a cost reflective message about their usage. This information will help some of them to change their consumption behaviour to reduce costs and bring benefits to the overall electricity system.
Strategy 3: Think about innovative time of use products
Suppliers, or other people, can encourage customers to modify their consumption using techniques that collectively we call Demand Side Response (DSR). DSR encourages customers to change their consumption usually in terms of reducing it, but it could also encourage greater usage in response to a commercial message. These changes in consumption can have significant value and DSR is common for larger customers, but not on the PC 5 to 8 market.
Strategy 4: Think about adding innovative DSR products and services
The customers are going to find this change difficult to understand. The easy option will be to blame the regulator and leave it at that. However, there is a massive opportunity to engage with your customers and help them make informed decisions about the products they buy and the way they choose to use electricity in the future.
Strategy 5: Plan and implement a customer engagement programme
Many customers in this market purchase their energy via intermediaries (TPIs). These third parties have an important role in getting your message to the customers.
Strategy 6: If you sell via TPIs, include them in your communications plans
One clear advantage of the Half Hourly settlement is the increased certainty of the settlement process because of the application of correction factors. Suppliers will experience less reconciliation volatility and this should reduce financing costs for reconciliation runs, improve their forecasting, and reduce any imbalance charges.
Strategy 7: Assess the effects of reducing reconciliation volatility and build them into your pricing formulae
Ofgem recognised that Half Hourly settlement currently creates higher costs for suppliers than the equivalent non half hourly settlement processes. This was because of the extra data and the Half hour agents’ costs being higher. Suppliers need to start approaching their Half Hour agents to negotiate better commercial deals.
Strategy 8: Get your contracts manager negotiating new deals with Half Hourly agents
To move your customer from non Half Hour to Half Hour settlement, suppliers need to use the Change of Measurement Class (CoMC) process. This process is designed for the few customers that switch to Half Hour settlement normally because their demand increased to above 100kW not the 160,000 customer affected by P272. You must review your CoMC process to make sure that it is fit for purpose. The BSC has added new measurement class “G” to facilitate P272.
Strategy 9: Review your CoMC process to make sure it is fit for the P272 purpose and can correctly use the new measurement class
P322 amended the implementation of P272 to mitigate risks to settlement. This includes an obligation for suppliers to submit plans to Elexon about migration activities. Elexon can be a significant help in this process and it is recommended that suppliers liaise with them to avoid any issues with settlement and to make sure they remain compliant.
Strategy 10: Make sure you liaise with Elexon about you P272 plans