CfD Stakeholder Bulletin — 25 April 2022

What changed

Ofgem confirmed on 25 April 2022 that generators will stop paying Balancing Services Use of System (BSUoS) charges from 1 April 2023. The decision implements code modification CMP308 to the Connection and Use of System Code (CUSC). BSUoS — the charge that recovers the cost of keeping the electricity system in balance in real time — was previously split roughly 50:50 between generators and demand. From April 2023, the entire cost sits with demand.

For CfD generators in Allocation Round 4, BEIS confirmed that strike prices will be adjusted downward after contract award to reflect the removal of BSUoS from their cost base. The adjustment applies from 1 April 2023, not from the start of the contract. The mechanism follows Example B in the LCCC/BEIS explanatory note published in December 2021.

What this means in practice

The cost transfer is large. BSUoS costs have been running at £1.5–2bn per year and rising, driven by constraint costs from curtailing wind in Scotland and managing system inertia as synchronous generation retires. Shifting the entire charge to demand means suppliers absorb this directly and pass it through to consumers. For industrial users on half-hourly contracts, BSUoS is already visible as a line item — it gets bigger. For domestic consumers, it disappears into the unit rate.

The CfD strike price adjustment is narrower than it looks. AR4 generators get their strike prices reduced to account for the BSUoS they will no longer pay. In principle, this should be revenue-neutral: generators lose a cost and lose an equivalent amount of strike price revenue. But in practice, the adjustment is based on a forecast of BSUoS costs at the time of contract award, not on actual outturn BSUoS. If actual BSUoS costs exceed the forecast — which they have consistently done — the generator keeps the difference. The strike price was cut by less than the cost that was removed.

The asymmetry runs deeper for existing CfD generators. Projects from Allocation Rounds 1–3 are not subject to any strike price adjustment. They simply stop paying BSUoS while their strike prices remain unchanged. This is a clean windfall: lower costs, same revenue. For a 400 MW offshore wind farm generating at a 45% load factor, BSUoS at £10–30/MWh represents £15–50m per year in costs that vanish overnight. The CfD difference payment mechanism does not claw this back because the reference price (the day-ahead market price) is unaffected by BSUoS — it is a transmission charge, not a wholesale market component.

The economics of this are worth stating plainly. CfD generators already receive a guaranteed price regardless of system conditions. They are not exposed to curtailment risk in the same way merchant generators are, because curtailment payments and compensation mechanisms insulate them. Removing BSUoS from generators while leaving CfD strike prices intact for existing projects means the system is now socialising the costs of balancing (which are partly caused by the output profile of intermittent renewables) while privatising the revenue certainty that CfD generators enjoy. The cost of managing system stress caused by inflexible, non-dispatchable output is now borne entirely by the demand side.

For suppliers, this is a margin compression event. BSUoS is volatile and hard to hedge — it spikes when the system is tight and constraint costs surge. Suppliers on fixed tariffs absorb this volatility. The Supplier of Last Resort levy already demonstrated that supplier failure cascades to consumers; adding £1.5–2bn of volatile, demand-side-only BSUoS to supplier cost stacks increases that fragility.

What happens next

The CMP308 modification takes effect on 1 April 2023. No further consultation is required — Ofgem's decision is final.

For AR4, the LCCC will calculate the BSUoS adjustment after contracts are awarded using the methodology in the December 2021 explanatory note. Generators should model their bids on the basis that the adjustment will be applied, but the quantum depends on LCCC's BSUoS forecast at the point of calculation.

The larger question is whether BSUoS reform triggers a wider rethink of how system balancing costs are allocated. Ofgem's decision treats BSUoS as a simple cost-recovery mechanism and moves it to demand for administrative simplicity. But BSUoS is not a fixed infrastructure cost like TNUoS — it is a variable cost driven by real-time system conditions. Putting it entirely on demand removes any price signal to generators about the system costs their output profile creates. A generator that produces into a congested zone at a time of surplus imposes constraint costs that now appear nowhere in its cost stack.

CMP361 (the "fix" for BSUoS volatility through a fixed tariff mechanism) is progressing in parallel and will determine whether the demand-side charge is at least predictable, if not efficiently allocated. The combination of CMP308 and CMP361 will define the BSUoS regime from 2023 onward.

For existing CfD generators in AR1–3, the windfall from BSUoS removal is permanent unless DESNZ retrospectively adjusts strike prices — which it has shown no intention of doing.