CLASS action: Is Ofgem opening a flexibility market can of worms?


Ofgem risks opening a can of worms by letting regulated distribution network operators provide commercial flexibility services when they are supposedly neutral market facilitators, aggregators and suppliers have warned.

The regulator issued a consultation this week around CLASS – Customer Load Active System Service – whereby DNOs use network assets to help balance the grid.

The regulator said it has already reached a minded to position. That is, to allow all DNOs to provide ‘CLASS’ flexibility services to National Grid ESO on a commercial basis.

To date, Electricity North West is understood to have been the main provider of CLASS services since Ofgem created a derogation in 2016 – after the start of the last price control.

Ofgem, which in the past has underlined that DNOs must be neutral market facilitators and not involved in service delivery, thinks allowing them to use assets to provide certain specific balancing services may result in lower costs to consumers.

It states that as only DNOs can provide CLASS services by adjusting network equipment, it is not distorting competition by allowing them to do so. But the regulator also said it will take action against DNOs that use the network information at their disposal and monopoly position for commercial advantage.

Commercial providers think the regulator’s stance is at odds with the push for flexibility markets that adequately reward providers for enabling a smarter, decarbonised power system.

“I am not sure it sends the right signal to the market,” said one consultant, “Service provision is either competitive or not – and this distorts it.”

A supplier that provides flexibility services agreed.

“The objection some people also have is the potential for competition to be undermined if the network companies are able to use assets in markets they weren’t intended to participate in. Additionally, by allowing DNOs to recoup revenue in this way, those opposed to this activity say it could enable double-payment to the cost of consumers.”

Allowing DNOs to compete in markets that they are supposed to neutrally facilitate – even if in just a subsection of balancing services – is not easily squared, they added.

A flexibility aggregator said it may be that DNOs can unlock lower costs to consumers through the mooted approach, but that argument is not clear cut.

“Clearly we support the best technological solution to balance the grid and if one of the DNOs has found a way of doing this cheaply with no adverse impact, then it needs to be investigated further,” said the aggregator.

“The point is our current regulatory framework is not set up to allow this, so I’m not sure it can be shoehorned in through a consultation.

“If this is to be allowed commercially, it probably necessitates a bigger review.”

See Ofgem’s consultation here.

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