Budget

This part of the Business Plan details the budgeted costs for 2020/21 in support of our strategy. This budget enables us to continue delivering our BSC obligations, allows us to implement our leading technology platform, increase our engagement with our stakeholders and customers, develop market arrangements, and focus on developing our people capabilities. All of this is necessary to allow us to support our customers and the changing market place.

Elexon is a not-for-profit entity, funded by electricity market participants. We do not carry any reserves or retained capital, and any underspend against budget is always returned to those participants. In light of this, budgeting for uncertainties in advance of any new financial year, with no other access to working capital, requires careful consideration. We need to put in place contingencies mindful of this constraint. We also endeavour to set challenging financial and efficiency targets for the business, which ensure we deliver the best possible value for money to the industry.

The overall total budget to deliver BSC activity in 2020/21 is £55.8m, which represents an increase of £2.6m (4.8%) against the current year’s budget of £53.2m. Excluding the new service of Radio Teleswitching cost recovery of £1.4m (see further details below), the increase in budget is £1.2m (2.3%).

The budget increase anticipated in 2020/21 compared to the forecast for 2019/20 (£46.7m) is driven by the impact of the Foundation Programme and other factors, which are summarised below.

In 2018/19 Elexon developed a plan to deliver its Wider Access and TERRE commitments on Elexon’s new digital platform (the Foundation Programme).

In 2019/20, we have successfully progressed some of the core elements of the developments. Due to the substantial and complex deliverables needed to meet the Project TERRE requirements, we have had to prioritise regulatory changes, such as this over our systems strategy work, resulting in a lower spend in 2019/20.

As a result, during our mid-year budget review in September- October 2019, we returned £6.4m of used budget, mainly System Strategy budget (£5.3m), back to BSC Parties. However for 2020/21 we are budgeting to spend at the level that we set out in last year’s business plan.

The budget for total regular activity shows an increase of £1.7m (4.4%) against the budget for 2019/20. This increase excludes the new additional Radio Teleswitching costs of £1.4m. It follows the conclusion of the Issue 84 workgroup, where the industry agreed that the Radio Teleswitch Service operational costs (previously borne by ENA) will now be recovered through BSC from April 2020. This new arrangement will see these costs fully recovered from BSC Parties on an annual basis. We recognise that our customers have specific cost pressures (not least the retail price cap) and that the costs levied by Elexon for our services contribute to this. We have therefore strived to maintain our operational costs at existing levels, despite delivering improvements in service and dealing with an ever-changing energy system.

Within the budget, we account for services Elexon provides to its subsidiary, EMRS. Next year (2020/21) will be the sixth year that Elexon, in its role as Settlement Services Provider for EMR, delivers its services via EMRS to the LCCC and ESC. All EMR related costs are fully funded by LCCC and ESC and the total costs of LCCC and ESC (which include those of EMRS) are consulted on separately by BEIS. Our participation also enables us to offset some of our overheads, which would otherwise have been borne by BSC Parties (actual savings for 2018/19 are £726k), and are budgeted for 2020/21 at £1m.

Chart 1 above details the total costs of Elexon regular activity net of staff and overhead costs for EMR activities (which are fully funded by LCCC/ESC) since go-live of the New Electricity Trading.

Arrangements (NETA) in 2001/02. This is expressed in real terms (in 2019/20 money after applying April RPI of each year). It shows our success over the years in bringing costs down but also reflects that in recent years we have both invested in future proofing our central systems and increased our activities to support the evolving market and new business models, as well as to deliver innovation.

The budget for our operational costs for 2020/21 is £20.9m, 5% more than the current year budget, and includes costs such as people, occupancy, staff-related and administrative expenses, consultancy and legal support.

This also includes the contribution from EMR activities as a result of providing resources to our EMR subsidiary, EMRS for which it recompenses Elexon. BSC people costs are expected to increase by £647k (5.2%). This figure is derived by deducting the £249k EMR contribution from £896k in the ‘Variance to 2019/20 Budget’ column from Table 2.

The 2020/21 regular activity headcount remains consistent with the 2019/20 budget, with an increase of only 0.6 full time equivalents (FTE). The headcount illustrated in Table 3 is an average for the year and does not represent the actual number of persons. Instead, it represents a fulltime equivalent of those working directly for Elexon, and also contractors, and is, therefore, representative of the costs.

We have budgeted based on known headcount by function, which is to remain static for the entire year. Full consideration is taken of indexation as well as employment conditions and trends in our sector, as well as the wider economy while preparing this budget. To allow for all of these potential costs, and in recognition that recruiting staff to fill vacancies created through natural turnover will sometimes require a modest uplift in salary, we have included a provisional amount in the 2020/21 budget, for this purpose. To fulfil our role as the EMR Settlement Service Provider, we have contracted with LCCC and ESC to provide the services on day rates that fully recover our management overheads, office overheads and occupancy costs on a not-for-profit basis in respect of those personnel working on EMR. We have budgeted 33 FTEs to deliver these services.

The £3.5m EMRS Contribution represents the income from LCCC and ESC to pay for EMRS, which is made up of people costs for those directly or partially used to deliver EMR services, as well as a share of fixed overheads apportioned on a per person basis. The fixed overheads element of the contribution defrays the fixed overheads that BSC Parties are currently paying, for example occupancy and the IT infrastructure, and is budgeted to be £1.0m for 2020/21.

A significant proportion of our costs of delivering the BSC arrangements come from contracted expenditure for the BSC Agents and contracted service providers for running legacy systems in parallel to the new technology platform until we can retire the legacy systems. We have adopted this parallel approach over a ‘big bang’ approach to reduce the risk and ensure that legacy systems are retired only once the new solution is stable. These are predominantly fixed costs, linked to indexation.

The key drivers of our £2.1m (16.3%) increase are as follows:

• Radio Teleswitch Service (RTS) – Following discussions with Energy UK in July 2019, Elexon convened industry representatives to agree a solution for operational RTS costs to be recovered from BSC Parties post April 2020, through existing BSC cost recovery arrangements. This represents £1.4m of new BSC contracted costs.
• Central Systems: During the transition period to the new digital platform we will run two systems in parallel to reduce risk. While some of the BSC Agents are still remaining on legacy infrastructure, running two systems gives rise to an increase of £1.3m. This is offset by no longer accounting for amortisation of assets from previous years, which has a budget impact of £0.7m

To ensure that we are appropriately funded in order to implement changes requested by industry through BSC modifications, our budget has to incorporate an element of demand driven expenses (‘demand led’).

The budget for BSC systems releases is £3.9m. This is a decrease (17.2%) on the previous year’s budget. The budget incorporates scheduled BSC changes, notably TERRE, Market-wide Half-Hourly Settlement, Performance Assurance changes and a number of other approved BSC changes. The budgeted figures are based on the impact assessment of known modifications, taking into account estimates of historic change costs, as well as taking a view on new changes that may come forward during the year.

This area of our budget is entirely dedicated to fund our Foundation Programme, which is working to transform and transition the current ageing BSC Central Systems to deliver a new digital platform based on modern technologies. We have had to prioritise regulatory changes, such as TERRE over our systems strategy work resulting in a lower spend in 2019/20. However for 2020/21 we are budgeting to spend at the level that we set out in last year’s business plan.

The Platform will be easier to maintain, mitigate the risks of failure and deliver better value for money to BSC Parties, as well as greater flexibility for future market arrangements.

We have several releases planned for 2020/21 (as explained earlier in this plan). We have adopted a phased approach to delivering the Foundation Programme, to minimise the overall cost and risk to parties, whilst spreading the cost across several years to reduce the financial impact on BSC parties. As such, we have included a budget of £10.1m in 2020/21, which is in line with the 2019/20 budget provision of the Foundation Programme.

Due to Elexon’s funding model, the absence of retained capital and in accordance with allowable accounting treatment under accounting standard FRS102, we do not need to capitalise this investment. Due to the phased nature of this transformation, we do not believe that this will materially impact the profile of our charges to industry compared to a ‘big bang’ approach.

The budget for Market Development is £0.5m to allow us to cover any non-BAU activities regarding the developments within the GB energy market and is unchanged from 2019/20.

A number of industry developments remain that require Elexon to continue to monitor, engage and informally assess impacts outside of the formal change process. Some of those have been referred to earlier. We continue to engage with new market entrants and their proposed business models, seeking to ensure the BSC enables innovation. In addition to all of the activity outlined earlier, we have been aiding Ofgem in the development of the Retail Energy Code, sharing learnings from the BSC.

This section outlines how we expect to charge the budget to BSC Trading Parties. Table 08 contains charging proposals from Section D of the BSC. Table 09 shows the charges excluding VAT.

The BSC Panel reviewed Section D charges in 2019/20 and found the charging regime is fit for purpose, reflective of the BSC parties’ activities and fair to existing and new market participants.