This part of the document details the budgeted costs for 2019/20 in support of our strategy as laid out earlier in this Business Plan. We believe this budget enables us to continue delivering our BSC obligations, particularly by implementing leading technology platforms, increasing our engagement with our stakeholders and focusing on developing our people capabilities to deliver structural solutions to the changes facing the energy industry.
This will be the fifth year that ELEXON, in its role as Settlement Services Provider for EMR, delivers its services via its subsidiary EMR Settlement Limited (EMRS) to Low Carbon Contracts Company Limited (LCCC) and Electricity Settlements Company Limited (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 (2017/18: £763k); £3.5m to date.
|Item||Year to March 2018/19 Budget £’000||Year to March 2018/19 Forecast £’000||Year to March 2019/20 Budget £’000||Variance to 2018/19 Forecast £’000||Variance to 2018/19 Forecast %||Year to March 2020/21 Projection £’000||Year to March 2021/22 Projection £’000|
|Demand Led Costs||4.2||4.1||4.9||(0.8)||(19.5)||3.7||3.7|
Total costs of ELEXON regular activity
The budget to deliver BSC activity in 2019/20 including the detailed breakdown of work streams described in this Business Plan is £53.2m. This represents an increase of £10.6m (24.9%) against the current year’s forecast. Whilst this budget is substantially more than previous ELEXON budgets, it will ensure we are able to design, test and deliver our new systems, address the changes coming from industry while maintaining our support to BSC Parties. We have had 140 new BSC Parties since April 2015, which represents a 44% increase. There is evidence we do more to support them:
- In 2015/16 our OSMs were in contact with BSC parties through either a teleconference or a customer visit 33 instances per month on average. We are already at 89 instances per month on average in 2018/19 and expect continued growth
- The number of trading disputes raised have also increased by 52% across the same period, a trend we anticipate being sustained
- We managed 171 more credit defaults in 2017/18 than in 2015/16 (475% increase) and the 2018/19 statistics show this is continuing
- Modifications and changes raised are getting more complex and require an Budget overview average of four workgroup meetings now against 2.2 in 2015, which increased the efforts needed and the average time taken to progress change (it now takes 214 days for a Modification to be approved on average, 52 days more compared to 2015/16)
- The consultations that have required attention have increased by 127%.
We have also proactively introduced the electricity market sandbox as means of supporting innovative business models and facilitating new technologies in the electricity market. We will move from the design to implementation phase of Market-wide Half Hourly Settlement, and as explained in our white paper (subject to a Modification), design the arrangements to enable consumers to have multiple providers.
In addition to the significant increase in our Business as Usual range of activities, as explained above, there are a number of industry-wide taskforces and reviews ELEXON has been invited to. As detailed earlier, these include the Energy Data Taskforce, EV Energy Taskforce, the BEIS/Ofgem review of codes and code governance, and actions arising from the Smart Systems and Flexibility Plan. This budget includes resources to allow us to effectively contribute to those joint BEIS/ Ofgem projects.
As outlined in 2018/19 ELEXON started the Architecture Strategy project which allowed us to establish a better understanding of the significant market changes that ELEXON is facing, and define how ELEXON’s processes and systems would need to evolve to address them. While we have continually been improving our processes, our core systems have been in place and served the industry well since the NETA arrangements came into force in 2001. The Architecture Strategy Project proposed a Foundation programme, which recommends moving to flexible and scalable platforms that will enable faster and more efficient delivery of change while building the capabilities required to capture future market opportunities and benefits to industry
The increased cost anticipated in the coming year is driven by the impact of our Foundation programme on our regular costs. The first release will be implemented and its first effects are reflected in this budget, as before efficiencies can take place it will increaseour operational and contracted costs while we run two systems in parallel and work on delivering future releases to our Foundation Architecture.
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 parties. 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 address contingencies mindful of this constraint, while also endeavouring to set challenging financial targets for the business, which ensure we deliver the best possible value for money to the industry
In addition, due to ELEXON’s funding model and the absence of retained capital, after consultation with our auditors and exploring financing options, we are proposing, in accordance with allowable accounting treatment under accounting standard FRS102, not 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.
Table 02 below 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 NETA go-live in 2001/02 in real terms (in 2018/19 money after applying April RPI of each year).
It shows our success over the years in bringing costs down but also reflects in recent years our investment in future proofing our central systems, as well as the increased activity in a growing sector.