The Local Constraint Market (LCM) aims to reduce overall costs of the transmission constraint across the B6 boundary, as an alternative to doing so through the national Balancing Mechanism.
*Applicable Balancing Services Volume Data (ABSVD)
Who should read this? Flex Service Providers (FSPs) who are not suppliers and don’t have a bilateral contract with suppliers for passing through payments associated with ABSVD. Eg. independent aggregators with HH settled assets.
Jargon warning! We know that some readers will find this blog quite detailed, using electricity industry terminology and jargon - in some cases unique to Britain. If you want to chat through what it may mean for you, please get in touch.
The broader themes of how unlocking flexibility from distributed energy resources may impact balance responsible parties (BRP) and imbalance positions, is an area of live debate in Britain and also in Europe with current discussions around the Network Code on Demand Response. Piclo is pleased to contribute to this debate, using our real-world experience from operating live flexibility markets in six countries globally.
The Local Constraint Market (LCM) is a National Energy System Operator (NESO) market designed to tackle the transmission constraint across the B6 boundary. It aims to reduce overall costs of this constraint as an alternative to doing so through the national Balancing Mechanism. The LCM harnesses distribution-connected flex providers who are able to take Generation Turn Down / Demand Turn Up actions. Every step of the journey is hosted in Piclo from bidding, to market clearing, to dispatch and settlement.
Before the game-changing ABSVD opt-out solution was introduced in Oct 2024—approved by Ofgem—there was an issue affecting non-supplier participants, such as aggregators, in the LCM. When end users engaged in the market, whether directly or through aggregators, their energy adjustments impacted their suppliers' balances rather than their own.This adjustment is called ABSVD (Applicable Balancing Services Volume Data), which corrects the supplier's imbalance in the electricity market.
To remedy this issue, Piclo has worked with NESO to implement the ABSVD opt-out solution which allows participants in the LCM to "opt-out" of the ABSVD adjustment. This means that their supplier’s position is not corrected any more and allows the participant to get a direct supplementary payment for the balancing service they are providing.
The financial implications are game changing, by opting out of ABSVD, the participant can realise a supplementary financial reward paid directly by NESO. The supplementary payment is calculated using a proxy for imbalance price (the half hourly DA wholesale price) for the settlement period(s) in which they deliver flexibility. This payment is added to the (per MWh) accepted bid price leading to potentially significantly increased earnings!
Let’s break it down with some examples:
Accepted bid of £40/MWh results in a payment of £40/MWh. The supplier’s energy account adjusts, usually being credited for the energy they didn’t need to source.
The same £40/MWh results in a payment of £40/MWh. End user is disincentivised because the underlying tariff cost will, in most cases, exceed the bid price.
Bidding £40/MWh in a settlement period with a Day-Ahead price of £50/MWh would result in a payment of £90/MWh for full 100% delivery. This creates a strong incentive for end users, as their earnings now exceed their costs.
While some suppliers worry about potential negative impacts—like increased exposure to imbalance penalties—analyses suggest that as long as market prices remain stable, the overall financial impact should be minimal.
The ABSVD opt-out tackles a critical inefficiency that has historically hindered participation in flexibility markets through third-party aggregators. Ongoing discussions within the Elexon issue group 114 are identifying potential unintended consequences and crafting lasting solutions including potentially creating an ABSVD like process for DSO services. Furthermore, Ofgem’s approval of Code Modification P415, which opens the wholesale market to Virtual Trading Parties (VTPs), raises vital questions about fair compensation for demand-side contributions.
As central administrators make crucial decisions about imbalance corrections and supplier compensation, the stakes are high. These decisions will shape bidding strategies, market prices, network investments, and the future growth of demand-side flexibility.
The ABSVD opt-out solution marks a pivotal step towards a more equitable and efficient Local Constraint Market. By enabling non-suppliers to work with customers to opt out of ABSVD adjustments, we’re enhancing the appeal of participation for end users, leading to increased engagement, reduced grid constraints, and ultimately lower costs for consumers.
As we navigate supplier concerns and pursue system improvements, the insights gained will be invaluable for the future of energy systems.
Ready to explore this new frontier? Piclo have developed a step by step guide to LCM participation and an article for setting preferences for ABSVD (opting in or out). For any further queries please reach out to us directly at support@picloflex.com. Join us as we reshape the energy landscape—together!