This part of the document details the budgeted costs for 2018/19 in support of our strategy, as laid out in Part One of this Business Plan.

Transcription

1 Overview This part of the document details the budgeted costs for 2018/19 in support of our strategy, as laid out in Part One of this Business Plan. We believe this budget enables us to continue delivering to the four strategic priorities identified in our Business Plan, particularly around ensuring that levels of service are fit for purpose and delivering value for money; by focusing on streamlining and automating the processes and systems, making them future proof in order to address wider industry challenges effectively and efficiently and improving the overall end to end operational delivery of the BSC. 2018/19 will be the fourth 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). ELEXON provides the human resources and office facilities to perform the functions of the Settlement Services Provider. Previous changes to the BSC have ensured there will not be cross subsidies between BSC and EMR. 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. There is therefore no breakdown of EMR costs in the BSCCo Business Plan but the impact to ELEXON s budget via reimbursement for providing human resources and office facilities is further shown in this document as EMR Contribution. Table 1 Summary March March March to to March March Item 2018/ / /21 m m m m % m m ELEXON Operational (1.3) (6.5) EMR Contribution (2.8) (2.5) (3.3) (3.3) (3.1) Subtotal (0.5) (2.8) Demand Led Costs (1.9) (82.6) Subtotal (2.4) (12.1) Contracted Costs (0.4) (2.6) Total Regular Activity (2.8) (8.0) System Strategy (2.1) (65.6) Market Development OVERALL TOTAL (4.9) (12.7) Page 1 of March 2017 ELEXON 2017

2 It should be noted that we started the budget process in October 2017, so the comparison for the full year outturn for is based on the September 2017 forecast. The budget to deliver BSC activity in 18/19 including the additional BSC activities described in this Business Plan will be 43.4m. This represents an increase of 4.9m (12.7%) against the current year s forecast, and an increase of 1.9m (4.6%) against the budget. The budget also supports our ability to address wider industry challenges, as well as respond to the significant increase in anticipated industry change in the coming year. We recognise that the budget has increased slightly compared to the forecast however our directly controllable operational costs are in the main kept consistent with current year, and it is Demand Led costs (being those costs incurred in response to industry raised changes) that has increased compared to forecast. At present, we have set a prudent estimate of potential system strategy costs. We will seek to refine this part of our budget prior to final sign off of this budget by our Board in March This budget sets our costs at an appropriate yet challenging level for the year ahead. A significant proportion of our costs of delivering the BSC arrangements come from contracted expenditure for the BSC Agents. We continue to drive savings in our Contracted costs, through robust and rigorous contract and service management and re-procurement processes. Some aspects however are variable and driven by demand from industry. Where this is the case, we have identified and explained these elements in this document. Similarly, Demand Led costs are, by their very nature, driven by industry. The control we have is in ensuring that change is delivered in the most cost effective and efficient manner. We believe the level of change is likely to increase in the next year especially with Project TERRE (Trans European Replacement Reserves Exchange) and therefore we have made further provision for this activity in this budget as shown in the increase of Demand Led costs. Strict governance and controls are in place to ensure that any underspend in this area is returned to parties, as has been the case throughout our 16 year history. We have major expected changes such as Project TERRE which comes about as a direct result of EU Regulations; implementation of our Architecture Strategy which is driven by our need to future-proof the central systems and processes; maintaining internal applications as well as expected costs associated with upcoming BSC releases. Since we changed our approach to systems transformation in 2015, which had been to carry out a large scale transformation of all of the current BSC Central Systems, maintaining our strategy from the last two years we are still focusing on an incremental transition to a flexible, scalable and responsive future proof platform as part of the new foundation Architecture Strategy. The strategy will introduce new ways of working, supported by a refreshed technology platform and responsive delivery methodologies. This will allow ELEXON to respond faster to changes, maintain its delivery reputation by reducing change delivery risks and position ELEXON to respond effectively to Page 2 of March 2017 ELEXON 2017

3 deliver our services to the changing needs of market and BSC parties. We will keep industry informed of progress on implementing the Architecture Strategy via stakeholder engagement sessions and via the Panel representative on the steering committee. We have also retained a provision of 0.5m for Market Development in line with our current forecast to support our continuous efforts to better understand developments within the market so that we are able to support the Panel in keeping them informed of issues that may fall outside of the direct governance of, but impact, the BSC. 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. Chart 1 Costs of ELEXON Regular Activity since NETA Go Live (Excluding NETA Costs) 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 NETA go-live in 2001/02 in real terms (in money after applying April RPI of each year) and shows our continued success in driving efficiencies throughout the business. The increase anticipated in the coming year is driven by our need to progress our Architecture Strategy, as well as our anticipated view of the increased levels of forthcoming industry change (some necessitated by law e.g. Project TERRE). Page 3 of March 2017 ELEXON 2017

4 ELEXON OPERATIONAL The budget for our operational costs for 2018/19 is 18.1m, 2.7% more than current year forecast, and includes costs such as People, Occupancy, General office expenses, Consultancy and Legal support. This also includes income from EMR activities as a result of providing resources to our EMR subsidiary EMR Settlement Ltd (EMRS). Table 2 below illustrates the Operational costs budget: Table 2 ELEXON Operational March March March to to March March Operational Costs 2018/ / /21 m m m m % m m People Costs 13,794 13,238 14,156 (918) (6.9) 14,114 14,184 Other Operational Overheads 7,111 6,871 7,285 (414) (6.0) 7,249 7,273 EMR Contribution (2,803) (2,480) (3,335) 855 (34.5) (3,262) (3,098) Operational Total 18,102 17,629 18,106 (477) (2.7) 18,101 18,359 People (Employee and Contractor) Costs People costs are expected to increase by 918k (6.9%) as a result of a higher average headcount necessary to deliver this Business Plan. The headcount illustrated in Table 3 is an average for the year and does not represent the actual number of persons, but a full time equivalent of those engaged, and therefore representative of the costs. Page 4 of March 2017 ELEXON 2017

5 Table 3 ELEXON People Costs and Average Headcount March March March to March to March March March People Costs and Average Headcount 2018/ / /21 '000 '000 '000 '000 % '000 '000 Employee Costs 12,414 11,724 12,506 (782) (6.7) 12,850 13,197 Contractors 1,380 1,514 1,650 (136) (9.0) 1, Total People Costs 13,794 13,238 14,156 (918) (6.9) 14,114 14,184 Average Employee Headcount (23.6) (14.8) Average Contractor Headcount (1.0) (8.5) Average Total Headcount (24.6) (15.0) Employee Costs per Head Contractor Costs per Head (1.0) (0.8) People Costs per Head To fulfil our role as the EMR Settlement Service Provider, via ELEXON s 100% owned subsidiary EMRS, 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 30.5 FTEs to deliver these services. The 3.3m EMR Contribution represents the income from LCCC and ESC to pay for the EMR, which is made up of people costs for those directly or partially utilised 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 0.9m for 2018/19. Page 5 of March 2017 ELEXON 2017

6 Table 4 below breaks down total headcount by the activities they perform. The increase in delivering BSC business as usual (BAU) activity is attributable to being able to deliver work in the pipeline. Table 4 ELEXON Headcount Breakdown BSC BAU EMR to to March March March March March March March Headcount 2018/ / /21 (FTEs) (FTEs) (FTEs) (FTEs) (%) (FTEs) (FTEs) (17.3) (12.3) Average Total Headcount (7.3) (31.5) (24.6) (15.0) Over the past years we ve sought to transform the organisation, to ensure that it is fit for purpose and best positioned to deliver on our mission and vision. Active appropriate recruitment and retention of key people is critical to ensuring business continuity and is one of the four cornerstones of our Business Plan, referred to as Capability. Many of our larger customers have or are undergoing staff reductions and coupled with the smaller players being unable to support a large internal team of market experts this has resulted in our customers demanding more support from us and also asking us to take on more of the market design activities. As a consequence, we experienced an increase in staff turnover. We actively seek to develop our people and therefore explore suitable internal candidates when and where appropriate. The impact of this however is often a lengthening of the recruitment process as we seek to bring new talent into the organisation to fill vacancies. To address the challenge of attracting talent to the organisation, the Executive have retained our pay and reward strategy to ensure we remain competitive, as well as working towards developing other retention mechanisms. This will in turn mean that the Industry benefits from the investment we make in our people. None of the forthcoming categories of costs of Demand Led, Contracted, System Strategy or Market Development, contain funding associated with internal resources, these budgeted amounts relate exclusively to external costs. Page 6 of March 2017 ELEXON 2017

7 DEMAND LED Table 6 Demand Led March March March to March to March March March Demand Led 2018/ / /21 '000 '000 '000 '000 % '000 '000 IA - Modification Proposals (12) (13.6) BSC Systems Releases 3,603 2,103 3,900 (1,797) (85.4) 4,000 4,000 Panel Committee Projects (93) (68.9) Total Demand Led 4,022 2,326 4,228 (1,902) (81.8) 4,200 4,200 This area of our budget is entirely demand driven, and is set to ensure that we are appropriately funded in order to be able to implement changes requested by industry. We continue to ensure that all change is delivered in the most effective and efficient way. Our budget is based on the following assumptions: We ve set the budget for impact assessments of modification proposals and change proposals at 100k, an increase of 12k from current forecast and a decrease of 77k from previous budget. The budget for BSC systems releases has been set at 3.9m. This is an increase on the previous years budget as well as current forecast due to the increasing amount of change within the industry mainly the upcoming Project TERRE implementation into GB market arrangements which is budgeted to cost approximately 3m. The remainder of the 900k budget is attributed to scheduled BSC changes based on the impact assessment of known modifications with estimates based on historic change costs. We have budgeted 228k to cover the delivery of any additional work requested by Panel Committees. Page 7 of March 2017 ELEXON 2017

8 CONTRACTED Table 5 Contracted Costs Item March March March to March to March March March 2018/ / /21 '000 '000 '000 '000 % '000 '000 TOTAL CONTRACTED 15,229 14,879 15,272 (393) (2.6) 15,311 14,908 Contracted expenditure includes the operating cost of our BSC Agents (e.g. Central Registration Agent (CRA), Funds Administration Agent (FAA), etc.) and contracted service providers (e.g. for Profiling, Qualification Services etc.); as well as the depreciation of the capitalised investments into our systems. These are the main costs we incur in delivering the BSC arrangements and are predominantly fixed costs, linked to indexation. The majority of our contracted costs for 2018/19 are in line with that of the forecast generating a 0.4m (2.6%) adverse variance as follows: Central Systems adverse variance of 74k mainly attributed to increased BMRS storage related costs and pass through costs. Performance Assurance Reporting Mechanism System (PARMS) overall adverse variance of 208k as a result of increase in qualification costs in line with projections, increased multi circuits testing, which are offset by savings within operational audit. Increased Data Transfer Service (DTS) costs of 110k directly relating to an estimated increase of 15 new suppliers plus overall increased usage. Page 8 of March 2017 ELEXON 2017

9 SYSTEM STRATEGY Table 7 SYSTEM STRATEGY March March March to March to March March March Item 2018/ / /21 m m m m % m m SYSTEM STRATEGY (2.1) (65.6) In we are forecast to spend 1.9m on our IS Strategy Initiative to invest in our systems in order to maintain our change delivery performance, given the increasing volume and scale of BSC change requirements by the industry. This is a continuation of the work carried out to develop our new Architecture Strategy, which assessed the near and long term market trends and assessed current BSC systems and processes against requirements driven by market changes. We have allocated funds to support the re-architecting of CRA, SVA and SVA as part of the new Architecture Strategy and to minimise costs to the parties by aligning with required industry modifications such as P344, P354 and P355. At present we have made a prudent estimate of the costs to deliver our architecture strategy programme. The first phase is due to complete by April 2018, so we will be in a position to refine our current estimate in time for final sign off by our Board in March Page 9 of March 2017 ELEXON 2017

10 MARKET DEVELOPMENT Table 8 Market Development March March March to March to March March March Item 2018/ / /21 m m m m % m m Market Development The budget for Market Development has been set at 0.5m, to cover any non BAU activities regarding the developments within the GB energy market. There remain a number of industry developments that require ELEXON to continue to monitor, engage and informally assess impacts outside of the formal change process. These include developments from European network codes (particularly assignment of our existing roles), code governance reforms (consultative Board, strategic direction and licensing), closer cross-code collaboration to improve the customer experience, BREXIT and it s impacts on the BSC and the potential for discussions on the future role of the independent system operator (especially its new responsibilities as proposed by OFGEM). In addition, we will continue to engage with new market entrants and their proposed business models, seeking to ensure the BSC is not a barrier to innovation and will further explore providing data to our customers accompanied by insightful analysis. Furthermore, we need to understand the potential impact upon the BSC of the proposed new Retail Energy Code. We have again budgeted for these market developments should we require to backfill or seek additional support, expert advice or guidance. Page 10 of March 2017 ELEXON 2017

11 Comparison of 2018/19 Annual with Annual Table 9 Comparison of 2018/19 with Item Year to Mar m Year to Mar 2018/19 m Variance m Variance % ELEXON Operational Incl. EMR Contracted Costs (0.1) (0.7) Demand Led (0.2) (5.0) Total Regular Activity (0.3) (0.8) System Strategy (1.6) (43.2) Market Development Overall Total (1.9) (4.6) (Unfavourable variances are in brackets) Comparison of 2018/19 Annual against Forecast out-turn of Table 10 Comparison of 2018/19 against Forecast Item Year to Mar Forecast m Year to Mar 2018/19 m Variance m Variance % ELEXON Operational Incl. EMR (0.5) (2.8) Contracted Costs (0.4) (2.7) Demand Led (1.9) (82.6) Total Regular Activities (2.8) (8.0) System Strategy (2.1) (65.6) Market Development Overall Total (4.9) (12.7) (Unfavourable variances are in brackets) Page 11 of March 2017 ELEXON 2017

12 CHARGING ANALYSIS This section outlines how we expect to charge the budget to BSC Trading Parties. Table 11 contains charging proposals from Section D of the BSC. All of the charges presented in Table 11 exclude value added tax (VAT). Table 11 Section D Charging * 500 Application Fee; Membership fee of 250 per month; CVA Metering System Monthly Charge of 50 per month. CVA BM Unit Monthly Charge (other than for Supplier BM Unit) of 100 per month (this charge is levied on each pair of BM units in the case of an exempt generator); For communication line and TIBCO charges, please refer to the ELEXON website Notified Volume Charge per Gross Contract MWh at a rate of /MWh; For all Base SVA BM Units a charge of 100 per month; SVA costs split: o 50 percent of costs are paid by generators on basis of metered energy volumes; o a fixed fee of 0.35 per SVA Half Hourly Metering System per month; o remainder allocated on Suppliers Non Half Hourly MWh market share. All remaining costs split on basis of metered energy volumes. * These are based on the current charges and are consistent with last year s budget. They are subject to change following a periodic review approved by the Panel. Please refer to the BSC website for current rates. Based on the information in Table 11 examples of charges to BSC Parties are provided. First, the 2018/19 Annual is set out in Table 12 below. Table 12 Split of Costs Assumed Split of Costs Forecast 2018/19 SVA Costs Other Costs Total Page 12 of March 2017 ELEXON 2017

13 Second, various assumptions about the size of the market are made. These are presented in Table 13. Table 13 Market Assumptions Market Assumptions Forecast 2018/19 Number of Trading Parties Sales - Notified Contract Volumes (TWh) Purchases - Notified Contract Volumes (TWh) Generation (TWh) Supply (TWh) NHH Supply (TWh) HH Supply (TWh) CVA BM Units SVA Base BM Units SVA Additional BM Units Data Line Comms Software (5 users) CVA Metering Systems (MSIDs) HH Supply (MSIDs) 240, PRS Supply (MSIDs) 30,342, HH and NHH Supply (MSIDs) * 0 30,670,843 30,701,514 * As a result of a modification during the year (P346), Half Hourly and Non Half Hourly metering systems are now aggregated as a single supply. Page 13 of March 2017 ELEXON 2017

14 Third, the charging regime from Section D of the BSC in Table 11 is then applied to costs in Table 12 based on the assumptions in Table 13. This gives the estimated charges (either specified charges or /MWh fees) as shown in Table 14. Table 14 Expected Charges Charge Item Forecast 2018/19 Specified Charges CVA BM Units ( /month) SVA Base BM Units ( /month) SVA Additional BM Units ( /month) Data Line - estimated average ( /month) Comms Software - average quad2 processor ( /month) SVA 1,080 1,080 1,080 Comms Software {additional user} ( /month) Contract Traded ( /MWh) CVA Metering Systems ( /month) Base Monthly Charge ( /month) HH SVA Ops ( /msid/month) NHH SVA Ops ( /NHH MWh) Gen Energy SVA ( /MWh) Main Charges Energy fee ( /MWh) Page 14 of March 2017 ELEXON 2017

15 Table 15 Cost Recovery by Item Charge Item Forecast 2018/19 Specified Charges SVA ( m) % of Total ( m) % of Total ( m) % of Total CVA BM Units % % % SVA Base BM Units % % % SVA Additional BM Units % % % Data Line % % % Comms Software (total) % % % Contract Traded % % % CVA Metering Systems % % % Membership Fee % % % HH SVA Ops ( /msid/month) % % % NHH SVA Ops ( /NHH MWh) % - 0.0% - 0.0% Gen Energy SVA ( /MWh) % % % Main Charges Energy fee ( /MWh) % % % Total % % % Page 15 of March 2017 ELEXON 2017