MHHS could pose a major commercial risk for suppliers

Market-wide Half Hourly Settlement (MHHS) has the potential to pose a major commercial risk for suppliers, with a risk of overpaying for energy purchases by up to 8%.

Our analysis shows that, on average, settled volumes are typically 8% higher at R1 than RF. It’s currently taking suppliers up to 14 months to obtain enough actual reads to correct this.

This means many suppliers are currently overestimating initial energy usage (based on EACs), and taking up to 14 months to correct this when actual meter readings are received. Under MHHS, the settlement timeline will shorten from 14 to 4 months, leading to potential margin erosion.

As a result of the reduced timeline, suppliers will have less time to collect actual readings that true up the energy volumes assigned to them through settlement, giving rise to potential inaccuracies in Supplier Volume Allocation (SVA).

In the absence of actual corrected consumption, SVA will become more reliant on GSP Group Correction, and scaling factors that smear errors in total metered volumes across suppliers proportionally. This could result in a supplier paying for more energy than what their customers have used.

Smart coverage, settlement performance, and electricity usage are key

Changes in usage will be partly corrected for through industry smearing (GSP Group Correction), but suppliers’ lack of control over this means there’ll be financial winners and losers in the process.

Winners will be suppliers with high smart meter penetration, strong settlement performance, and a customer base with electricity consumption above industry average.

But if a supplier’s customer base has low to medium electricity usage, and their smart coverage and settlement performance are poor, the impact is likely to be much more significant.

To mitigate the risk of overpaying for energy, MHHS readiness plans should include a focus on how to maximise meter read collection and improve settlement performance ahead of cutover to ensure EACs are more reflective of actual consumption.

BFY can support suppliers with assessing their risk of overpaying (based on R1 and R2 settlement performance), as well as wider readiness for MHHS.

For more on MHHS, and the potential impact on your organisation, contact Jon Vincent or Holly Odle.

This is the first instalment in our MHHS Readiness series – look out for more insight from the team in the coming weeks, and join our mailing list here.