All about that baseline: how much flexibility is actually being delivered?
An unexpected surge in the costs associated with letting virtual power plants trade flexibility prompted action to close some loopholes. However, it's now being questioned whether virtual power plants deliver much flexibility anyway. Utility Week investigates.
By Tom Grimwood, Clean Power editor
All about that baseline: how much flexibility is actually being delivered?
An unexpected surge in the costs associated with letting virtual power plants trade flexibility prompted action to close some loopholes. However, it's now being questioned whether virtual power plants deliver much flexibility anyway. Utility Week investigates.
By Tom Grimwood, Clean Power editor
Action was recently taken to halt a rapid surge in the costs of compensating suppliers adversely affected by virtual power plants trading flexibility in the wholesale market, which it was feared could soon reach hundreds of millions of pounds per year. The entry of virtual power plants was enabled by a series of modifications to the Balancing and Settlement Code (BSC), which allowed independent aggregators to sell power from virtual power plants – secondary Balancing Mechanism Units (BMU) in the language of the BSC – without becoming the registered supplier for the assets they are combining.
To do so, they must instead register as Virtual Lead Parties (VLPs) in the case of the Balancing Mechanism, or Virtual Trading Parties (VTPs) in the case of the wholesale market.
The supporting arrangements include mechanisms for compensating suppliers for energy they have bought in advance for their customers but are unable sell due to demand turn-down actions taken by these parties. For VTP trades, affected suppliers can claim compensation from a mutualisation fund paid for by all suppliers in proportion to their market share.
This mechanism came under the spotlight after the amount being claimed from the fund each month rapidly surged from around £670,000 in September 2025 to almost £5.6 million in February this year. If the trend continued, Octopus Energy suggested, the cost of the scheme could “easily” reach £345 million in 2027 – adding £10 to the typical household energy bill at a time when they are already under immense scrutiny.
A flurry of BSC modifications were proposed in response. They included P511, proposed by Axle Energy, which traced most of the increase to “a single supplier + VTP + generator configuration using a small number of large assets, most likely open cycle gas turbines and gas reciprocating engines.” The supplier in question – SEFE Energy – accounted for more than £14.3 million of the almost £18.9 million claimed over the period.
The proposal document noted that the VTP role was intended to provide a route into the wholesale market for demand-side flexibility from consumer devices such as electric vehicle chargers and batteries. But Axle said the arrangements effectively allowed large generators, which already had market access, to obtain compensation from the mutualisation fund via a supplier.
The modification sought to address this issue by preventing large generators from selling power through a VTP. It was recently approved by Ofgem and came into effect last month.
Amount paid out by compensation scheme in September 2025
Amount paid out by compensation scheme in Febtuay 2026
However, industry figures say the compensation arrangements, which remain subject to debate, are not their only concern when it comes to VTPs. They also have major reservations about the baselining arrangements, which determine how much flexibility they are considered to have delivered.
They fear the combination of lenient baselining requirements with the incentive provided by the compensation mechanism risks creating a “perfect storm.”
And they say these fears are emblematic of a wider concern around the ability of regulation to respond quickly to emerging issues in the rapidly evolving markets for demand-side flexibility.
Baselining arrangements
Flexitricity has been at the forefront of the development of flexibility services in Great Britain, becoming the first VLP to trade on the Balancing Mechanism in 2020. It is also registered as a VTP.
The company proposed another of the BSC modifications put forward in response to the surge in compensation costs for VTP trades. P510 would introduce the same kind of direct compensation mechanism as there is already in place for VLPs.
Founder and chief strategy officer Alastair Martin says they are currently focused on the implementation of this mechanism, which would see VTPs directly compensate suppliers for downward actions, but suppliers also compensate VTPs for upwards actions. However he is also worried about baselining arrangements, which he fears are susceptible to abuse.
The default baselining methodology was originally set out in the BSC modification P376, which first applied to VLP trades in the Balancing Mechanism. In broad terms, this methodology calculates the baseline for a site for a particular settlement period by averaging out its usage over the same period on previous days – the last 10 eligible weekdays for weekday periods.
However, there are some industrial and commercial customers for whom the P376 methodology would not be appropriate due to their specific processes and schedules. Accordingly, there are provisions within the BSC to enable the code panel to approve alternative methodologies proposed by parties to the code.
But Elexon, the BSC code manager and Flexibility Market Facilitator, has not yet received any such proposals. Martin says no one has bothered because of the ability of VTPs to instead self-nominate baselines based on their own custom methodologies, without prior approval.
Baselining practices
The VTP role was created through the BSC modification P415, which was proposed by Enel X and came into effect in November 2024. A spokesperson for the company says their impression is that “most people” are submitting baselines based on their own methodologies. “Without any intent to do something wrong, it is a convenient thing to do,” they explain.
However, this arrangement also leaves VTPs with room to take a “generous” view of what flexibility they have delivered.
The spokesperson gives the hypothetical example of an electric vehicle which is left plugged in overnight, and in the absence of any incentive to do otherwise, would likely be charged for a couple of hours.
If the car was instead not charged at all, it would be reasonable to claim to have reduced demand for those few hours: “But I don’t think it would be reasonable to claim that because the car was plugged in from when the owner got home at half past five in the evening, that you were curtailing it all of the time from when it was plugged in.”
“Now I don’t know that’s what people are doing, but that’s what I’ve heard suggested as an approach that people might take,” they add.
The spokesperson says, as far as they are aware, “people aren’t actually breaking the rules” but it’s difficult to tell without access to more information: “There’s not public visibility into things that involve actual customers’ meter data so you’ll have to make some inferences.”
Nevertheless, one industry source told Utility Week they had come across instances where VTPs had submitted baselines they believe are “unfeasible in terms of what their customers are likely to do”.
Another source raised concerns over the recent actions of Axle Energy as a VTP, providing Utility Week with analysis of its behaviour over the first two weeks of July as an example. They said data from Elexon showed the baseline volumes attributed to the company’s secondary BMUs were three times higher than the metered volumes over this period.
Accordingly, its deviation volumes – covering both VTP and VLP trades – were also significantly higher than its metered volumes, meaning the company sold more flexibility from the sites in its secondary BMUs than they consumed in total.
Putting it into more precise numbers, its baseline volumes totalled more than 35.6GW between 1 July and 14 July, whilst its metered volumes amounted to just 11.8GWh. Its deviation volumes were more than 24GWh, of which more than 21.6GWh was eligible for compensation as VTP actions.
The source said these figures do not make sense for a typical aggregator. Unless they are generating lots of energy onsite, they said Axle Energy’s customers would need to be consistently reducing their consumption to one third of their usual levels.
They drew comparisons with two other companies – Ohme and Zenobe – whose behaviour they said was much more typical of what they would expect for an aggregator. Over the same two-week period, their metered volumes were actually slightly lower than their baseline volumes.
In charts of these volumes by settlement period, demand can clearly be seen to have shifted from earlier periods to later ones, rather than being destroyed.
Responding to the suggestion that its baseline volumes were unreasonably high, Axle said in a statement: “Different asset portfolios have different consumption profiles, which is important context when interpreting aggregate settlement data.
“Axle operates across a diverse mix of energy assets, including sites with behind-the-meter generation and storage. This can reduce the amount of electricity those sites draw from the grid and therefore affect the metered volumes shown
Policing
As signatories to the BSC, Alastair Martin says VTPs should submit baselines “in accordance with good industry practice, which obviously means you don’t just make stuff up that suits you and makes your delivery look good.” But he is not confident that these standards are being enforced sufficiently across the industry. When the role first came into being, Martin says VTPs were not subject to the Performance Assurance Framework which is in place to monitor and enforce compliance with the BSC.
In November last year, the BSC panel proposed a modification (P504) adding VTPs to the list of Performance Assurance Parties in the BSC, thereby allowing Elexon to investigate their actions. The modification, which had been recommended by the Performance Assurance Board, was approved by Ofgem and implemented in February.
Nevertheless, Martin remains concerned over how well VTPs are being policed. He says it is not currently obvious from the outside how proactively Elexon is investigating their activities and if it has taken any enforcement actions.
He would at least like there to be some guidance on how Elexon would determine whether or not a VTP is failing to comply with the BSC with regards to baselining. Drawing a comparison with the Transmission Constraint Licence Condition, Martin says Ofgem was, in that instance, reluctant to issue guidance on how the condition would be enforced on the basis that “whenever we reveal where our red lines are, people will just trade up to them”.
He says this concern is reasonable, but on the other hand: “If you leave it to the market to guess where the red lines are, and we never see an investigation or know the details of one that does happen, then what you end up with is that where people trade is contingent on their willingness to sail close to the wind.”
“I think that outcome is worse than drawing a line and seeing people cluster at it,” he adds.
The spokesperson for Enel X is similarly uneasy about the current situation, saying they are “not keen on self-nominated baselines” in general: “I think that if you do have them, then they need to be treated with some care by someone who is policing it. And that role falls on Elexon.
“I don’t know whether they’re doing enough yet. I would like to have some reassurance that they are looking carefully at this stuff to make sure that what’s being done is credible.”
The spokesperson fears that “we have come up with a perfect storm,” whereby VTPs are both able to make excessive claims for the flexibility they have delivered, whilst also being over-incentivised to do so because of the current compensation mechanism, which means they do not face the costs their actions impose on suppliers: “It’s a bad combination.”
The response from Elexon
Responding to their concerns, Elexon emphasised that although VTPs can nominate their own baselines, they must do so in accordance with good industry practice. In theory, Elexon said VTPs could use different calculation approaches at different times of day, if this led to greater accuracy, but it would not be considered good industry practice to do so arbitrarily.
Elexon said if it is made aware of “wilful, serious or systemic” non-compliance with BSC obligations, it can launch an investigation and bring any evidence to the Performance Assurance Board (PAB), along with recommendations for further action. The actions the PAB can order include commissioning deep-dive audits and requiring VTPs to submit and implement plans to rectify the issues identified by Elexon.
In the event of serious, persistent non-compliance it can also recommend that the BSC panel withdraw a VTP’s permission to trade by removing its BSC qualification. Elexon urged anybody aware of activities that could be indicative of non-compliance to come forward.
At the same time, Elexon stressed that it is not reliant on tip-offs and is proactively monitoring VTP activity. It recently completed a full audit of VLPs, which it is publishing this month, and is planning to do the same for VTPs as part of its next reporting cycle. In general, Elexon said it is important that assurance and monitoring are proportionate to the activity of market participants. It said it does not want to overburden them with disproportionate bureaucracy given that the resulting costs will ultimately fall on consumers. It said the level of scrutiny may change over time as the market grows and matures.
Regarding Martin’s call for guidance, Elexon said it does not want to be overly prescriptive as this would defeat the purpose of allowing VTPs to calculate their own baselines. But it invited feedback from anybody who feels the current requirements are unclear or being interpreted in different ways.
Gaming opportunities
Commenting on the development of flexibility more broadly, independent consultant Elizabeth Allkins says Britain is at the “bleeding edge” and “so of course we’re moving fast and breaking things. Flexibility is so important for a decarbonised energy system, but it’s new and different. Of course there are going to be learning opportunities along the way. We can’t get everything right first time.”
She says a number of issues need to be resolved to allow the sector to grow: “Revenues for flexibility are still not secure, distributed flex struggles to operate in legacy markets, and operational challenges such as the processes to deal with duplicate MPANs create unnecessary friction for flexibility assets.”
Allkins says baselining is another one of these issues that needs to be actively worked upon, and not just in relation to self-nominated baselines by VTPs.
As well as the wholesale market and the Balancing Mechanism, a version of the P376 methodology was also adopted by the National Energy System Operator (NESO) to calculate baselines for its Demand Flexibility Service (DFS).
Allkins was previously the director of future energy at Ovo, which helped to assess the accuracy of the methodology as part of NESO’s Crowd Flex trial. In trial settings, Allkins says the methodology was shown to be largely accurate, especially when looking across a big enough cohort of customers. Once the number of assets get into the hundreds, she says there is a “smearing effect,” whereby any errors in one direction are offset by errors going the other way: “The challenge is more around when you’re thinking about how you pay the individual customer.”
And Allkins says the methodology is not without vulnerabilities. One of these was exposed as part of the first iteration of the DFS.
The original version of the methodology adopted by NESO included a within-day adjustment to average usage over previous days. As Utility Week revealed several years ago, some enterprising domestic customers discovered they could earn tens, if not hundreds of pounds per event by artificially increasing their consumption in the hours leading up to DFS events. They then shared this knowledge with other customers on several online forums.
NESO was forced to respond, removing the within-day adjustment for subsequent iterations of the service.
Allkins says there are other ways which this methodology could theoretically be gamed. A flexibility provider with detailed information about customers’ consumption patterns could “cherry pick” those which appear to be providing the most flexibility under the methodology: “With P376, the opportunity is to pick the customers that have the right shape. Maybe they’ve been on holiday for the last 10 days and so the baseline’s really low.”
When calculating average consumption over previous days, the methodology excludes any days on which an action was triggered. In the case of VTPs trading in the wholesale market, there would not be a gatekeeper in the form of NESO.
So long as they could find a willing trading partner, they could trigger trivial events with the intention of excluding particular days from the calculation of future baselines. “There’s nothing stopping you from adjusting your asset behaviour, triggering an event, and then by doing that, making the baseline be what you want,” says Allkins.
“There’s nothing stopping you from adjusting your asset behaviour, triggering an event, and then by doing that, making the baseline be what you want.”
Elizabeth Allkins, consultant
The bigger picture
Looking at the bigger picture, Allkins says the current flexibility market rules and processes were “good enough” when the sector was still at the embryonic stage: “But what worked in the past won’t work in the future. Issues that felt insignificant or marginal in the beginning are becoming very big very quickly.”
She says the surge in supplier compensation costs which triggered the proposal of P511 is another useful example of this: “The issue is a foreseeable (and arguably foreseen) consequence of the implementation of P415 but was considered an edge case when the rules were written.”
Allkins says progress should not be slowed in an attempt to “identify and prevent all possible unintended consequences” but that also means regulation needs to be agile: “We do have to ensure appropriate monitoring and reporting is in place to identify where issues are emerging, and the regulatory frameworks, including clarity on the respective roles of Elexon as the market facilitator and Ofgem as the regulator, to act quickly and act proactively when harm is identified.”
She says the supplier compensation issue took six months to come to the surface and the meantime, millions of pounds had been spent: “The market is already making on this stuff, so you’ve got to be on it.”
As an evangelist for flexibility, Allkins says she was nervous about highlighting these kinds of issues for fear that it might tarnish its reputation: “I hope what it achieves is the opposite.”
“I truly believe flexibility has a long and happy future ahead, and I think we owe it to the future to get the building blocks right so that the market is built on strong foundations,” she concludes. “If we don’t, we build a fragile framework that will not stand the test of time.”
