Blog: P462 Explained - Impacts, Opportunities, and What’s Next in the Balancing Mechanism Reform

What is P462?  

P462, formally titled "The removal of subsidies from Bid Prices in the Balancing Mechanism", is a proposed modification to the Balancing and Settlement Code (BSC), put forward by the National Energy System Operator (NESO) in October 2023. BSC workgroups began formal discussions on the proposal in January 2024.

The modification aims to remove renewal subsidies paid to Renewable Obligation (RO) and Contract for Difference (CfD) generators from bid pricing, creating bid pricing in the Balancing Mechanism (BM) that is more reflective of the operational costs of those assets to reduce generation. It would achieve this by paying the subsidy costs to the generators via a separate settlement cashflow equal to their lost subsidy, in the event they are bid down in the BM by NESO.

Currently, because these RO and CfD subsidies are paid to generators only on metered generation volume, if these generators are bid down by NESO they don’t get paid the subsidy when they don’t generate. They therefore include this lost subsidy in the price they set to be bid down in the Balancing Mechanism, which creates varying bid prices as there are varying subsidy levels for different generators.

For more on the proposal, visit: https://www.elexon.co.uk/bsc/mod-proposal/p462/

Why have NESO proposed this modification?

NESO's primary objective in raising P462 is to lower costs for end consumers. By removing subsidies from BM bid prices, the modification is expected to:

• Reduce costs to the end consumer by better reflecting consumer costs in the wider BM merit order and incentivising NESO to utilise lower cost units first.
• Provide a more transparent view of the actual cost of reducing generation by removing the subsidy from generators’ BM bid pricing. The subsidy cost will be recovered whether each generator is bid down (and recovers their subsidy through a new settlement mechanism) or generates and receives the subsidy through their respective scheme.

What impacts could P462 have on power markets?

If implemented, P462 could lead to several significant changes:

1. Potential cost savings for consumers

If P462 achieves more efficient dispatch decisions from NESO, this could save consumers money through reduced balancing costs for NESO, paid by consumers via Balancing Services Use of System (BSUoS) charges. There is a Cost Benefit Analysis (CBA) ongoing to determine what these savings could be.

2. Bid prices will become less negative

This is the obvious first order impact, but generators with a cost to turning down generation will now reflect less of that cost in bid pricing, so what might have been a bid price of, for example, -£80/MWh now might become -£10/MWh. This could lead to lower Balancing Mechanism revenues for unsubsidised assets, such as batteries or merchant wind farms.

3. Cashout, or system prices will become less negative

Cashout or system prices are set by the marginal bid or offer price that NESO need to pay for energy actions in the Balancing Mechanism. When this is set by the bid price, if bid prices have become less negative then cashout prices will also become less negative. This will mean lower risk/opportunity for imbalance volumes on various assets/consumers. We don’t expect there to be an impact on higher cashout price events, as offer pricing shouldn’t be impacted by P462.

4. Day Ahead and Within Day market prices are likely to become less negative, reducing wholesale market spreads

Following on from point 3 above, if market participants know that cashout prices will have a natural floor of a small negative value, they will have less incentive to sell their expected export volumes at larger negative prices in earlier markets. For example, today a generator with a Renewable Obligation (RO) or pre-AR4 Contract for Difference (CfD) subsidy of £80/MWh could be willing to sell their generation at -£79/MWh in Day Ahead and within day markets, so that they can secure their subsidy and earn at least £1/MWh plus the REGO price to cover operational risks and margin. 

However, if they believe they will be able to get a cashout price of at least -£10/MWh, they might feel it wouldn’t make sense to sell their output at -£79/MWh in Day Ahead or Within Day markets anymore, which would lead to them bidding into those markets with less negative, or possibly even slightly positive prices. This would mean less and maybe fewer negative prices at Day Ahead and Within Day, and therefore lower price spreads between the highest and lowest price in a day, if higher price events are unaffected.

5. Lower revenues for Flexible assets

Lower Day Ahead and Within Day price spreads, and less negative BM bid prices would reduce the opportunity for flexible assets such as batteries, electric vehicles or consumer-led flexibility to capture value from wholesale markets. Negative prices are a big opportunity for flexible asset to earn money for charging or consuming, so a decrease in the magnitude or frequency of those events will decrease revenue opportunities. This could then decrease investment in those assets at a time when they are needed to achieve Clean Power 2030.

6. Unpredictable consequences and changes in behaviour

There are a number of unpredictable consequences and changes in behaviour that may occur including: more volume being taken to imbalance if some market participants change bidding behaviour in Day Ahead and Within Day markets; changes in interconnector flows if prices in Great Britain become higher relative to Europe during periods of high generation, meaning GB could import more from Europe at times where there is already excess generation; and increased revenue for CfD generators with negative price rules, supported by top-up payments from consumers, if negative price events become less frequent.

It will be important to understand and consider P462 as part of the package of the various concurrent and interacting live reforms and not in isolation.

What updates should you look out for?

P462 is in an ongoing BSC modification and workgroup process, but here are some key dates to look out for and where you can have your say:

By the end of October 2025: Full Cost Benefit Analysis report to be published by Cambridge Economic Policy Associates (CEPA) – look out for updates from Elexon and through our contact channels

21^st November – 12^th December 2025: Assessment Procedure Consultation – have your say on the Cost Benefit Analysis and wider implications of P462

February 2026 – Assessment Report is presented to the BSC Panel

April 2026 – Workgroup present their Modification Report to BSC Panel and then submit to OFGEM for consideration

There is no confirmed date for either a decision from OFGEM or the implementation of any changes from P462

EDF Wholesale Market Services will keep you up to date with any news on P462 and other topics, so look out for content on our social media channels.