Where is the electricity balancing market going?

The question in the title begs another question – can we really talk about a “balancing market” for electricity at all, with the answer being – no, not really.

It is true that in a very broad sense the wholesale electricity market is to a large extent about balancing because, when buyers and sellers make their contracting decisions a key driver is to ensure that the contract positions are well aligned with what happens in practice.  If this is not the case, market players are cashed out at System Prices which are in effect determined by the overall system supply-demand balance and which, in some circumstances, can be damagingly penal.  

In addition, there is also the so-called Balancing Mechanism (BM) which is organised along market principles by National Grid (NG) and represents a commercial opportunity for registered participants with flexible generation assets.  The results of the BM bid-offer algorithm also feed directly through to the calculation of the System Prices.  While the BM is a short term market, NG (as the System Operator) also contracts longer term on a competitive tender basis for the provision of a variety of balancing services - such as frequency response, short term operating reserve (STOR) and demand turn up (DTU).

So, in returning to my opening question, although there isn’t a single market for electricity balancing, there is a structure which, in its totality, broadly reflects market forces. 

The overall structure for balancing described above has been in place and largely unchanged since privatisation of the electricity industry 30 years ago. The rules were refined when NETA was introduced in 2001, notably when Gate Closure – the last point at which contracts can be accepted into the system before each settlement period – was reduced from 3.5 hours to 1 hour. Inevitably, with the passage of time, there have been market developments which have put this structure under pressure and significant time and effort continues to be invested in designing new approaches to electricity balancing. 

One factor is that as new requirements have been identified NG has increased the range and complexity of balancing services that it seeks to procure from market participants.  In fact at the moment, there are over 20 different types of balancing service - and it is widely recognised that the dividing line between many of these different products is not clear cut with overlaps and inconsistent pricing being commonplace. 

Another key issue relates to the growing importance of decentralised generation and renewable technology within the UK electricity infrastructure – there being two aspects to this point.

First, the main renewable technologies – wind and solar – are by definition intermittent in nature, meaning that the task of balancing the UK System in real time is becoming more complicated.  The emergence of lower cost battery storage technology and the likely growth of electric vehicles, while possibly providing new tools not currently available to manage intermittency risk, will also increase the complexity of the balancing task and shift a lot of it away from central System Operation towards the lower voltage distribution network and even “behind the meter”.  This leads on to the second aspect which is the need to think about whether and how smaller, decentralised players can directly participate in the Balancing Mechanism itself. 

At present, making bids and offers into the BM is restricted to larger generators with appropriate asset flexibility and communications capabilities that can respond in real time to the requirements of the System Operator.  National Grid already recognises that this is too restrictive for the emerging new realities of the electricity system.  In order to address the various points raised above, NG published in June 2017 its “System Needs and Product Strategy” (SNaPS) consultation document – with follow on work to develop an alternative structure continuing through 2018.

Another initiative under way is the EU’s Trans European Replacement Reserve Exchange (TERRE) which seeks to develop a Europe-wide market for balancing services.  In 2016 a BSC code modification ( P344 ) was put forward as the UK market’s attempt to incorporate the provisions of Project Terre into the BSC.  Some 12 months later, another modification ( P355 ) was introduced which proposed to explicitly allow smaller plant to sell a wide variety of energy and system products into the BM – the so-called BM Lite option.  There currently remains confusion and overlap between the scope of P344 and P355 which needs to be resolved before any meaningful progress can be made – recognising that there is of course the larger and as yet unresolved question of what role if any the UK will play in the single European energy market (including Project TERRE ) post-Brexit.

At this stage of the process, there are no clear answers as to what the market for balancing services will look like going forward, only the recognition that significant changes will need to be made to keep the market structure responsive and relevant to the needs of all its participants.

As a provider of flexible and transparent electricity supply services to consumers and independent generators, EnDCo is constantly looking at balancing risks and related commercial opportunities in order to maximise the revenues and profits of our customers.

For further information, please email me at: les.abbie@endco.co.uk

Les Abbie, CEO, EnDCo