What will be the impact of the proposed changes to the Balancing Mechanism?

Published on 16th May, 2018

In February we wrote a blog about developments in the so-called “balancing market”, covering the balancing services which are let out to contract by the National Grid as well as the Balancing Mechanism (BM) itself.

To summarise – the System Operator (SO) National Grid meets firm (i.e. predictable) balancing needs by calling on contracted balancing services while the less predictable requirements arising between Gate Closure (one hour before each settlement period) and real time are covered by calling on flexible generation in the BM. In theory, providers of demand-side response (e.g. consumers cutting back on consumption) are also allowed to participate in the BM, but in practice the BM has so far been almost exclusively the preserve of the large, grid connected generators.

Credit: Freepik

In this piece, we’re going to take a closer look at developments affecting the BM because, while it has by and large successfully fulfilled its remit both to enable the SO to achieve continuous balance between supply and demand and to ensure that the system is operated within a number of defined limits, the electricity world is changing in some fundamental ways and the BM needs to adapt accordingly.

The growth in renewable generation is leading to less synchronous* generation on the system, meaning that power generation output is less easily regulated. Renewable generation is also often intermittent by nature and generally embedded within the low voltage distribution network. All these factors mean that system needs are becoming less predictable and more volatile.

As SO, National Grid recognises and accepts the need for change. In addition, as the system decentralises there is growing pressure to make the BM more accessible to smaller, decentralised generation and to “crack the nut” of achieving meaningful levels of demand-side participation in the BM.

Ofgem, as industry regulator, remains keen to promote a more competitive, open market for the provision of balancing services – both contracted and BM.

Currently, participation in the BM is not a viable option for smaller, independent generators or providers of demand-side response. This is mainly because there are onerous information/data requirements for submission to the SO – including the dynamic parameters relating to the generating asset and a schedule of bid-offer data (the prices at which the asset is prepared to generate at different levels of output). In addition, it is a condition of participation that there are high quality electronic data communication facilities in place which enable the participant to exchange information with the SO more or less instantaneously.

As a result, it is not difficult to see how the need to provide instantaneous flexible response in the BM is incompatible with base load industrial generation operations such as those linked to industrial processes (e.g. waste-to-energy, production of aluminium, cement etc.) as well as intermittent renewable schemes such as wind and solar generators.

So, how will the BM change in the future and what will be the impact of these changes?

At this stage, the clearest indication of what is going to happen can be found in the Second Assessment Procedure Consultation for the BSC Code Modification P344. This code change is the UK vehicle to incorporate the requirements of Project Terre (Trans-European Replacement Reserves Exchange) and there is a deadline of December 2019 for its implementation under EU single energy market legislation.

Whether and to what extent the UK remains part of the single European energy market is unclear post-Brexit – but the intention of P344 is to allow customers and independent Aggregators to participate in the submission of bids from embedded generators and demand-side providers in the form of balancing reserve products into the BM.

This goal is likely to remain in place regardless of Brexit complications, with all existing BSC barriers to participation in the BM to be removed and delivery of balancing products to be independent of electricity Suppliers (PPA providers).

However, there remain significant areas of uncertainty. There is an unresolved issue as to whether Aggregators will be required to pass information about their BM submissions to incumbent Suppliers. While Aggregators see this as a potential surrender of commercially valuable information, under current arrangements Suppliers have exclusive control of all meter-level activities and data flows. P344 therefore raises important issues about Supplier responsibilities and lack of clarity on how these will be resolved probably explains why some Aggregators have applied for their own supply licence.

In addition, while P344 covers the modifications needed in the BSC to free up access to the BM, the SO itself has yet to decide how the Grid Code will be modified to allow greater access to the BM.

Given the very specific and onerous requirements of near to real time balancing activities, it remains to be seen whether the proposed changes will actually result in substantively wider participation in the BM.

While the BM should, in theory, open up to a whole new class of potential participants, what proportion of these will actually have the flexibility and focus required to take part must a be a matter for doubt.

EnDCo provides independent and transparent access to the wholesale electricity market for independent generators and consumers. Our services include helping our customers to fine tune their electricity imbalances through contract positioning and other imbalance services.

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

Les Abbie, CEO, EnDCo

(*) : Synchronous generation is when the turbine rotor and magnetic field rotate with the same speed.