In order to provide a reliable service across the UK, electricity demand and generation need to be balanced and Electricity networkthis is achieved through a variety of ways. This Industry Insight will explore how balance is brought to the electrical system and will explore concepts such as:
- The balancing mechanism
- Trading energy
- Energy arbitrage
The balancing mechanism
The balancing mechanism provides a hugely important role in enhancing the reliability of electricity on the Great Britain electricity system.
The official definition of the balancing mechanism given by the National Grid is the period between gate closure (one hour prior to real time) until the end of a settlement period (30-minute window). During this time the electricity system operator (ESO) can instruct (or dispatch) parties to increase or decrease their generation or consumption.
This balancing mechanism is in place to ensure that electricity generation and demand are balanced on a second-by-second basis. The balancing mechanism is a core tool for the ESO as it typically accounts for 5-15% of all contracted electricity volumes over a year. As it helps the National Grid to manage system extremes and volatility close to real time, it provides a vital function as the need for flexibility is unpredictable and constantly changing. Therefore, the presence of the balancing mechanism enables the National Grid to ensure the stability and reliability of the electricity system in an efficient manner.
How to participate in the balancing mechanism
Parties can currently enter into the balancing mechanism, through their balancing mechanism unit (BMU), in 4 ways:
- Transmission connected generation BMUs
- Distribution connected generation BMUs
- Supplier base BMUs
- Supplier additional BMUs
In the case of transmission connected generation, balancing mechanism participation is mandatory while distribution connected generation is also able to participate, as long as it has a relevant contract with the ESO.
Supplier base BMUs occur when a supplier registers a set of base BMUs to register their meters for each geographic area to be settled against. These base BMUs are set up as a collection of BMUs across a number of locations. Base BMUs are not currently used for active participation in the Balancing Mechanism.
If suppliers wish to become active balancing mechanism participants, they may register “Additional” BMUs to be used.
Balancing Mechanism Reform
Due to the change in the energy landscape brought about through the transition to a greater amount of renewable energy, which is cleaner but intermittent, the balancing mechanism is set to reform to remain efficient in the coming years.
The first of the main drivers for reform of the balancing mechanism is the consumer benefits of increased participation. Studies have shown that competitive balancing markets drive down costs for consumers and also report that consumers could benefit financially from anywhere between £110M-£500m per annum by 2020 as a result of increased participation in the balancing mechanism.
The second main driver is of maintaining operability. This is due to the aforementioned changes in the energy mix of Great Britain, with distribution connected capacity more than doubling between 2014 and 2017 and has been forecasted to reach as high as 67GW by 2050.1 Currently, only a small volume of distribution connected capacity is accessible through the balancing mechanism, something which needs to change drastically if the current levels of operability are to be maintained as the amount of distribution connected capacity rises exponentially.
The final main driver of balancing mechanism reform is to provide equal treatment and access to all potential providers in order to facilitate a competitive balancing services market and allow as many providers as possible to participate in balancing the network.
Due to the complex nature of energy, the markets and ability to trade takes a variety of different forms. These are primarily day-ahead, intraday, year-ahead, and minute-to-minute.
Day-ahead trading is one of the most popular ways of trading energy. In the day-ahead markets energy which is traded will then be used the next day. The trading is driven by the assessments of buyers, such as utilities, for their energy needs for the following day and how much it is willing to pay for this volume.
Intraday trading acts as a supplement to day ahead trading to help secure the necessary balance between supply and demand. Intraday trading occurs to cover for potential incidents between the closing of the day-ahead market and its delivery on the following day. In the intraday market, buyers and sellers can trade at close to real-time with trading taking place up to one hour before delivery while prices are set based on a first-come, first-served principle.
The intraday trading market is growing in importance due to the intermittency of demand, which the increased share of renewable energy provides. This leads to an imbalance between the day-ahead contracts and produced volume which need to be offset and the intraday trading markets represent a good opportunity to do so.
Year ahead trading
Year ahead trading focuses on a longer-term approach which allows for the purchase of energy up to a year in advance. This approach is best suited to buyers that can accurately predict potential events, such as weather events or political events which are likely to alter the price of energy within the next year.
Minute-to-minute trading is an approach which allows for the real-time trading of energy. Much like intraday trading, this approach is growing in importance as it closely matches with the needs of the transitioning energy landscape. It allows for traders to take into consideration the potential fluctuations in energy prices caused by issues such as intermittent sources.
Energy arbitrage is a tool which the National Grid uses to balance the electricity supply and demand on the network in close to real time, it is the process of providers selling energy for a profit at times of peak demand.
The tool of energy arbitrage is used when the National Grid predicts that there will be a discrepancy between the amount of electricity produced and that which will be in demand during a specific time period. In this instance, the National Grid may accept a bid or offer to either increase or decrease generation.
Due to the increase in energy storage technologies, such as Powerstar VIRTUE, energy arbitrage is also experiencing a rise in popularity. This is because of the capability of energy storage to store energy at off-peak times and then sell back to the grid at times of high demand. Additionally, the greater share of inherently intermittent renewable energy on the network has introduced a more volatile supply network which has heightened the discrepancy between energy produced and predicted demand, which furthers the opportunity and the benefits of participating in energy arbitrage.
The importance of balancing the network to the UK electricity system is almost impossible to overstate. The balancing of the network enables the reliable supply of electricity and for the economy of the UK and the everyday lives of its citizens to continue as normal. Through the energy transition, it is crucial that the balancing of the network also transitions in a way that best suits the changing energy landscape in order to best support the new ways in which energy will be transmitted, distributed and consumed.
Energy storage, especially through leading solutions such as Powerstar VIRTUE, can be vital in balancing the network as they provide users with an asset, they can use to balance the network. This is because energy storage can store excess generation from renewables and then provide this to the grid to balance at a time when necessary while also providing energy resilience through Uninterruptible Power Supply (UPS) when balancing isn’t required.