What is the Balancing Mechanism?
The inability to store energy in large amounts coupled with discrepancies in energy production and consumption means the National Grid constantly faces periods of under-utilisation or over-capacity. To maintain these systems and address any fluctuations, the National Grid Electricity System Operator (ESO) relies on balancing mechanisms (BM). Described by the National Grid ESO as Great Britain’s ‘core flexibility market’, BM is the primary tool of the System Operator to manage the supply (generation) and demand (consumption) of electricity close to real-time. The BM (together with other non-BM ancillary services) helps avoid unexpected disruptions to the energy supply.
Through the BM, the ESO procures balancing services from energy generators which offer flexibility in energy generation through the balancing market. This act of ‘balancing’ enables the ESO to increase or decrease generation/consumption based on demand and supply needs.
The BM is open to registered participants whose assets can offer the flexible capacity to support the balancing needs of the grid. These include storage assets such as batteries and generation assets such as power stations.
How does it work?
There are two time periods through which the BM trading activities occur: the settlement period and gate closure. During the former, suppliers and generators can trade up to one hour before each half-hour delivery period - after which the market closes or reaches ‘gate closure’. Gate closure marks a shift from planning and trading activities to balancing the market.
The balancing market functions through the ESOs “auction market” where market participants submit Bids and Offers (i.e., price per MWh) - notifying the ESO of their ability to either increase or decrease power supply. The ESO further requires Dynamic Data from each generator on the capabilities of their BM Units (BMUs) - where a BMU refers to a collection of apparatus. Furthermore, any energy generated or consumed by the contents of a BMU is accredited to that BMU.
The submitted information notifies the GB’s market operator, Elexon, of each participant’s position and ability to either increase generator or reduce consumption and done in parallel with trading activities. After gate closure, the ESO uses BM to ensure system balance until real-time. At this point, the ESO sends out instructions (i.e. requests by the National Grid for increased or decreased energy generation/consumption) to balance out any existing discrepancies based on the system needs. Upon accepting the instructions from the ESO, it is pertinent that generators ensure their BM units produce the specified level output required to balance the system as failure to do so can result in system irregularities.
Why is it important?
Beyond BM, the ESO is able to employ Non-BM ancillary tools to manage the demand and supply of electricity. This is done through Short Term Operating Reserve services and Frequency Response Services. However, the BM is the most effective tool for balancing demand and supply close to real-time. The BM also plays an important role in supporting the integration of renewables into the grid and in managing unpredictable generation schedules.
As the proportion of energy generated from renewables such as wind and solar increases, so will the need for responsive flexible options to support the transition and ensure the stability of the grid. In 2021, the costs of the balancing mechanisms month-on-month rose above GBP 300 million. These high costs are borne by consumers and have led the ESO to look into methods to reduce costs and widen access to smaller-scale flexibility providers.
There have been efforts by the ESO to understand the barriers to entry for small-scale flexibility providers and to support their participation as a study conducted revealed that these players will support efforts to reach zero carbon system operation. Thus, widening opportunities for asset owners - both small and large.
Outlook
For asset owners, participating in BM enables them to access newer revenue streams while supporting the UK’s net-zero transition. Similarly, the BM offers significant opportunities not only for Grid operators but also for operators of battery storage providers who store excess energy provided by renewable resources to be used later.
Nevertheless, it should be noted that participating in the BM offers no assurance of asset utilisation. As such, it is important that asset owners looking to participate in the BM fully explore factors such as their flexibility, bids (i.e. price), asset utilisation, the opportunity cost of participation and the number of instructions their assets can perform among other things.
