Balancing costs

Our role as the Electricity System Operator (ESO) is to ensure electricity supply meets demand second-by-second, as well as managing the physical constraints of the network. This is what we refer to as ‘balancing’ the grid. 

We need a wide range of tools to be able to balance the grid effectively and economically. The Balancing Mechanism, balancing services, and ESO energy trading are the tools we use to balance the system. Whilst the electricity market in the UK operates on the principle of self-dispatch, to manage imbalances between supply and demand from this self-dispatch, the ESO will re-dispatch to manage the system imbalance and system constraints. 

Balancing costs are those costs associated with (A) the Balancing Mechanism, (B) balancing services, and (C) energy trading.

(A) Due to the complex nature of balancing the grid, there are many different segments that contribute to the overall Balancing Mechanism costs. Balancing Mechanism costs can be comprised of costs associated with the ESO’s actions in the following:

• Energy actions resolve system imbalance by re-dispatching generators to increase or reduce generation to match supply.
• System actions are actions that are associated with the physical parameters of the network or grid constraints. These actions are associated with re-dispatching generators to balance the system’s voltage, inertia, thermal, and frequency parameters on an immediate timescale.

The costs of these actions depend on the submitted bids and offers into the Balancing Mechanism. These bids and offers are submitted by the market participants. The ESO will redispatch BMUs in the most economically efficient way.

(B) Balancing services are those services we procure outside of the Balancing Mechanism to provide specific market and procurement efficiencies. 

(C) We conduct energy trading to balance the system where there is a foreseen energy requirement, ensure the system is secured where constraints are expected, and to minimise costs to meet our balancing requirements. Our trades are typically carried out in the short term close to real time, where we are trading with our counterparties within day and intraday. The ultimate goal of our trades is to minimise the overall cost of our balancing actions.  

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The last few years have seen considerable increases to balancing costs. The most notable drivers of the rise in costs have been due to costs associated with the procured ancillary services, combined with higher wholesale prices of electricity and higher bids and offer prices submitted in the BM. It's important to note the substantial increases in wholesale prices over the last few years and their knock-on effect in the Balancing Mechanism, and their impact on the marginal generation of electricity. Further, the electricity system is becoming more volatile both on the generation side of balancing (increasing variable sources of electricity) and on the demand side of balancing (greater variability from DER participation and integration). 

While we do not control electricity prices, we undertake many significant endeavours, initiatives, and reforms to equip ourselves and the industry with the right systems, markets. and capabilities to be able to manage an evolving electricity market and system at the optimal cost. For more details on the analysis we have conducted into balancing costs, please see our reports and data below. For more information on our strategy to reduce balancing costs, please see our balancing costs strategy document.  

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Read our balancing costs strategy

Balancing costs have risen significantly over the last few years due to a multitude of factors. We have developed a strategy to minimise these rising costs by leveraging initiatives in: