An introduction to 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.
Rising balancing costs
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.
Our strategy to minimise balancing costs
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:
These are initiatives that we have implemented to improve the design of the GB network and to manage the delivery of changes that optimise availability and reduce constraints.
Costs associated with congested electricity networks make up a large proportion of balancing costs. Network planning and optimisation initiatives therefore have potential to make a significant impact on constraint costs. These initiatives are, and will continue to be, in alignment with industry, government, and public interest.
Some of these major initiatives include our Constraint Management Pathfinder (Intertrip Service), which generates about £200m per year in balancing cost savings, and the analysis and recommendations that we have contributed to the Accelerated Strategic Transmission Investment (ASTI) framework, which is estimated to provide £2.1b in savings beyond 2025.
These are initiatives where we design and procure new services to balance the system, with greater competition at an optimised price.
We are continually evolving and improving the market and service design in GB, and as part of this we have produced several reforms to our ancillary services, such as the Response Reform, which saw the introduction of three new response products, and Reserve Reform, which saw the introduction of three new reserve products. The introduction of these products has produced an estimated £33m in savings before 2025 and more than £165m in savings after 2025. These new response and reserve products also enable the decarbonisation of our network by securing losses on a lower inertia system and enabling new technologies to enter into these markets.
In an evolving energy industry, we want to ensure that we are most effectively using innovative solutions to drive down costs. We engage in many projects that experiment with first in sector approaches and technologies, collaborating with industry and academia.
Some of these include our Innovation D Heat project with SSEN and the engagement and analysis that is produced for the frequency risk and control report, which includes an assessment of the magnitude, duration and likelihood of transient frequency deviations, forecast impact, and the cost of securing the system. This confirms which risks will or will not be secured operationally.
Balancing GB’s electricity system is an incredibly complicated task, with significant and difficult decisions being made from second-to-second. Our control room has fantastic capability in balancing the grid, but we are always looking to optimise our systems and processes to ensure that we are keeping up to date with the high standard that we like to set, and that we are adapting to industry changes.
Our Balancing Programme has many initiatives that will improve the capability and forecasting of our control room even further. There is room for improvement around real-time metering protocols and requirements that would benefit the control room’s visibility over generators in Great Britain.
Balancing costs reduction portfolio
We are constantly trying to strike the right balance with balancing costs. In our efforts to operate an evolving system, we have been undertaking a huge range of initiatives within our balancing costs strategy that are aimed at minimising balancing costs. Please use the link below to view the list of initiatives within our balancing costs reduction portfolio. To find out more about each initiative and what savings they are generating and how, there are links attached to the initiatives where appropriate.
Events and engagement
On 25th July, we held a workshop on balancing costs with key members of the industry. The aim was to provide an open forum for views to be expressed on causes of balancing costs and ways of mitigating high costs in the future. If you would like to know about any future engagements, or have any suggestions, please don't hesitate to get in touch by reaching out to [email protected].
Questions about balancing costs
Balancing costs are a complicated topic and we regularly receive questions about them. Use the link below to see if your questions have already been answered. Contact details are shared at the bottom of the frequently asked questions (FAQ) document if you have a new question.
Balancing costs data and reporting
We publish a suite of data relating to balancing costs, including data on forecast and historic balancing costs, including Balancing System Use of Service (BSUoS) and balancing services charging reports.
The BSUoS charge recovers the cost of day-to-day operation including the cost of balancing the electricity transmission system.
We are regulated by Ofgem and all of our procurement of balancing services are outlined under our Standard License Condition C16. Ofgem assess our performance against their RIIO (Revenue = Incentives + Innovation + Outputs) framework. One of the criteria to which we are measured against is 'value or money' - relating to balancing costs.
Every Wednesday, we hold an open technical industry forum to discuss recent operational actions we have taken in the Electricity National Control Centre (ENCC) and answer any questions. Often the analysis and commentary provided in these forums is purposefully based around Balancing Costs.
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Balancing market review 2022
The ESO Balancing Market Review reports look at trends in the Balancing Markets and key drivers of cost in the balancing mechanism.
It covers the work led by the ESO market monitoring team including a reviews of market activity to support understanding the drivers of balancing costs.
Daily balancing costs archive
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