Efficiency and the balancing market

Balancing markets are emerging as the favoured mechanism by which market forces can be brought into play to help balance supply and demand. The aim is to provide an incentive for power retailers and generators feeding power to the grid to be as concerned with getting the balance right between electricity supply and consumer demand as system operators have to be. The closer the match, the less waste of resources, and the greater the efficiency of the system. Accurate forecasts of likely generation are a vital first step in that price reduction process.

How a balancing market is regulated determines whether it brings efficiency benefits, or just adds costs to consumer bills. A balancing market that uses financial carots and sticks to make each individual generator or retailer exactly match its projected output with actual power delivery sounds highly efficient in theory. In practice, however, penalising market players individually pushes up their costs unnecessarily, with the undesired effect of hitting the consumer in the pocket.

highly integrated

Today's power systems are highly integrated and have been developed over the years to cope with huge hourly and daily fluctuations in consumer demand. They have also been built to withstand large sudden losses of supply, such as when a power plant trips off line. The failure of an individual market player to supply exactly its projected output is absorbed within all the other fluctuations. A balancing market that penalises that player -- and rewards another player for making up the loss -- makes no sense in terms of overall efficiency. Yet this is what happens on a market which puts players at risk of having to sell surplus power at an uneconomic price on the balancing market, while having to make up a deficit through purchases of electricity only available at a high price.

The bottom line for the system operator is the actual amount of reserve power it needs to buy to keep the system secure. A balancing market which apportions the real costs sustained by the system operator appropriately among market players is exploiting efficiencies to their utmost. The result is steady downward pressure on electricity prices.

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