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Highlights

Average price down, short system price up

Participants encouraged to go long

Phase 2 of reforms from November

London — Average imbalance electricity prices have fallen in the UK since reforms were introduced in November 2015, but when the system is short the incentive for participants to balance their positions is stronger, energy regulator Ofgem has said in a working paper.

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A greater incentive to balance when the system is tight represents a significant contribution to the UK's security of supply and shows the reforms are working, the regulator said in its Analysis of the first phase of the Electricity Balancing Significant Code Review.

The UK's balancing market is to be tightened again from November 1, increasing the pressure on market participants to exhaust "all efficient opportunities" to balance their positions in advance of "gate closure", the regulator said. Gate closure occurs one hour before the start of the relevant settlement period.

In a comparison of imbalance prices in the two years before and after the November 2015 reforms, prices after the reforms fell within a GBP20-30/MWh range, down from GBP30-40/MWh before the reforms.

When the system is long, the average imbalance price is now GBP27.48/MWh, down from GBP32.90/MWh before.

Negative imbalance prices have also become more pronounced when the market is long, with more periods of lower negative prices.

But when the system is short, the average price has risen to GBP70.67/MWh since the reforms, from GBP60.33/MWh before.

"Sharper imbalance prices, especially at times of tight margins, contribute to increased security of supply as parties have greater incentives to be in balance," Ofgem said.

This rewards parties able to respond to market conditions and should drive the market to invest in flexibility, the regulator said.

Flexible sources include storage, reciprocating engines, open cycle gas turbines and demand side management.

"Market participants are more likely to go long due to the greater risks associated with being short," Ofgem said.

This had led to an overall reduction in net imbalance volumes in all periods, with the system 55 MW longer on average in the post-reform period.

Imbalance volumes as a proportion of credited energy volumes had increased for independent and renewable generators, while they had decreased for interconnectors and integrated suppliers.

Meanwhile the impact of the reforms on market participant cashflows had been between minus 75 pence/MWh and 27 pence/MWh.

"Only renewable generators have seen a dramatic increase due to the high percentage of their credited energy volumes that goes into imbalance rather than forward trades," Ofgem said.

MORE MARGINAL PAR IMMINENT

From November 1 the reforms enter a second phase, with the Price Average Reference Volume (PAR) dropping from 50 MWh to 1 MWh (it had been at 500 MWh before November 2015).

Imbalance prices will then reflect the cost to the system operator of buying the final (most expensive) megawatt hour of energy needed to balance, instead of a weighted average of the final 50 MWh.

Other changes include an increase in the "value of lost load", which is set to double to GBP6,000/MWh in system price calculations, and amendments to the reserve scarcity price.

In scenarios drawn up by National Grid subsidiary Elexon, the second phase of pricing changes continue the improvements seen to date, "though in a less pronounced manner than the first phase," the regulator said.

"We see that the [imbalance price] minimums get lower, the maximums get larger and the standard deviation increases, reflecting the spikier prices caused by the changes," Ofgem said.

In conclusion, Ofgem expected behavioural change over time to lead to stronger incentives to invest in flexible generation, which would support security of supply - but it was still too early "to make any judgements about that at this stage."

UK IMBALANCE PRICES BY SCENARIO

Min Max Average Standard deviation
Pre-phase one reform -£67.02 £1,361.89 £40.99 £29.48
Post-phase one reform -£100 £1,528.72 £41.33 £39.68
Phase two reform -£158 £1,990 £42.15 £44.83
Source: Ofgem, Elexon

--Henry Edwardes-Evans, henry.edwardes-evans@spglobal.com

--Edited by Jeremy Lovell, jeremy.lovell@spglobal.com