Balancing Markets

Balancing markets play a crucial role in the world of electricity, ensuring that our power grids remain stable and reliable. These markets are essential because they help maintain a delicate balance between the supply of electricity and the demand for it. By continuously adjusting the amount of power generated to match the amount consumed in real-time, balancing markets help prevent disruptions in power supply and keep our lights on. In this blog post, we’ll delve into the importance of balancing markets, exploring how they work and why they’re vital for both consumers and the overall health of the power grid.

The Reason for a Balancing Market

Balancing energy markets involve all the rules, agreements, and operations that help keep the power system in balance through electricity market dynamics[1].

The purpose of the balancing market is to rectify any imbalances that occur in real time. It is crucial for maintaining the power system working smoothly and following its rules. The system operator makes sure that electricity production and usage stay balanced all the time.

Balancing occurs after the closure of regular markets (gate closure), where the Transmission System Operator steps in to ensure that supply matches demand almost instantly. This balancing market is the final step in a sequence that includes year-ahead, month-ahead, day-ahead, and intraday markets (see Figure 1). The balancing market in Europe is equivalent to the real-time market in the US [2].

Roles in the Balancing Market

• Balance Responsible Parties (BRPs) are responsible for keeping their positions (sum of the energy volume physically injected or withdrawn from the system and their trades) balanced or helping the system keep the balance. BRPs are financially responsible for the imbalances of their portfolios [1].
• Balancing Service Providers (BSPs) are generators, demand response facilities, and storage operators that can offer balancing services (capacity, energy, or both) to the TSOs [1]. A balancing service provider shall qualify for providing bids for balancing energy or balancing capacity which are activated or procured by the connecting TSO or, in a TSO-BSP model, by the contracting TSO.
• Transmission System Operators (TSOs) shall be responsible for procuring balancing services from BSPs to ensure the safe operation of the power system.
• Interconnector owners [3] are responsible for financing the construction and ongoing maintenance of the interconnector. They may play a role in facilitating electricity trading between the connected markets, scheduling power flows, managing congestion, and collecting fees for using the interconnector.

Figure 1. Balancing market sequence in electricity markets and its participants [4]

Balancing Products

Ensuring the power grid stability involves two main categories: balancing capacity and balancing energy [2]. Balancing capacity is a way to secure backup resources for grid stability while balancing energy is the real-time action of adjusting power flows to maintain balance. These two services work together to ensure a reliable and stable electricity grid.

Balancing energy is divided into four different products [5]:

• Frequency containment reserves (FCR)
• Frequency Restoration Reserves with manual activation (mFRR)
• Frequency restoration reserves with automatic activation (aFRR)
• Replacement Reserves (RR)

Figure 2. Balancing market sequence and products for frequency restoration [1]

Balancing Process

A balancing market consists of three main phases balance planning, balancing service provision, and balance settlement. All balancing processes follow similar functioning principles, as represented in Figure 3.

1. BSPs submit balancing capacity bids to the TSO.
2. Based on the reserves required by the TSO, balancing capacity prices are determined.
3. BSPs receive payment from the TSO for the procured balancing capacity, in other words, for being ready to provide energy when needed.
4. TSOs plan system balance based on BRPs energy schedules (or reserve availability), and BSPs specific product bids until the balancing energy gate closure time.
5. TSOs forward bids to the relevant balancing energy exchange platform together with the available cross-zonal capacities, relevant network constraints and TSO balancing energy needs.
6. The activation optimization function (AOF) receives the input data. It creates a cost curve consisting of the TSO balancing energy demands and all bids' common merit order list (CMOLs).
7. Based on this curve and on all defined technical constraints, it provides the satisfied demands, the selected bids, and the input data for the cross-border marginal prices and the cross-border exchanges (if any).
8. This data helps TSOs request their BSPs to activate balancing energy bids according to the algorithm results.
9. BSPs receive payment for the procured balancing energy.
10. If there is an imbalance in the system, imbalance prices or costs are assigned to BRPs to act and adjust their energy portfolio accordingly to balance things out.

Figure 3. General balancing process diagram [1, 2]

Positive and Negative Imbalances

When a Balance Responsible Party (BRP) doesn’t meet its obligations, two things can happen:

1. BRPs that don’t supply enough electricity must pay a fee called “the short imbalance price” for each MWh of deviation.
2. BRPs that supply more electricity than needed, receive a fee called “the long imbalance price”.

These imbalance prices are based on the costs of keeping the electricity system balanced in real-time. BRPs pay these fees as an incentive to keep their energy supply and demand balanced [2].

• When there’s a negative imbalance, it means less electricity is supplied to the grid than was scheduled. The TSO needs to correct this imbalance by either injecting more energy or reducing the load. To do this, the TSO must find and purchase the needed energy or compensate for the shortfall by curtailing the demand.
• On the other hand, a positive imbalance happens when the TSO receives more electricity than planned or when less electricity is withdrawn than expected. In this case, the TSO must find extra demand or reduce the electricity supply from other sources.

It is important to note that the terms “negative” and “positive” refer to whether energy needs to be injected (negative imbalance) or withdrawn (positive imbalance) to maintain balance in the system. And if there’s both a positive and negative imbalance of the same amount, they cancel each other out [6].

Conclusion

In this blog post, we have explored the important role of balancing markets in maintaining stability and reliability in our power grids. We have discussed the various balancing products available, from frequency containment reserves to replacement reserves, and examined how these products help grid operators manage fluctuations in supply and demand. Additionally, we learned about the balancing process itself, highlighting the key actors involved, including transmission system operators, balancing responsible parties, and ancillary service providers.

Understanding the complexities of balancing markets is crucial for anyone involved in the energy industry, from policymakers to energy traders. By grasping the nuances of these markets, we can better appreciate the challenges and opportunities they present, and work towards building a more resilient and sustainable energy future.

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References

1. Electricity Balancing in Europe, European Network of Transmission System Operator for Electricity (ENTSO-E), November 2018.
2. Reinier A.C. van der Veen, Rudi A. Hakvoort, The electricity balancing market: Exploring the design challenge, Utilities Policy, Volume 43, Part B, 2016, Pages 186–194, ISSN 0957–1787, https://doi.org/10.1016/j.jup.2016.10.008.
3. European Union. (2017). Commission Regulation (EU) 2017/2195 of 23 November 2017 establishing a guideline on electricity balancing. (CELEX: 02017R2195–20210315). https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:02017R2195-20210315. Accessed 2024–03–01.
4. How to capitalize on the opportunity presented by negative pricing in the British Wholesale Electricity Market, Arup, 2020.
5. Cheng Huang, Qian Zhou, Yongyong Jia, Wenjia Chen, Zhaoxia Jing, Yuxia Rong, Dihang Ruan, Research on European cross-region balancing market settlement method under high proportion of renewable energy, Energy Reports, Volume 8, Supplement 4, 2022, Pages 1125–1136, ISSN 2352–4847, https://doi.org/10.1016/j.egyr.2022.02.083.
6. Cretì A, Fontini F. Balancing Markets. In: Economics of Electricity: Markets, Competition and Rules. Cambridge University Press; 2019:136–154, https://doi.org/10.1017/9781316884614.012.