Electricity Market
How the Electricity Market Operates
The British Electricity Trading and Transmission Arrangements, commonly referred to as BETTA, came into effect in April 2005. For the first time, a British wide wholesale electricity market was established for Scotland, England and Wales and this ensured there was a uniform system in place for the generation, transmission, distribution and supply of electricity.
The major benefit for Scotland; which produces more electricity than it needs; was that it could now sell its electricity to a much wider market: including continental Europe via the Anglo-French interconnector. This also proved beneficial for the growing number of renewable generators, for similar reasons.
Another significant development that affected the electricity market was the introduction of the Renewables Obligation, which came into effect prior to BETTA, in April 2002. Details of this are provided separately here.
Note:
· “Generators” sell their electricity to “Suppliers” who then sell it to “consumers”.
· It is also possible for “Generators” to be “Suppliers”.
How does BETTA Operate?
The BETTA enables forward bulk electricity trading between generators and suppliers, through bilateral contracts, or trades through a broker, and on one or more power exchanges. In addition, BETTA is also responsible for ensuring demand meets supply; second by second; as well as settling finance imbalances, when surplus or shortfalls occur.
The majority of electricity trading occurs in forward contract markets, with a very small amount being traded and subject to balancing arrangements. To ensure supply and demand is carefully monitored, controlled and balanced, the volume of electricity being traded must be notified to the system operator; the National Grid Company (NGC). However, the NGC is not involved in the actual bidding transactions.
This helps to predict any surplus or shortfall in the actual generation and supply from predicted, and then the generation or supply can be modified accordingly, utilising the Balancing Mechanism. This maintains security of supply, keeping the overall system in balance in real time and it is governed by the Balancing and Settlement Code (BSC), which is managed by a separate company called ELEXON.
Where a deviation from actual generation or supply has occurred from the predicted, the imbalance settlement ensures the correct electricity price is applied to the generators and suppliers.
Overview of BETTA [1]:
Electricity Trading
Electricity trading occurs in half hourly blocks for every day of the year: for each balancing mechanism (BM) unit. All of the market participants; including generators, suppliers, traders and consumers; must notify their expected final position by gate closure, which is no later than one hour prior to the actual half hour period in question. Therefore, the final trading position of each BM unit must be declared by gate closure and the final trading position of a BM unit is known as the final physical notification (FPN).
For example: the gate closure for the half hour block commencing at 09:00 and finishing at 09.30, would be 08:00.
Balancing Mechanism
There is also the opportunity for generators and suppliers to participate in the balancing mechanism. This involves submitting offers or bids to alter the generation or demand one hour prior to delivery, which helps to match supply and demand, thereby balancing the overall system.
This could provide an additional source of revenue. However, after consultation with industry experts, it is unlikely that this in an avenue we could pursue, because the limited capacity of our buffering system would impair our ability to respond to the necessary size of alterations. It would therefore be left to the national grid to balance the load generated by the buffering system and the costs associated with doing this would be absorbed by the imbalance settlement.
Imbalance Settlement
The deviation and any imbalance between generator or suppliers actual physical flow compared to contractual positions; agreed prior to gate closure; must be calculated. The price paid is described in greater detail in the following section and these prices aim to reflect the costs incurred in operating the balancing mechanism, in addition to having to purchase short term energy in the period between gate closure and delivery.
Electricity Pricing
Since the introduction of BETTA, the wholesale price of electricity is now dictated by a more competitive market, and both generation and demand side bidding. The three prices associated with the sale of electricity are:
· The System Sell Price (SSP)
· The System Buy Price (SBP) &
· The Market Index Price (MIP).
The price obtained for a MWh of electricity is dependant on how the actual generation and supply deviates from the predicted generation and supply; as detailed by the final physical notification (FPN) level. If any deviation exists, the generator or supplier will incur a charge for creating an imbalance on the system, as previously described.
The System Sell Price (SSP) will be paid if:
· A generator produces more than the agreed amount of electricity, or
· A supplier has a demand less than the agreed amount.
The System Buy Price (SBP) will be paid if:
· A generator produced less than the agreed amount of electricity, or
· A supplier had a demand more than the agreed amount.
SSP |
SBP |
|
Generator |
Excess |
Deficit |
Supplier |
Deficit |
Excess |
The Market Index Price (MIP) is the weighted average of the System Sell Price and the System Buy Price.
Estimating the Electricity Price
The price of electricity fluctuates considerably for many reasons:
· According to time of day, time of week and seasonal demand,
· Due to the nature of the contract between generator and supplier, and
· As electricity is sold on the open market, it is therefore driven by demand.
This makes the prediction of prices extremely difficult to summarise. To review the pricing calculations used within this project, click here.
Additional Revenue for Electricity
When the generator sells the electricity to the supplier, it is possible for the ROC’s to be sold as well. Where this is the case, the ROC’s add to the price of the electricity, however, if they are not sold alongside the electricity, they can be sold at a later date, for example through e-ROC auctions. For further details on ROC’s, click here.
Electricity Market Diagram – Cash Flows
The diagram below [2] summarises the obligation placed on electricity generators, the flow of electricity sales within the system and how the Renewable Obligation can be fulfilled.
BETTA Disadvantages Renewables
The BETTA favours generators and suppliers who are capable of:
· Guaranteeing specific levels of generation or supply in advance, and
· Guaranteeing agreed flexibility in output/demand at short notice.
This becomes problematic and disadvantageous when you consider that many renewables; in particular wind energy; produce inherently intermittent and difficult to accurately predict levels of energy generation. Therefore, the BETTA currently disadvantages many renewable technologies and will continue to do so, unless an appropriate storage/buffering mechanism can be established, or the arrangements are revised to better support the uptake of renewable generation technologies.
Regulatory Bodies
There is a single government regulator for the UK’s gas and electricity markets, known as OFGEM (the Office of Gas and Electricity Markets). Their main purpose is to protect customers, as well as [3]:
· Help secure the UK’s energy supplies,
· Promote competition in the market,
· Ensure there is adequate investment in networks,
· Regulate the monopoly companies that run the gas and electricity markets &
· Curb climate change and promote sustainable development.
The Impact of the Electricity Market on Case Studies
Having consulted with a trading and sales industry expert, the following assumptions have been made with respect to how the electricity generated in each case study would be traded and sold.
Case Study 1: Off grid, stand-alone system on Stornoway (10MW capacity)
· Generation of 10MW or less is classed as ‘clip’ size and is unlikely to be directly traded on the open market: it would more likely form a part of a larger generation size portfolio. However, as the off grid scenario is stand alone and not grid connected, this will not pose any problems for this particular case study. It was therefore assumed that there is a readily available market and all of the electricity generated that meets the demand can be sold.
· The pricing structure utilised for the stand alone scenario will be taken as the Market Index Price (MIP) for the following reasons. The price of electricity on the island is generally higher than the mainland and the overall system has been sufficiently sized to meet the demand and include spare capacity, utilising a combination of wind power and power from the buffering system.
Case Study 2: Strong grid, grid-connected system in Glasgow (24MW capacity)
· The pricing structure utilised for firm power will be taken as the Market Index Price (MIP). In reality, this would be MIP plus a ‘risk’ or ‘premium’ factor, however, we have no indication of the value of the risk or premium and therefore, for the purpose of this analysis, it has been excluded.
· The BETTA enables bulk trading, years in advance. However, because of the difficult to predict nature of the system and the small generation capacity, it is likely that this system would operate selling firm power one hour prior to gate closure and the national grid would be responsible for balancing the load.
· The pricing structure utilised for wind power will be taken as worse case scenario; the System Sell Price (SSP) due to its unpredictable and intermittent nature.
· The power produced from the wind will be sold as a ‘must take contract’ and therefore it is assumed that all the power will be sold to the grid.
Additional power generation income can also be obtained if the generator partakes in balancing the load as previously explained. However, as the capacity of both scenarios is relatively low, this would be unlikely to happen in practice and this has therefore been excluded from the analysis.
References:
[1] KEMA (2007) Outline description of studied international markets cited in Eric Francisco (2007) Energy Buffering for Large Wind Farms
[2] OFGEM - About us: http://www.ofgem.gov.uk/About%20us/Pages/AboutUsPage.aspx
[3] Renewable Obligation, and Climate Change Levy http://www.nowap.co.uk/page7.html
Bibliography:
· Brian Dunlea, Head of Portfolio Analysis & Strategy, Trading & Sales, British Energy – part of EDF Energy
· Eric Francisco (2007) Energy Buffering for Large Wind Farms
· The ELEXON BETTA Project: http://www.elexon.co.uk/documents/Publications/Fact_Sheets/BETTA_Project.pdf
· The BETTA way forward: http://www.ofgem.gov.uk/Media/FactSheets/Documents1/1105-factsheet0702_15april.pdf
· Electricity Supply in the UK: http://www2.env.uea.ac.uk/gmmc/energy/energy_links/electricity_supply.htm
· Changes to electricity generation, distribution and supply licences under BETTA:
http://www.ofgem.gov.uk/Networks/Trans/Betta/Publications/Documents1/1615-04betta_jan31.pdf· BETTA User Guide:
http://www.ofgem.gov.uk/Networks/Trans/Betta/Publications/Documents1/9549-2605.pdf· Market Index Definition Statement:
http://www.elexon.co.uk/documents/BSC_and_Related_Documents/BSC_and_Related_Documents_-_Market_Index_Definitio/MIDS_v5.0.pdf
