New single system pricing mechanism brings considerable challenges for electricity generators

A new electricity market pricing system will now place even more responsibility on generators to improve the management of their supply imbalances or face much higher pricing penalties.

Energy data analysts EnAppSys says that the impact of the new Single System price mechanism that came into effect this week on Thursday 5th November will raise the stakes considerably for those generators that fail to produce what they forecast – and also for those who fail to manage the balance between supply and demand.

In Britain, large power producers have to finalise their generation profile one hour ahead of time and cannot then deviate from this. This means that if a power supplier has a problem within this hour period, it cannot generate at another station or else buy power from the market to bring itself into balance.

Within this hour period, and for the following half hour, National Grid manages supply and demand on a real time basis through the balancing mechanism. This involves payments made to and from generators and large demand sites to increase and decrease their supply and demand. In each period this process is both buying and selling electricity with the net volume position determined by whether the system is undersupplied or over supplied.

Under this system those parties that are out of balance but help the system are kept whole (i.e. they don’t make or lose any money compared to market price) and those that are out of balance the ‘wrong way’ suffer a loss. The system previously utilised dual pricing with a price paid by those that undersupplied and a different price for those that oversupplied.

This previous mechanism that calculated the prices that apply had been determined by Ofgem to not provide enough incentive to generators and suppliers to balance their position and under modification P305 the mechanism has been changed and has gone live.

Under the new system there will only be one price for imbalance and the price will be based on an average of the highest priced net 50MWh of energy volume buys and sells made by the system operator (National Grid) against the current mechanism that uses the average price for the last 500MWh of balancing trades.

The new system also incorporates a default ‘penalty’ price of up to £3,000/MWh (50x market price) to apply at times when significant system actions have to be taken to ‘keep the lights on’ with this price rising after 2018 when the first capacity market delivery year commences.

The result will be much higher volatility in prices, with those on the wrong side of the supply equation potentially being penalised much higher than previously and those on the right side of any imbalance receiving payments potentially well in excess of the normal market prices.

The expected outcome of the changes will be a greater emphasis on accurate forecasting output of intermittent generation, better forecasting of demand and ensuring the reliability of generation.

Paul Verrill, director of EnAppSys says: “All of this comes at a time of traditionally high prices and tight supply margins which will increase the pressure on power companies to get their forecasting right.

“In the early days of the new system, we expect power companies will be doing all they can not to be on the wrong end of the new prices, but this will be a risky period and the costs of getting it wrong could be considerable.

“Introducing this change in November, at the start of the Winter season, is certain to make electricity industry market credit and risk managers very nervous

“To add further impact the introduction of the new system also changes the format of published system data. As these changes have only recently been finalised, there has been a rush in the industry to modify systems to not only be ready for single system pricing but also to ensure their existing back office and front office systems continue to function”.

Single system pricing is already used elsewhere in Europe and places much greater emphasis on companies being able to balance their own position, rather than having their national network operator do it.

However the continental market has a number of significant differences to the UK market and there is a large degree of unknown as to how things will play out in our markets.

Paul Verrill says: “Single system pricing introduces a new variable into a market that is already seeing lots of uncertainty. The potential exists for companies to get things very wrong and put their business models in jeopardy.

“We therefore expect a very conservative approach in the market initially, but with the existing complexities of the GB market, working with the new mechanism will undoubtedly be very challenging.

“Nevertheless, in the longer term we believe this will be a positive move, helping to deliver increased value for those demand sites and generators that can offer flexibility in the GB electricity market to balance its supply and demand issues without the System Operators intervention, and should also allow greater renewable generation going forward”.

As part of its electricity market data analysis services, EnAppSys has been preparing for the introduction of Single System Pricing by modifying their systems to accommodate the data format changes and developing a number of live tools that seek to predict price movements and potential imbalances which went live at the start of the new pricing mechanism.

This work has enabled its customers to have a seamless transition to the new data flows and provide new tools designed to help electricity market companies better manage their position and also identify any opportunities the change may bring.

Paul Verrill, director of EnAppSys