Trading in the electricity market
At a high level, the electricity market in Great Britain allows:
- Customers to choose the supplier of their choice
- Suppliers to buy electricity to meet the demands of their customers from the generator(s) of their choice
- Organisations without a physical demand for electricity, or any means of generating electricity (e.g. Banks), to trade electricity. These are known as Non Physical Traders.
Suppliers, Generators and Non Physical Traders are all referred to as Parties in the BSC.
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Trading and settlement
Electricity is generated, transported, delivered and used continuously in real-time, and supply must always match demand as electricity cannot be stored.
Although the generation, transportation, delivery and usage of electricity is continuous, for the purposes of trading and settlement (determining the amount of electricity used/generated and arranging payment for it) electricity is considered to be generated, transported, delivered and used in half hour chunks called Settlement Periods.
For each half hour, those with demand for electricity and / or those with customers with demand for electricity (e.g. Suppliers) will assess in advance what the demand will be. They’ll then contract with Generator(s) for that volume of electricity.
Contracts can be struck up to the start of the Settlement Period which the contract is for (this cut-off is known as the Submission Deadline and contracts can’t be struck after this time). In the half hour itself, Generators are expected to generate and deliver their contracted volume of electricity and Suppliers are expected to use their contracted volume of electricity.
However, in the half hour (in real-time) some or all of the following can happen:
- Suppliers may have forecasted their electricity requirements incorrectly
- A Generator may be unable to generate the contracted amount
- There may be problems with transporting electricity
This means there’s a requirement for real-time management to ensure that supply matches demand and to address any issues with transportation and delivery. This is the role of the System Operator (National Grid).
Generators with additional capacity (i.e. those that have not contracted for the full volume that they can generate in any half hour) can make that additional volume available to the System Operator and can set the price they wish to receive for that additional volume. Similarly, a Generator can state that it will reduce the volume being generated, and can set a price for reducing their generation.
Suppliers that are flexible enough can offer to reduce their demand to make additional volumes of electricity available to the System Operator and can set the price they wish to receive for that additional volume. Similarly, flexible suppliers can say to the System Operator that they will increase demand for a set price.
Bids and offers
These are called Bids and Offers
- An Offer is a proposal to increase generation or reduce demand
- A Bid is a proposal to reduce generation or increase demand
The System Operator will, in real-time, and as required, match supply and demand in each half hour by accepting Bids or Offers depending on whether they need to increase or reduce electricity generation to meet demand.
Afterwards, metered volumes are collected for the half hour from Generators and Suppliers, and compared against their contracted volumes (which are adjusted for any Bids or Offers accepted). All Parties have their contracted volumes compared to determine whether the volumes they bought and
Where the contracted volumes do not match the metered volumes, the following applies:
- Where a Supplier has used more electricity than they contracted for, they must buy additional electricity from the grid to meet the amount used
- Where a Generator has generated less than they were contracted to, they must buy additional electricity from the grid to meet their contracted levels
- Where a Supplier has contracted for more electricity than they used, the Supplier must sell that additional electricity to the grid
- Where a Generator has generated more electricity than they were contracted for, then they must sell that additional electricity to the grid
Balancing Mechanism (BM) Units are used as units of trade within the Balancing Mechanism. If you want your Bid/Offer Acceptances to be considered, your BM Units are obliged to submit physical information to the Electricity System Operator ahead of Gate Closure.
Each BM Unit accounts for a collection of plant and/or apparatus, and is considered the smallest grouping that can be independently controlled. As a result, most BM Units contain either a generating unit or a collection of consumption meters. Any energy produced or consumed by the contents of a BM Unit is accredited to that BM Unit.
These differences are referred to as imbalances, and settlement is the process of calculating the volumes of imbalance and the price to be paid for these imbalances.
Settlement also works out other related charges and payments.
As more accurate data comes into Settlement we repeat the calculations on four occasions, spaced across 14 months, providing a more accurate picture of Settlement each time.
Imbalances are settled centrally, via a set of systems called the BSC Central Systems which are designed to perform this role.
Imbalance settlement is a closed system for the money paid in and out, i.e.:
- Any surplus cash is redistributed amongst all Parties
- Any deficit is charged proportionally to all Parties
Where any Party does not meet its imbalance charges (i.e. defaults on payment) for whatever reason, all the Parties pick up the cost proportionally. We have collateral requirements in place to reduce the risk that the rest of the industry will be required to pay a Defaulting Party’s settlement liabilities. We estimate imbalance exposure on a continuous basis and translate it to a monetary value.
You are required to lodge collateral as ’Credit Cover’ in excess of this monetary value, so that should you default, the money owed can be recovered from the credit you have lodged rather than from other Parties.
This Credit Cover protects other Parties if you default.
The electricity industry is always evolving and occasionally there are major changes that impact every aspect of how companies interact with the market. Examples of proposed industry-wide changes include the Market-wide Half Hourly Settlement programme, the changes related to the introduction of the Retail Energy Code, and Project TERRE.