BSC Insight: Unprecedented Price Spikes in 2021
In 2021, we have seen the highest System Prices since 2001, which was the first year of the New Electricity Trading Arrangement. The highest price this year was £4,000/MWh on 8 January in Settlement Periods 39 and 40. On 12 April 2021, the System Price was over £1,000/MWh for five consecutive Settlement Periods. In this BSC Insight, one of our Product Analysts, Angus Fairbairn, looks into how and why these high prices occur.
What is the System Price?
Elexon calculates System Prices every 30 minutes. The System Price is used by Elexon to settle Energy Imbalance Volumes for electricity market participants. System Prices reflect the marginal price of energy used by National Grid ESO to balance the net energy Imbalance of the Electricity System.
The System Price is multiplied by BSC Parties’ Energy Imbalance Volumes to provide an Energy Imbalance Charge. A high System Price will cause increased Energy Imbalance cashflow. Therefore, a high System Price gives a financial signal to industry to lower their Energy Imbalance Volumes.
The System Price is calculated from the price and volume of balancing actions taken during a Settlement Period. These actions are subject to a fourteen-stage calculation process.
Frequency of high System Prices
BSC Modification P305, implemented on 5 November 2015, introduced a single marginal System Price. The System Price is applied to BSC Parties’ Imbalance Volumes to produce their Imbalance Charge for every half hour Settlement Period.
Since 5 November 2015, there have been 74 (0.03%) System Prices over £500/MWh with the highest yearly number of prices exceeding £500/MWh being 31 in 2016. During 2021 up to and including the 12 April 2021, there have been 24 System Prices, with at least three Settlement Periods every month, exceeding £500/MWh. Six of the high prices in 2021 occurred on 12 April where the System Price exceeded £500/MWh for three hours from Settlement Period 38 to 43.
How System Prices are calculated
The System Price is calculated from balancing actions taken within a Settlement Period. Balancing actions are accepted to increase generation or reduce demand on the system (Offers) or to reduce generation or increase demand (Bids). When more Offer volumes are accepted by National Grid ESO to keep the system balanced, the Settlement Period is considered short. All Settlement Periods with a price spike over £500/MWh were short.
Causes of System Price spikes
Settlement Periods seeing price spikes in 2021 have had a higher contribution of balancing volume from Gas BM Units. During the 24 Settlement Periods 91% of Offer volume and 63% of Bid volume came from Gas BM Units. Across all Settlement Periods in 2020, 78% of Offer volume and 37% of Bid volume came from Gas BM Units.
As the price spikes have occurred in short Settlement Periods, the System Price is derived from the prices of Offers rather than Bids. The graph below displays the average price of accepted Offers with the Offer volume during the 24 Settlement Periods in 2021 when the System Price was over £500/MWh. You can filter this graph by fuel type on the right hand side.
The most expensive Offer prices were seen on 8 January in Settlement Period 35 where the average Offer price was £3,167/MWh. More recently, on 12 April in Settlement Period 35 the average Offer price was £2,400/MWh. During these two Settlement Periods all Offer volume was generated by Gas BM Units. Gas BM Units were the driver of the high Offer prices seen in all Settlement Periods with a System Price over £500/MWh and they were the only fuel type to have an Offer accepted with a price over £1,000/MWh.
Seasonality of high System Prices
If the rate of price spikes seen up to 12 April continue for the rest of the year, there could be more than 80 Settlement Periods with a System Price exceeding £500/MWh in 2021. However, looking at System Prices for previous years, there is some seasonality as to when the high prices occur. Between 2016 and 2020, 62% of System Prices over £500/MWh occurred in autumn, 26% in spring, 12% in winter and 0% in summer. Due to this seasonality, the rate of price spikes is likely to change throughout the year.
The De-Rated Margin and System Prices
The average De-Rated Margin in 2021 up to 12 April was 2020 was 13,588MW, just slightly less than the 2020 figure of 13,862MW. During the 24 Settlement Periods when System Prices were over £500/MWh the average De-Rated Margin was 2,758MW. The lowest De-Rated Margin during a Settlement Period with a System Price over £500/MWh was 718MW on 1 February 2021; the third lowest De-Rated Margin of 2021.
A contributor to low De-Rated Margins during periods with System Price spikes is lower than average Wind generation. During the 24 price spikes in 2021, Wind generation contributed an average of 1.1GWh, in all other 2021 Settlement Periods Wind contributed 3.4GWh.
When the De-Rated Margin is tight, the Transmission System Operator, performed by National Grid ESO in Great Britain, has a smaller pool of available balancing actions to accept. The Transmission System Operator, who will pick the most economical actions to balance the system, may have to accept expensive actions to balance the system which causes high System Prices.
Low De-Rated Margins caused National Grid ESO to issue three Electricity Margin Notices, one per day from 6 January to 8 January 2021.
How price spikes support the economic management of the electricity system
National Grid ESO has a variety of balancing products and tools that it can call upon to manage the electricity system during periods of electricity scarcity. The System Price supports the economical management of the transmission system by providing an economic signal to electricity market participants. A high system price signals a need for additional electricity to be made available, which will receive a higher price for that additional capacity. As the volume of available electricity increases in response to the high price the electricity market will help to balance itself.