BSC Insight: Why the Reserve Scarcity Price is being reviewed
National Grid ESO raised BSC Issue Group 92 to review the Reserve Scarcity Price with representatives from across the electricity industry. The need for this arose due to feedback from industry representatives that the Reserve Scarcity Price has had less of an impact on System Prices than expected and a need to ensure the calculation is fit for a future energy market.
The issue group will consist of a series of workgroups facilitated by Elexon. In this Insight article our Analysis and Insight Delivery Lead, Emma Tribe, explains how the Reserve Scarcity Price is calculated, how it is included in the System Price Calculation and how it has affected System Prices since its introduction in 2015.
What is the Reserve Scarcity Price?
BSC Modification P305 ‘Electricity Balancing Significant Code Review Developments’ introduced the Reserve Scarcity Price into the System Price Calculation in 2015.
This BSC change followed Ofgem’s Electricity Balancing Significant Code Review, which recommended the addition of a scarcity element to reflect the real time value of energy reserve.
The Reserve Scarcity Price represents the impact that electricity scarcity might have on the price of energy balancing reserves. Elexon calculate this by multiplying the Loss of Load Probability by the Value of Lost Load.
Value of Lost Load
The Value of Lost Load represents the price to an energy consumer of not being able to access a megawatt hour (MWh) volume of electricity. It is a parameter that is currently set to £6,000/MWh.
Loss of Load Probability
The Loss of Load Probability is a value between zero and one, representing the likelihood that there will be insufficient electricity supply to meet demand. The closer to one the figure, the more likely it is that there will be insufficient demand.
National Grid ESO calculates the Loss of Load Probability for every Settlement Period according to the principles set out the Loss of Load Probability Calculation Statement. Once calculated, the Loss of Load Probability is sent to Elexon in advance of the Settlement Period.
The Loss of Load Probability is reviewed as the Settlement Period approaches. As such, the Loss of Load Probability is published a day ahead, eight hours ahead, four hours ahead, two hours ahead and an hour ahead of the Settlement Period.
The Loss of Load Probability at one hour ahead is used in the calculation of the Reserve Scarcity Price.
How the Reserve Scarcity Price is used in the System Price Calculation
Elexon calculates a System Price for every half hour Settlement Period according to the rules set out in the Balancing and Settlement Code Section T. The System Price is used to calculate the price of the Energy Imbalance Volumes of electricity market participants.
If a market participant has a surplus or deficit of electricity in a Settlement Period, they will either be paid or pay the System Price for that Imbalance. This System Price has become a market signal for electricity market participants to be efficient with their Imbalance Volumes.
The System Price Calculation uses the prices and volumes of electricity balancing actions procured in a Settlement Period to calculate a marginal System Price. For the purposes of calculating a System Price that is representative of the prevailing market conditions, some balancing actions can have their prices revised upwards or downwards.
The Reserve Scarcity Price and Short Term Operating Reserve
The Short Term Operating Reserve (STOR) is an electricity-balancing product that National Grid ESO procures in advance of the Settlement Day for delivery in pre-agreed STOR Availability Windows. National Grid ESO set STOR Availability Windows as times during each day, such as during the afternoon electricity demand peak, where they will likely need to call on reserve.
The utilisation price for activating a volume of STOR is agreed in advance and payments are made for the provider to be available during the STOR Availability Windows. The pre-agreed utilisation price that feeds into the System Price may not be representative of the prevailing market conditions. Therefore, the utilisation price is compared to the Reserve Scarcity Price.
The Reserve Scarcity Price mechanism can revise the price of Short Term Operating Reserve (STOR) balancing actions upwards. If the Reserve Scarcity Price is greater than the utilisation price of a STOR action, the System Price will use the Reserve Scarcity Price instead of the utilisation price when calculating the marginal System Price.
In determining the final System Price, the System Price Calculation will also consider the Net Imbalance Volume and the allocated price of the actions from most expensive to cheapest.
Up until April 2021, National Grid ESO has been able to procure STOR months in advance of the Settlement Day. However, from April 2021 onwards STOR will be procured a day in advance of the Settlement Day. This change is to comply with European balancing guidelines.
Impact of Reserve Scarcity Prices on System Prices
Between 2016 and 2020 there have been 36 Settlement Periods where the Reserve Scarcity Price has repriced actions. Of these 36 Settlement Periods, there have only been nine Settlement Periods where the Reserve Scarcity Price repriced actions have set the System Price. To set the System Price, the Reserve Scarcity Price repriced action must be the most expensive action in the Net Imbalance Volume.
The graph below shows the instances where the Reserve Scarcity Price has impacted System Prices. There is also a table with the System Prices where the Reserve Scarcity Price set the System Price.
Settlement Periods where RSP impacted System Prices
2020 saw the largest number of Settlement Periods repriced with the Reserve Scarcity Price. In total, this happened during 22 Settlement Periods, a new annual record. In six of these 22 Settlement Periods, the Reserve Scarcity Price set the System Price. The highest System Price set by the Reserve Scarcity Price was £2,242/MWh in March 2020. Additional insight into this can be found in our Insight Article.
Prior to 2020, there had only ever been 14 Settlement Periods where the Reserve Scarcity Price repriced actions and three Settlement Periods where the Reserve Scarcity Price set the System Price.
The history of Reserve Scarcity Prices
BSC Modification P305 introduced the Reserve Scarcity Price concept into the System Price Calculation in November 2015. However, initial issues with the De-rated margin and Loss of Load Probability calculation meant that the Reserve Scarcity Price mechanism was suspended until March 2016.
Part of the P305 solution was that BSC Systems would only calculate the Reserve Scarcity Price during STOR Availability Windows. This is because STOR is only utilised during STOR Availability Windows, and the Reserve Scarcity Price was designed to only apply to STOR actions.
Between March 2016 and December 2020 there have been 34,586 Reserve Scarcity Price’s calculated. Of these only 2,780 (8%) have been more than £0.0001/MWh, which is the smallest number we report to, and only 474 (1.4%) have been greater than £1/MWh.
The graph below shows the Reserve Scarcity Prices greater than £0.0001/MWh. The graph breaks the Reserve Scarcity Prices down into price brackets. There is a filter at the side of the graph for selecting a specific year.
Distribution of non-zero Reserve Scarcity Prices
2020 sees increases in Reserve Scarcity Price
The four Reserve Scarcity Prices over £1,000/MWh occurred in 2020, along with 31 of the Reserve Scarcity Prices between £100/MWh and £1000/MWh.
All of the Reserve Scarcity Prices that set the System Price were over £100/MWh, with the lowest priced at £159.70/MWh. The lowest Reserve Scarcity Price to reprice a STOR action was £16.51/MWh.
There have been 198 Settlement Periods with a Reserve Scarcity Price over £10/MWh, which represents 0.57% of Settlement Periods with calculated Reserve Scarcity Prices. This small number of Settlement Periods with a Reserve Scarcity Price over £10/MWh is why there have been so few Reserve Scarcity Prices that have impacted System Prices.
How Reserve Scarcity Price is related to the De-rated Margin
The De-Rated Margin represents the difference between the forecast electricity generation and the forecast electricity demand. The relationship between the De-Rated Margin and the Loss of Load Probability is such that, as the De-Rated Margin decreases, the Loss of Load Probability will increase.
Elexon calculate the Reserve Scarcity Price from the Loss of Load Probability, multiplied by the Value of Lost Load. Both of these elements have changed since they were first implemented in 2015.
A feature of the P305 solution for Reserve Scarcity Prices was a two stage implementation. Ofgem proposed the phased approach to allow market participants time to adapt to the changes.
In the first stage of the implementation, the Value of Lost Load was set at £3,000/MWh and the Loss of Load Probability was calculated by a static function from the De-Rated Margin.
The second stage of the modification was implemented in November 2018, in this stage the Value of Lost Load increased to £6,000/MWh and the Loss of Load Probability was calculated by a dynamic function from the De-Rated Margin.
The graph below shows the De-rated Margin from an hour ahead of the Settlement Period and the Reserve Scarcity Price. Only the data points where the De-rated Margin is less than 3,500MW have been shown, as a De-rated Margin greater than 3,500MW is unlikely to result in a non-zero Reserve Scarcity Price. The data is spilt by implementation stage.
Relationship between De-rated Margin and Reserve Scarcity Price
The average De-rated Margin during a STOR Availability Window is 9,422MW. The De-rated Margin is less than 3,500MW in 4.2% of Settlement Periods during an STOR Availability Window.
In stage one of the Reserve Scarcity Price Calculation, the De-rated Margin needed to be less than 1,300MW to result in a Reserve Scarcity Price that was greater than £100/MWh.
In stage two, De-rated Margins less than 1,800MW resulted in Reserve Scarcity Prices greater than £100/MWh. However, because the Loss of Load Probability function became dynamic in stage two there are also Settlement Periods where De-rated Margins less than 1,800MW did not result in Reserve Scarcity Prices over £100/MWh.
Since the second stage of the implementation there have been more instances of the Reserve Scarcity Price setting the System Price, six Settlement Periods compared to three Settlement Periods. The changes to the calculation implemented in November 2018 have made it more likely that a tighter margin will result in a Reserve Scarcity Price impacting System Prices.
However, the six Settlement Periods in 2020 still represent a very small number of Settlement Periods. There were no Settlement Periods where the Reserve Scarcity Price Set the System Price in 2019, despite the changes, which shows that tighter margins still need to be present for the Reserve Scarcity Price to impact System Prices.
Reserve Scarcity Price Issue Group
Since the Reserve Scarcity Pricing Mechanism was implemented in November 2015, there has been feedback from industry that it hasn’t impacted System Prices as much as expected. This has been part of the justification for re-examining Reserve Scarcity Prices through an Issue Group. Additional justification from National Grid ESO is that:
- The margins in LOLP calculation may appear tighter than reality due to the de-rated margin methodology not taking into account all reserve and response options available to the ESO
- RSP can only apply in STOR windows when STOR is utilised, and to the STOR product
- There is a risk that the RSP signal may provide an inaccurate price signal to the market
There have been changes to the electricity fuel mix, the volume of energy imbalance and the cost to the Electricity System Operator of balancing the system in the past five years.
Further changes to the way the electricity system operates is expected, as Great Britain transitions to a net zero electricity system. As such, the efficiency of the calculation needs to be considered with the future in mind.
If you would like to be involved in the issue group discussions, please email [email protected] with the subject “Issue 92 Workgroup 1” to confirm your interest.