BSC Insights: Why did the average System Price increase in 2021?

In this BSC Insight our Senior Product Analyst, Emma Tribe, shows how the high wholesale gas prices have caused System Prices to increase to record levels in 2021.

The average System Price in 2021 was £113/MWh, which is highest annual average System Price since it was introduced in 2001. This meant that in 2021 market participants have faced very difficult decisions on choosing whether to hedge in the wholesale market or spill and be subject to an unknown System Price and increased Credit Cover requirements.

What are System Prices?

System Prices are used to settle Energy Imbalance Volumes. There is a single System Price calculated per Settlement Period, so there are 48 System Prices for any 24 hour period. The System Price represents the real time cost of balancing the system in a Settlement Period.

The graph below shows the average System Price since 2016, which shows that 2021 was the first year that an annual average System Price was over £100/MWh. The arrows in the top right corner of the graph can be used to show the data by month. In December 2021, the monthly average System Price was the highest  monthly average system price at £221/MWh.

Incidences of System Prices greater than £1000/MWh

Since 2016, there have been System Price spikes where Settlement Periods have had System Prices higher than £1,000/MWh. However, in 2021 there have been 33 Settlement Periods where System Prices have exceeded £1,000/MWh. This means that 2021 had the highest number of extreme System Prices and the highest ever System Price for a Settlement Period. This was £4,000/MWh and occurred in two Settlement Periods in September.

The graph below demonstrates all instances since 2016 where the system price was over £1000/MWh.  

December 2021 had one Settlement Period where the System Price was over £1,000/MWh. January April, September and November 2021 all had more than five Settlement Periods with System Prices greater than £1,000/MWh. However, December 2021 is still the month with the highest average System Price. This is because the System Price in all Settlement Periods had been higher, rather than having a few Settlement Periods with extreme System Prices.

Balancing the electricity system

The System Price calculation uses the price of electricity balancing actions taken by National Grid Electricity System Operator (NGESO) used to balance the electricity system for that Settlement Period. NGESO take energy balancing actions to maintain the balance of the electricity transmission network for every minute of the day up and down Great Britain. If there is a deficit of electricity then actions are taken to increase the energy on the system and if there is a surplus of electricity then actions are taken to reduce the energy on the system.

Balancing actions in the buy stack increase the level of energy on the system. An example of this would be a gas generator increasing their generation output by burning more gas than they had planned to provide additional electricity to the electricity system. NGESO would then pay for the additional delivered electricity volume.

Balancing actions in the sell stack are the opposite; they decrease the level of energy on the system. An example of this would be a gas generator reducing their generation output by burning less gas than they had planned, so that they deliver less electricity to the electricity system. The generator would then pay NGESO for the volume they reduced their output buy. This is a payment to NGESO because the generator has saved money by burning less fuel. In the case of wind generation it is often a negative payment as there is not fuel saving by generating less.

Fuel mix of energy balancing actions in 2021

The graph below shows the buy and sell stack from 2021. During the year, 75% of balancing volume in the buy stack was from gas generation and 43% of balancing volume in the sell stack was from gas generation in 2021.

Gas fuelled power stations are often the most economic plants for NGESO to buy and sell energy from that meet their technical requirements, even with the increase in gas prices. While there are other fuels for providing balancing services, these may have insufficient capacity to meet the full need, may have longer lead times to react or may not be available when required.

Unlike wholesale markets, the energy from the balancing mechanism cannot be bought well in advance of delivery. Although there are tenders to provide specific balancing products when required.

The balancing mechanism, which provides the majority of balancing volume to NGESO is a separate market to the wholesale energy market, where electricity is traded by suppliers, generators and traders. However, the high prices of energy volumes in the wholesale market affect the price of actions in the balancing market and vice versa.

The Balancing Mechanism opens an hour before the start of a Settlement Period. This has made it particularly vulnerable to high gas prices when there is an immediate need for more electricity to balance the system.

How the price of balancing actions changed over 2021

The graphs below show the percentage of accepted buy and sell balancing actions by price band. The label represents the lower bound of the band, so the band labelled 50 represents a price of between £50/MWh and £100/MWh.

There is a fuel type filter so you can see how the price of balancing volume from each fuel type has changed.

In the first quarter of 2021, 91% of buy balancing energy was priced between £50/MWh and £100/MWh. However, in quarter two this price band went down to 62% of buy balancing energy and in quarters three and four the volume of balancing energy able to be bought at this price band was negligible.

The gas price crisis is evident in the in the final quarter of 2021 when cooler temperatures increased the need for domestic gas heating. At least 88% of volume in the buy stack was priced at £200/MWh or higher in quarter four

The percentage of sell stack volume by price band has not changed in the same way as it has for the buy stack. In quarter four there has been a greater percentage of negatively priced sell stack balancing volumes, as well as greater percentage priced higher than £100/MWh. In quarter four, 38% of the sell stack volume was from wind generation and 37% was from gas generation. These two fuel sources are subject to different price drivers. While the gas price crisis has changed the price of sell balancing volumes from some fuels types, it has not had the same effect on the pricing of sell balancing volumes from wind generation.

The global gas price crisis has changed how gas generators price electricity volumes. As gas generation is the predominant supplier of electricity balancing services to NGESO this has affected the System Price. As the price of electricity balancing volumes is used to calculate the System Price.

Where to find more information on System Prices

Elexon continue to monitor System Prices monthly in the System Price Analysis Report which provides detailed analysis on System Prices and the elements of the System Price calculation. Near real time system prices, and the prices of balancing actions behind them is published on the Balancing Mechanism Reporting Service.