Insights: Highest System Price in 19 years
The System Price reached £2,242/MWh and £1,708/MWh in the early evening of Wednesday 4 March 2020. This was the first instance of the System Price being over £2,000/MWh since 2001. In this Elexon Insight our Market Advisor, Emma Tribe explains how the System Price was calculated and how it compares to historic System Prices.
System Prices on 4 March 2020
Elexon calculates System Prices every 30 minutes. They are 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.
System Prices give a financial signal to electricity market participants to reduce their Energy Imbalance Volume, or to have Energy Imbalance Volumes that are helpful to the system.
A high System Price will lead to high energy imbalance cashflow for market participants. This cashflow could either be a large charge if the participant had a deficit of energy, or a large pay out if the participant had an excess of energy.
Looking at the graph below, which shows System Prices for 4 March, there is a clear spike at Settlement Period 37 and 38 (18:00 to 19:00). The System Price reached £2,242/MWh in Settlement Period 37 and then £1,708/MWh in Settlement Period 38. For comparison the average System Price in February 2020 was £33/MWh and the maximum System Price was £120/MWh.
Looking at the System Prices earlier in the day, System Prices had remained between £0/MWh and £72/MWh in Settlement Periods 1 to 32. The System Price then increased between £119/MWh and £144/MWh in Settlement Period 33 to 36 before going up to £2,242/MWh.
The difference in Settlement Periods 37 and 38 compared to the rest of the day was the Reserve Scarcity Pricing Mechanism. The Reserve Scarcity Price was able to set the marginal price of energy used in balancing the net energy Imbalance of the Electricity System. Hence, the Reserve Scarcity Price helped set the System Price.
There was also a Buy Price Adjuster of £19.14/MWh that affected the System Price in these two Settlement Periods. The Buy Price Price Adjuster is added to the System Price as a final step in the calculation.
Reserve Scarcity Pricing
Energy scarcity will generally cause the cost of balancing energy to increase as balancing services providers adjust their prices to match the scarcity. However, there are certain balancing services providers that cannot adjust their prices because they have a fixed price agreement with National Grid ESO.
Short Term Operating Reserve contracts fix the price of balancing energy in advance during pre-agreed Short Term Operating Reserve Availability Windows. The Short Term Operating Reserve providers are then paid an availability fee to be available with their contracted prices during these windows.
These fixed Short Term Operating Reserve prices for balancing energy could then have a knock on impact on System Prices. This is because System Prices may not reflect the energy scarcity, and therefore not give the right market signal. The Reserve Scarcity Price was introduced in 2015 to stop this happening.
Getting the Reserve Scarcity Pricing
To get the Reserve Scarcity Price, National Grid ESO calculate forecasts of the De-Rated Margin and Loss of Load Probability for a Settlement Period. Elexon then publish these forecasts on bmreports.com as an information tool for industry. Using the Loss of Load Probability calculated one hour ahead of the Settlement Period, Elexon calculate a Reserve Scarcity Price to be fed into the System Price calculation.
The Reserve Scarcity Price is equal to the Loss of Load Probability multiplied by the Value of Lost Load, currently £6,000/MWh. On the 4 March 2020, during Settlement Period 37, the Loss of Load Probability was 0.3705 (37.05%).This meant that the Reserve Scarcity Price was calculated to be £2,223/MWh.
The Reserve Scarcity Price is then used as part of the System Price calculation. It represents what the price of Short Term Operating Reserve actions would have been if they could have changed their pricing to match the market scarcity.
Reserve Scarcity Price forecast
Below, I have calculated what the Reserve Scarcity Price would have been during the second Short Term Operating Reserve Availability Window of 4 March (dotted lines). This was calculated using the eight hour ahead, four hour ahead and two hour ahead Loss of Load Probability forecasts. The calculated Reserve Scarcity Prices are then compared to the Reserve Scarcity Price that was used in the System Price Calculation, which uses the one hour ahead forecast.
All of the forecasts are less than the final Reserve Scarcity Prices during Settlement Periods 37 and 38. Although the two hour ahead forecast is very close to the final Reserve Scarcity Prices.
The four and eight hour ahead Reserve Scarcity Prices are around a quarter of the magnitude of the final Reserve Scarcity Price. However, they are large enough to indicate to the market well in advance that there might be energy scarcity.
Reserve Scarcity Price and forecasts: Settlement Periods 34 and 41, 4 March
The Loss of Load Probability and De-Rated Margin forecasts are a signal to the market to make more energy available, and for market participants to have efficient Energy Imbalance Volumes. In this instance, the forecast showed greater energy scarcity the closer in time to the Settlement Period. It is difficult to investigate the impact the forecasts had on participants Imbalance Volumes given there are lots of factors involved in influencing Imbalance Volumes.
Comparison to historic System Prices
There have only been nine other System Prices higher than £1,000/MWh between 2002 and 4 March 2020. All of these high Prices were in November 2016 and May 2017. The November 2016 high prices were caused by French Nuclear outages affecting energy prices in Europe. The May 2017 high prices were due to low wind and solar generation.
I have compared 4 March System Prices to very high System Prices after 2001 in the graph below.
System Prices during 2001 have not been considered in this comparison as this was the first year of the New Electricity Trading Arrangements that introduced the System Price in England and Wales. There were some incorrect market signals created during 2001 with the System Price that were corrected for by modifications to the System Price calculation.
System prices over £1,000/MWh since 2002
None of the prices over £1,000/MWh in November 2016 or May 2017 were set by the Reserve Scarcity Pricing mechanism. Instead, they were a result of National Grid ESO needing to take high priced balancing actions.
Comparison to historic periods of scarcity
Since its introduction, this mechanism has only occasionally affected prices, mostly because there hasn’t been enough periods of energy scarcity in the market to cause market signals. The graph below shows all of the instances where the Reserve Scarcity Price has set the System Price.
There were only three Settlement Periods where this had happened before 4 March, these were in October 2016 and May 2017. Both of these periods coincided with the market conditions that led to the prices over £1,000/MWh described above.
The previous highest System Price set by Reserve Scarcity Price was £843/MWh on 9 October 2016.
Reserve Scarcity Price setting the System Price
In November 2018, the Reserve Scarcity Price calculation changed. The Value of Lost Load was set to £6,000/MWh where it had previously been £3,000/MWh. The method for calculating the Loss of Load Probability was also changed from a static function to a dynamic function.
Hence, 4 March was also the first time a Reserve Scarcity Price calculated with the new calculation set the System Price.
Find out more background information and context regarding some of the terms mentioned in this article.
Reserve Scarcity Pricing Mechanism
The Reserve Scarcity Pricing Mechanism was introduced as part of Electricity Balancing Significant Code Review Modification P305 implemented in 2015. This Mod also details post implementation reviews conducted after it went live.
System Price Analysis Report
Elexon monitor the System Price calculation and produce a monthly System Price Analysis Report full of information on the elements of the System Price calculation over a given month.
Balancing Mechanism Reporting Service
Elexon publish data on System Prices and the Balancing Mechanism, as well as forecasts and REMIT information on the Balancing Mechanism Reporting Service.
Historic System Prices
Historic System Prices dating back to 2001 are published on the Elexon Portal in Best View Prices.