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Imbalance Price Calculation

This is an outline of the key stages in the imbalance or cashout calculation.

Why does cashout exist?

Every electricity market needs some mechanism to price the mismatches between traded and delivered energy. We call these differences imbalance. Surplus volume receive the imbalance or cashout price. Participants with a shortfall pay the imbalance or cashout price.

The GB market uses a single price for both long (surplus) and short (deficit) participants.

The system is balanced through the Balancing Mechanism by offers (to increase generation / reduce demand by selling it to the system) and bids (to decrease generation / increase demand) by buying it from the system. The bids and offers can be accepted by NESO, the system operator.

Concepts

Marginal Cost

The imbalance price calculations use a marginal cost principle. Every long or short participant pays the cost of the marginal (the most expensive) energy trades used to balance the system.

The amount of volume used in these calculation is set in the Balancing & Settlement Code by a parameter called PAR. PAR is currently set to 1MWh.

This (and the tagging processes described below) means that the total amount paid by long or short parties in the Balancing Mechanism can be greater than the aggregate cost of balancing the system (which would be the volume-weighted average price of the accepted bids and offers on the system). This money is redistributed to participants through the reallocation process known as RCRC - Residual Cashflow Reallocation Cashflow.

Energy vs System

The system operator can accept bids and offers in the Balancing Mechanism for two reasons:

A common example of System trades are wind bids accepted to manage thermal constraints (limited transmission capacity) which restrict flow from Scotland into England.

Some, but not all System trades (trades made to manage the stability or flow of energy around the system) are removed from the calculations.

The cashout can only be priced from energy trades, but system trades can be included in the trades which go into the calculation (they are repriced to match the most expensive energy trades).

Buy Ranked Sets and Sell Ranked Sets

In the first stage of the calculation, accepted bids and offers are treated independently in Sell and Buy Ranked Sets respectively. Buy and Sell are always used from the system operator's (rather than the market participant's) perspective.

First and Second Stage Flagging

Acceptances are tagged to allow Elexon to resolve which acceptances should and should not be included in the imbalance price calculations, while letting their volume still count towards the Net Imbalance Volume or NIV.

The First Stage deals with SO Flagged and CADL Flagged trades.

The Second Stage ensures the cashout price is set by 'energy' trades. Acceptances which were originally flagged have flags removed if they are cheaper than the marginal energy trades in their Buy or Sell Ranked Sets

Inputs

Balancing Mechanism Acceptances ("Acceptances")

Bid / Offer Acceptances are provided to Elexon by NESO.

Where Acceptances were made for System rather than Energy reasons, they are System Operator or 'SO' Flagged. By default these will be First Stage Flagged.

BSAD

BSAD stands for Balancing System Adjustment Data. It represents a subset of balancing trades which are carried out outside of the balancing mechanism, mostly interconnector trades and pre gate closure balancing trades carried out by NESO to take longer-duration balancing actions ahead of normal BM timescales.

Acceptances in this domain are known as BSAA - Balancing System Adjustment Acceptances.

Calculation

1. CADL Flagging

Short-duration orders (<10 minutes) get flagged in the First Stage Flagging. These are considered to at least potentially be System trades even if they are not explicitly flagged as such.

2. Set Formation

The Buy and Sell Ranked sets are formed, ranked from least expensive balancing action to most expensive.

3. Removal of De-minimis volume

De-minimis volume - removes acceptances with a volume < DMAT

4. Removal of Arbitrage volume

Where the price of an accepted bid is higher than the price of an accepted offer in the same Settlement Period, the overlapping volume creates an arbitrage. The system operator gets paid to turn one unit up and another one down.

These trades are removed from the imbalance price calculation.

What happens to this money? Arbitrage trades reduce balancing costs by reducing BSUoS

5. Classification - from First Stage to Second Stage Flagged

Classification is the process of deciding whether to keep First Stage flagged acceptances flagged in the calculation at the Second Stage. The Buy and Sell Ranked sets are classified independently.

First Stage Flagged acceptances are retain their flags (become Second Stage Flagged) if they are more expensive than the most expensive First Stage Unflagged acceptance in the Buy or Sell Ranked Set.

First Stage Flagged acceptances which are cheaper than the most expensive unflagged acceptance are unflagged at the second stage (become Second Stage Unflagged).

6. NIV Tagging

To establish an imbalance price, Elexon wants to find how much energy was needed to balance the system, rather than for system reasons. This amount is known as NIV. Although it represents the energy imbalance, it can contain system acceptances where they are also economic to balance the system.

To arrive at this value, in the Second Stage, the most expensive Buy and Sell Ranked Sets are be netted off from each other.

An equivalent volume in each set will be 'NIV Tagged'. Slightly confusingly, this means that they don't contribute to NIV.

After netting, there is either a Buy or Sell Ranked Set Remaining, the NIV Set.

A positive volume here of accepted offers (residual Buy Ranked Set) produces a positive NIV, indicating the system was short.

A negative volume of accepted bids (residual Sell Ranked Set) produces a negative NIV, indicating the system was long.

7. Replacement Price

Second Stage Flagged acceptances in the NIV Set need to be repriced: the cashout price must be based on energy trades. The replacement price is the price of the most expensive RPAR volume of unflagged acceptances in the NIV set.

At this point, no distinction needs to be made between Second Stage flagged or unflagged and the flagging is no longer considered.

If there is no unflagged volume, the Market Price is used.

8. PAR Tagging

The most expensive PAR MWh in the NIV set after replacement prices have been set is PAR Tagged.

9. Adjustment for Transmission Losses

The PAR set is adjusted for transmission losses, multiplying acceptance volume by each unit's Transmission Loss Multiplier.

The imbalance price is set as the volume-weighted average price for the PAR Tagged acceptances.

BSAAs do not need to be adjusted for transmission losses.

10. Buy & Sell Price Adjustment

A Buy Price Adjustment is used when the system is short.

A Sell Price Adjustment is used when the system is long.

This value is provided by the System Operator.

11. Imbalance Calculation

The imbalance is calculated from the volume weighted average cost of energy in the PAR set, after transmission loss adjustments, plus the Buy (Sell) Price Adjustment.

If NIV is empty or contains less volume than PAR, the Market Index Price (MID) is used for the imbalance price.

Glossary

The following BSC-defined terms are used in the calculations: