The Energy Regulation and Markets Review - Stikeman Elliott

United Kingdom
efficiently as possible. The prices that it pays in respect of balancing actions determine
the cash-out charges for shippers that are out of balance.
Electricity trading
Electricity is traded across the national grid between generators, suppliers and trading
entities.
Any entity that has a licence granted under the Electricity Act is required to
become a party to the BSC, however, it is also possible for parties who do not hold a
licence to be party to the BSC. These are non-physical traders (i.e., only trading within
system) such as banks and trading houses. All parties to the BSC each have two energy
accounts: a to-energy account and a from-energy account. The market operator (Elexon
Limited (‘Elexon’)) credits and debits these accounts with traded volumes in each halfhourly
settlement period and with physical flows onto and off the system where parties
are licensed. Energy trades take the form of notifications which are made to Elexon
in respect of each settlement period. Elexon then aggregates all the volumes traded or
flowed or by each party in each settlement period and determines whether or not each
party was in balance or not. If the party is not in balance, it is deemed to buy from the
system if it is short or sell to the system if it is long to cancel the imbalance. The price
at which the deemed purchase is made can be very high and the price of the deemed
sale can be very low, or even negative, which incentivises parties to balance. Most trades
are effected either under the industry standard grid trade master agreement (‘GTMA’)
or under an ISDA master agreement with a GTMA annex. Bespoke power purchase
agreements (PPAs) are also used, particularly for longer-term structured arrangements.
In parallel with the electricity trading activities, NGET is responsible for ensuring
physical balance of the system in real time. Physical participants must submit a final
physical notification (‘FPN’) 20 no later than one hour before the start of each settlement
period (known as gate closure). Trades must also be notified, via notifications, within the
same time frame. Parties may not adjust their position once gate closure has occurred
although they are free to do so up to this point. At gate closure NGET assesses the
overall balance of supply and demand against FPNs and notifications. If it needs to
take balancing actions it will assess the bids and offers made in the balancing market by
physical players and accept the most appropriate. It continues to monitor the market and
take appropriate action to maintain physical balance throughout the settlement period.
After each settlement period each party’s actual position is determined and if there is an
imbalance, cash out occurs as described above.
The balancing market is completely separate from the general trading market.
The balancing market is there to provide a physical balancing tool to NGET. Physical
players are required under the BSC to submit bid offers into the balancing market and
are required to either dispatch 21 or curtail demand if instructed to do so. The operation
of the balancing market is regulated to ensure that any balancing actions are as efficient
20 FPNs are submitted under the Grid Code rather than BSC.
21 There is no concept of ‘central dispatch’. Each party is responsible for self-dispatch.
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