When the then Department for Business, Energy and Industrial Strategy (BEIS) opened a consultation on market reform in October, it had the Balancing Market in its sights along with the wholesale and ancillary markets. It should have been first on the list – and it should have been addressed years ago. Ofgem’s eye has been off the ball while the Balancing Market has become less and less fit for purpose over its 22 years in operation. As a result, we are all paying the price.
The regulator has not been inactive. But it has missed the point.
For years Ofgem worried about liquidity in energy markets. Between 2014 and 2019 it imposed special licence conditions in its ‘Secure and Promote’ requirement, in an attempt to force liquidity in. They required large companies to market-make, set trading windows and gave help to small market participants. But in 2019 the regulator lifted the licence condition, unable to say whether it had had any effect.
The regulator was right about one thing. Increased liquidity at the prompt market would increase it along the curve. But that should be addressed from the fundamentals: the Balancing Market. Reforming it would give National Grid ESO (NGESO) better flexibility options to manage the system and give the market the transparency it needs to change. The result would be a huge rush of liquidity that would cascade into longer-dated markets and in the end lower costs for consumers.
Lack of transparency in how ‘commercial factors’ are defined
Since 2001 the Balancing Market has been operated as a pseudo financial market. But it is in practice more of a physical market. NGESO asks for the physical parameters of what an asset can do and for commercial parameters. But too often it ignores the commercial parameters and uses ‘other factors’. Assets do not get taken in merit order for a variety of reasons – known to NGESO but less transparent to the market – and more recently the rate that it ‘skips’ what looks like the best commercial option has got worse.
This is not done behind closed doors. People can see it, because they have spent money developing tools so they can monitor what is happening. It is not transparent and the obscurity is made worse because NGESO has struggled to develop the software needed as the Balancing Market grows and a wider variety of assets bid in to meet the need for more flexibility.
A decade ago, the system operator had only to make a few balancing actions per hour. Now the system is completely different; it already requires tens of balancing actions per minute and that will multiply as the number of balancing options – including the demand side – increases. It is a massive job and one that has to be partially automated, but the new software needed is far from ready.
The result? Because the Balancing Market is not a simple commercial auction, players have realised they can make themselves more commercially attractive by adjusting their parameters. For example, an asset can reduce its price offer but say that for physical reasons it has to run for more hours: it looks cheaper, but long-term the asset takes more profit than may be justified.
What the GB power market needs
What should happen? The market should incentivise participants to use the physical parameters of their assets most effectively for consumers. That requires it to be transparent. National Grid should explain whenever it takes non-commercial numbers. Better yet, it should decide whether it is a commercial or non-commercial bidding strategy and it is worth debating whether that would be helped by moving from a ‘pay as bid’ to ‘pay as clear’ market.
Ofgem have missed this. The markets haven’t been as liquid or as efficient as they could be because of poor regulation and inadequate market rules. We need a revision of the Balancing Market. That would bring lots of flexible assets into the prompt market so you get price discovery, liquidity and trading and you can stack ancillary services. It will get very liquid, very fast and it will need ‘best-in-class’ systems. There will be even more need for automation and short-term balancing. But it will solve a lot of problems because physical delivery of power through the balancing mechanism and short-term traded markets affects everything: long-term traded prices, Power Purchase Agreements, Contracts for Difference, the Capacity Market.
Brady can equip you with what you need to succeed right now.
Changes to the Balancing Market that bring liquidity, price discovery and transparency to short-term markets will affect trader behaviour. If you get the short-term wrong, you will get the long-term wrong. But in fact, this is something that a company like Brady Technologies is prepared for. Ofgem and NGESO may have work to do but we are ready: a solution like PowerDesk lets you see everything, and it is available now. We can quickly give traders the tools they need to work in a market that is fit for the future.
BEIS and Ofgem have missed on this. It should be top of the agenda for the new Department for Energy Security and Net Zero.
Managing Director – Energy
Chris leads the strategic direction of Brady’s PowerDesk suite of solutions for European power trading markets, including the development of Brady’s next generation energy algorithmic trading software initiative.
As an energy trader, Chris was present at two market openings before heading up EDF Energy’s Trading and Operations capabilities between 2009 and 2017. As Vice Chair of the Power Trading Committee and Chair of Energy UK’s Wholesale Markets Subcommittee, Chris helped create the current GB energy market today, making changes to the energy trading products, negotiating the mandatory market making rules and making changes to allow customer’s assets to be re-optimised closer to real-time.
In 2017 Chris delivered a distributed trading capability (Powershift) into EDF, allowing customers to access markets alongside EDF’s own fleet of power stations and batteries. EDF’s Powershift is now a leading player in the UK flexibility market, optimising batteries, engines and DSR on behalf of EDF’s customers and is part of the international group’s flexibility offerings.
Chris has a background in Physics and complements this with an MBA from INSEAD.
About Brady Technologies
Brady Technologies enables energy market participants to profit in new ways from the green energy transition, supporting Environmental, Social & Governance (ESG) requirements. We provide software solutions to support above market returns, resilient risk management and scheduling in volatile markets.
Our customers include globally renowned organisations from utilities, independent power producers, renewable asset developers, energy trading firms, oil & gas companies, state power grid operators and commodity trading firms. Whether engaged financial or physical trading, on major exchanges or over-the-counter, we help market participants to realise revenue growth across the trading life cycle.