ENV-2E02 ENERGY RESOURCES 2005

Handout 2

Sections 5 - 7
 ENV-2E02 EnergyResources 2004 - 05 Section 5

ENERGY FROM WASTE PLANT in JERSEY

Section 5 The Non Fossil Fuel Obligation: Renewables

Obligation

Section 6 Forecasting Electricity Demand

Section 7 Operation of the Pool and NETA

Last update 20th December 2004

5. Non-Fossil Fuel Obligation funding for those which were further from
commercial exploitation. Wind energy had the
5.1 Introduction highest guaranteed price at 11p per kWh compared
to a typical consumer price of 6 – 7 p and a
· At the time of privatisation, the NFFO was
generating cost from fossil fuels of around 3 – 4p
per kWh. This meant that there was a substantial
introduced which placed a levy on all energy subsidy for wind.
generated from fossil fuels. The levy has then been
used to subsidise the non-fossil fuels. The REC's
were expected to purchase a minimum percentage
 Potential generators had to submit applications for
of their electricity from such sources. the subsidy, but not all ultimately received
planning permission, or alternatively the schemes
· The original proposal was seen as solely a subsidy ultimately failed through lack of finance.
for the nuclear industry
…………………………….(but needs  The subsidy was paid until 31 st December 1998 – a
qualification) limit initially placed by the EU
· This was quickly changed to a separate section for
5.2 Summary of NFFO-2
Renewables and Nuclear, and then the Renewables
section was subdivided further by technology type.
 As with NFFO-1 a fixed price was paid to all
generating capacity
· The NFFO-1 (1990) required a minimum
contribution of 102 MW from new "renewables"  NFFO-2 (1991) was further divided the capacity
and in fact the REC's made contracts for 152 MW. by technology type and the outcome was as
However by November 2000 the residual capacity indicated in the table below.
was 144.5 MW.

 The payments under NFFO-2 also expired on 31 st

 A fixed price was paid for renewable energy. The
December 1998
price paid per unit varied significantly with higher

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 ENV-2E02 EnergyResources 2004 - 05 Section 5

Technology Group NFFO-2 Actual Available price per

Requirement Contracts November 2000 kWh
(MW)` (MW) (MW)
WASTE Municipal/ industrial 261.48 271.48 31.5 6.55
Other Waste 28.15 30.15 12.5 5.9
Landfill 48.0 48.45 46.4 5.7
Sewage 26.86 26.86 19.1 5.9
Hydro 10.36 10.86 10.4 6.00
Wind 82.43 84.43 53.8 11.00
Total 457.28 472.23 173.7

Details of NFFO – 2 Order

5.3 NFFO - Order 3 - January 1995

The Projects for NFFO-3 were announced at the end of January 1995 and include
TECHNOLOGY Requirement DNC (MW) Available (Nov: 2000) (MW)
Energy Crops Gasification 19.056
46.5
Energy Crops Residues 103.805
Hydro 14.480 11.7
Landfill 82.071 82.1
Municipal and Industrial Waste 241.765 77.4

Wind - large 146.916 44.7

Wind - small 19.707

Total all schemes 627.800 262.5
electricity. As the time period of the subsidy was

· As expected that many of the above schemes

much greater, the subsidised price came down
significantly. Within any one technology band, there
failed through planning permission etc. were a number of different bids. There was a declared
problems intention of 627.800 MW and the successful ones were
those which required the least subsidy to provide this
· The Department of Trade and Industry took
amount of installed capacity..

steps to "size cap" schemes to avoid the 5.4 NFFO –Orders 4 and 5
dominance in the market of a few large
generators. Thus Eastern Electricity's proposal NFFO orders 4 and 5 were announced in mid 1990s and
for a straw burning plant was rejected from came into effect in 1996 and 1998 respectively. They
inclusion in NFFO-3 as it was too large a were very similar to NFFO-3 and both had a twenty
scheme. year timescale finishing in 2016 and 2018 respectively.

· The DTI also made sure that there was a The bid prices were noticeably lower than for NFFO-3.
sensible spread between the various
With the extended time scale, many schemes from both
Technologies.
orders are still being built and commissioned – see
section 5.6. Indeed some NFFO-3 scheme have only
· Clearance was given from EU for NFFO-3 to recently been commissioned
extend beyond 1998, and it is due to cover
period up to 30th November 2014, 5.5 General Review of NFFO tranches to
NOTE: this excludes NFF0-1 and NFFO-2 date
projects.
The Government planned (1995) to have 1500 MW of
Unlike NFFO -1 and NFFO-2, the price paid for renewable generating capacity installed by 2000.
renewables was not a fixed price. Each potential
supplier had to bid to supply electricity. The bid was But in reality only a little over half of this figure
the price they were prepared to accept for supply of has been achieved.

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 ENV-2E02 EnergyResources 2004 - 05 Section 5

UPDATE: from New Review – February 2003

As at 30th September 2002, 409 projects contracted under NFFO, the Scottish Renewables
Obligation (SRO) and the Northern Ireland (NI) NFFO had been commissioned and were
generating electricity, totalling nearly 1033 MW DNC (declared net capacity). These figures
include those projects formerly contracted under NFFO-1 and 2, whose contracts expired on
31 December 1998. The breakdown is shown in the table:
Order Technology Band No. of Capacity MW
Projects (DNC)
Note the reduction in
NFFO-1 Hydro 21 10.001
output from Wind since
LFG 19 30.776 2002
MIW 4 40.63
Other 4 45.48
SGas 6 5.98
Wind 5 8.138 11.6
Totals 59 141.005 144.5
NFFO-2 Hydro 10 10.457
LFG 26 46.393
MIW 2 31.5
Other 1 12.5
SGas 18 19.059
Wind 23 52.452 53.8
Totals 80 172.361 173.7
NFFO-3 Biomas 2 69.5
Hydro 8 11.738 Increase since
LFG 42 82.071 2002
MIW 6 77.419
Wind Large 10 41.021
Wind Small 11 10.835
Totals 79 292.584 262.5

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 ENV-2E02 EnergyResources 2004 - 05 Section 5

Current Status of NFFO (30th September 2002) – contd

Order Technology Band No. of Capacity MW

Projects (DNC)
NFFO-4 Agricultural Waste 1 1.43
Hydro 8 2.297
LFG 53 139.431
MIW 3 22.48
Wind Large 4 12.97
Wind Small 4 2.755
Totals 73 181.363
NFFO-5 Hydro 3 0.64
LFG 55 110.355
Wind Small 4 3.647
Totals 61 113.657
NI-NFFO- 1 Hydro 8 2.325
Wind 6 12.664
14 14.989
NI-NFFO- 2 Biomass 2 0.304
Hydro 1 0.075
Wind 2 2.567
Totals 5 2.946
SRO-1 Biomass 1 9.8
Hydro 8 7.82
Wind 7 25.13
WTE 2 3.78
Totals 18 46.53
SRO-2 Hydro 2 1.46
Wind 5 31.29
WTE 4 15
Totals 11 47.7
SRO-3 Wave 1 0.2
Wind Large 1 8.29
Wind Small 3 2.47
WTE 2 8.1
Totals 8 19.05
Grand Total: 409 1033.18
Government originally targetted to have 1500 MW available by 2000. At the start of 2001 there
were 331 schemes with a total ouptu of 834 MW

5.6 Recently commissioned projects – November 2002

NOW ON-LINE - from New Review No 54
Schemes that have come on-line since the last update include:

Order Technology Band Site Name MW (DNC)

NFFO-5 Landfill Gas Weldon Phase 1 4.41
NFFO-4 Hydro Afon Tyn y Cornel 0.2
NFFO-4 Landfill gas Edwin Richards 1.78
NFFO-5 Landfill gas Compton Bassett 2
NFFO-5 Landfill gas Lidsey 1.44
NFFO-5 Landfill gas Connon Bridge 0.6
NFFO-4 MIW Huddersfield Incinerator 7.5
NI-NFFO-1 Hydro Silent Valley Hydro 0.44

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 ENV-2E02 EnergyResources 2004 - 05 Section 5

RENEWABLES OBLIGATION If an Obligation were to be in place, the paper discuss

the advantages and disadvantages of placing the
The full paper is accessible on the WEB and linked obligation on
from the Energy Pages on the WEB a) the generators
b) the National Grid Company
In 1999 the Government produced a consultative c) the Distributors (i.e. Eastern Energy)
document designed to ascertain opinion on how d) the Suppliers
renewables might be funded in the future. e) the Consumers

The reasons for this may be summarised as:- The paper considers all of these, but ultimately the
chosen option for the 2000 consultation was option (d)
1) The Government’s declared commitment to reduce – the Suppliers.
CO2 emissions by 12.5% or more by 2010.
Renewables were seen as a way of achieving this. 5.8 RENEWABLES OBLIGATION – 2000
A new Climatic Change Levy (CCL) is being consultation
introduced from April 1st 2001 which will in effect
place a tax on fossil fuel use by industry and New and RENEWABLE ENERGY – Prospects for
business (though not domestic and transport the 21st Century: The Renewables Obligation:
sectors). The levy at 0.43 p per kWh will increase Preliminary Consultation
business and industrial energy prices by 7 – 15%.
This paper draws on responses to the 1999 consultation
2) The proposed New Electricity Trading document. Much of the document is now confirmed
Arrangements (currently scheduled to come into for implementation following Parliamentary Legislation
force on 23rd March 2001 – subject to final in October 2001 with the intention that it should run
confirmation). An aspect of these arrangements is until 2026 with annual revisions of targets etc. There
to favour flexible generators which would thus tend was then a Statutory Consultation Period, and finally
to penalise electricity generated by renewables. the Renewables Obligation came into force on 1 st April
2002..
3) The requirement to continue subsidising renewable
energy – even though in many case the price of the The Renewables Obligation requires that all
established renewable technologies are only a little SUPPLIERS obtain a minimum amount of renewable
more expensive than conventional generation. energy for sale to their customers. The target amount
is set to increase by a proscribed amout each year up to
4) To provide a mechanism for renewable projects 2010 and presumably beyond. In the cost of
which are currently not commercially viable and generating electricity from conventional sources
would not be possible without Capital Grants. averaged between 1.8 and 2.5p per kWh. Further it is
expected that many of the more established renewables
5) The need to differentiate between research on will be able to generate electricity at a price range less
renwables and commercial exploitation than about 3p per kWh..

The consultation paper considered three mechanisms to It is important to note that the Renewables Obligation
promote renewables:- refers to NEW Renewables, so in 2002/2003 much of
the renewable generation was excluded. The total
1) Energy Taxes and emissions trading (see Appendix Renewable generation is around 3% with about 50%
6 of paper) coming from the New Renewables. This means that
2) Using a form of Obligation to stimulate a market unless substantive comissioning of new renewables
for renewable trading takes place in next few months there will be a
3) Direct Grants for renewable energy projects. substantial shortfall in the 3% new reneables shceduled
for the current 12 month period.
Following consultation, option (2) is now favoured as it
was seen that this would provide the best mechanism to The idea behind the obligation is to ensure that
drive down prices of renewable energy sources such renewables are used even if their price exceeds that of
that they would be competitive with conventional conventional generation. However, there is an
sources. Option (3) might provide an initial stimulus, optional buy out set at a proposed 3p per kWh limit.
but is unlikely to be sustained unless the price of This limit was retained despite discussions which
electricity were to rise significantly. suggested a higher "but out" price would ensure a
higher deployment of renewables. The idea behind this
Part of the background for the paper was to ensure that is that if the price of some renewables is too large than
fuel poverty was avoided, and thus prices were to rise suppliers can opt out of their obligation by paying for
as little as possible. It was seen that only option (2) the units at 3p per kWh.
was likely to satisfy the diverse requirements needed
for promoting renewable energy. In the first few years of operation, it is probable that the
statutory limit will be significantly higher than the

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 ENV-2E02 EnergyResources 2004 - 05 Section 5

phsyical amount of renewable generation capacity The "Buy Out" price is significantly above the price for
available, and most companies will have to invoke the conventional generation, so this would mean that the
"Buy Out" Clause. price a supplier would have to pay for any shortfall in
his obligation would be at least:
The scheme will be controlled by the issue of
Renewable Obligation Certificates (ROC's), and these 3p + generation cost + Climatic Change Levy
certificates will have an intrinsic value.
Taking 1.8p as a typical generation cost and the
A supplier may thus satisfy his obligation by one of the Climate Change Levey which applies to all Fossil Fuels
following means. of 0.43p perkWh. This would suggest that the cost to
the supplier would be in excess of 5.2p.
1) Purchasing sufficient RenewableEnergy which will
automatically transfer to that supplier the requisite The "Buy Out" price will be recycled to the
number of ROCs. These are then handed to the In this way the value of ROC's are likely to be
regulator at the end of the year.
.
2) Purchasing ROC's from companies who have a As this is significantly above the price for conventional
surplus of such certificates. [ this is very unlikely generation, thus will automatically provide a subsidy
to occur in the first few years, as there is a for renewable energy.
substantial shortfall in the physical capacity of
renewable generation] It is intended that the 3p will not be decreased in future,
but it is suggested that it should rise by the RPI.
3) Pay the "Buy Out" price for all units of non-
renewable electricity purchased up to the statutory Using this 3p it is anticipated that electricity bills in
limit for the year in question. Initially the "but 2010 will be 3.7% higher than those in 1998.
Out" price will be 3p per kWh..

Summary of incentives for Renewables: Table B from Consultation Document:

Source Needed for Renewables Climatic Capital

10% Obligation Change Levy Grants
Target Exemption Available
Landfill Gas   
Sewage Gas   
Energy from Waste  
Large Hydro > 10 MW 
Small hydro   
On shore Wind   
Offshore Wind    
Agricultural and Forestry   
Residue
Energy Crops    
Wave Power   
Phtovoltaics   

Notes contributions paid by employers. Thus an organisation

with a low energy use but high number of employees
 Large Hydro generation will have to pay Climatic benefitted, while those with a large energy
consumption and low number of employees had to pay
Change Levy
more. Partly because of the exemption of the CCL levy
 Energy from Waste does not qualify under to the University for its CHP generation, UEA
Renewable Obligation as it is already developed benefitted from this change by several tens of thousands
and competitive with conventional generation of pounds per year.
 Offshore Wind and Energy Crops are likely to not
Table D illustrates how the Renewables Obligation will
get started without additional stimulus – hence a
Capital Grant issued to help initial cost. be met. Note that there are two components for
Renewables: those which are classified as being within
The Climatic Cgange Levy came ino force on 1st April the Renewable Obligation; and those which are not (i.e.
large Hydro and Energy from Waste.
2001 and amounts to 0.43p kWh for all electricity
purchased by industry and businesses. This increase in
energy costs was offset by a reduction in the NI
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 ENV-2E02 EnergyResources 2004 - 05 Section 5

It is planned that 10% of electricity will be generated by renewables by 2010 amounting to 38 TWH. This
means that 380.3 – 38 = 342.8 TWh will come from conventional generation. In 1999, the contribution
from conventional sources was 350.8 – 6 = 344.8 and thus a reduction of only 2 TWh in conventional
generation will be achieved. Since a significant amount of nuclear is planned to be closed, by then there will
be an increase in fossil fuel generation, and it is difficult to see how the reduction in CO 2 can even be
stabilised to 1999 levels yet alone reduced further in line with the Kyoto Protocol. Either the Government
must promote renewables more widely than the 10%, or they must curtail demand, or see a replacement of
nuclear generation as older stations are decommissioned.

Table D. Profile of Obligation to 2010 (from Consultative Document)

Estimated Renewable Contribution from Contribution Obligation
Electricity Target for Non-Eligible from Eligible as % of
Demand 10% in 2010 Renewables Renewables Sales
TWh TWh TWh TWh %
1999 350.8 6.0
2000 353.2 5.9
2001 355.7 6.3
2002 358.2 16.1 6.7 9.4 3.1
2003 360.6 18.0 7.0 11.0 3.6
2004 363.1 20.0 7.5 12.5 4.0
2005 365.6 21.9 8.0 13.9 4.5
2006 368.5 25.8 9.0 16.8 5.3
2007 371.4 29.7 10.0 19.7 6.2
2008 374.3 33.7 11.0 22.7 7.1
2009 377.3 35.8 12.0 23.8 7.4
2010 380.3 38.0 13.0 25.0 7.7

Note: NFFO-3,4,and 5 projects will come under Eligible Renewables, and in first year of Obligation (i.e. 2001 –
2002) it is anticipated that much of the obligation will be fulfilled by these projects or ones to come on line shortly.

The above table shows the Government’s projections but their data are incompatible with the objective to
reduce CO2. In 2001 the electricity consumption was higher than the projected figures by 9 TWh.

5.9 Operation of Renewables Obligation extra ROC’s become excessive. The proceeds
from the BUY OUTs paid to OFGEM will be
Renewable Generators can be issued with Renewable recycled to the suppliers in proportion to the actual
Obligation Certificates (ROCs) if they can demonstrate number of certificates held by each supplier. Thus
to OFGEM, that the electricity generated by them falls a supplier with no ROC’s would receive nothing,
with an eligible category of Renewables. These ROCs while those with a large number will receive a
form the basis whereby OFGEM can monitor proportionately high amount. This is seen as a way
compliance of the Obligation by the Suppliers. to encourage suppliers to purchase their full
obligation in the first place and to provide
The Supplier will have to demonstrate that it the necessary capital for new projects in the longer
proportion of eligible renewable electricity is at least term. Since the recycled BUY OUTs are
the proportion shown in Table D. proportional to certificates held, this puts a price
on the certificate which in turn will be used by
They may do this in one of several ways. suppliers the price at which they are prepared to
1. Purchase from generators the exact amount of purchase or sell extra certificates.
renewable electricity verifiable by ROCs to meet
the target. They will have to produce the requisite 5.10 B&B – or Banking and Borrowing
number of certificates to demonstrate this.
Suppliers who have access to more than their
2. Suppliers who have a deficit of ROCs could Obligation in any one year may bank the certificates for
negotiate with others who have a surplus and use in another year. The proposed maximum amount
purchase the required ROCs at an agreed price. that can be banked is suggested at 50% of the required
Since there are several suppliers, this will ensure obligation. A supplier who in one year has negotiated a
competition. contract over and above their obligation in one year
may find this attractive if they can see that in the
3. Suppliers can opt for the BUY OUT option at the following year they might have difficulty in making
proposed level of 3p per kWh, if the price of the

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 ENV-2E02 EnergyResources 2004 - 05 Section 5

contracts – perhaps through late commissioning of earlier stage of development. It is proposed here that a
suitable plant. one off payment of 40% of the eligible costs could be
made for such projects. However, strict guidelines will
It is presumed from the document that those banked apply for the submission of proposals, and furthermore
and not redeemed will not figure in the recycled BUY this aspect will also need to be ratified by the EU before
OUT funds, and thus it will be an added dimension in it can be implemented.
the pricing of ROC sales and purchases – i.e. is the
value of certificates likely to rise or fall in the future. 5.12 Concluding Remarks
As well as banking, suppliers may borrow certificates While the Renewable Obligation should help to
against redemption opportunities in the future. To promote further development of renewables, there are
avoid distortion of the markets and the avoidance of serious issues which are not covered in the report.
using the BUY OUT option for suppliers with a
shortfall, the maximum level of borrowing is proposed The Renewable Obligation refers only to electricity
at 5% of the supplier's obligation target. generation, no support is indicated for other
applications – e.g. solar hot water/space heating.
5.11 Banded Prices and Capital Grants. Equally, the RO is only applicable to grid connected
schemes (presumably because of the monitoring
The Consultation document also considers the idea of aspect). For offshore wind and wave it may make more
banded obligation payments – i.e. each technology environmental sense to generate hydrogen offshore and
would have its own BUY OUT price could distort pump this ashore for local reconversion using a very
development. This would add an additional clean fuel into electricity at the point of use. If this
complication in that each supplier would not only have were done it would tend to promote “A Hydrogen
to demonstrate overall compliance, but compliance in Economy” and set the development for local Fuel Cell
each technology band. This could be counter generation of electricity. This is perhaps a significant
productive for suppliers in different parts of the deficiency in the proposals.
country, and also the differential setting of the BUY
OUT prices may not properly reflect the technical and The first tranche of the Obligation is due to run from 18
other developmental problems within each band. months from October 2001 to March 2003, and
Equally, the Government is keen not to favour one thereafter targets will be revised on an annual basis.
form of renewable electricity over another.
It will not be until March 2003 that the full implications
There are two exceptions to the above: Offshore Wind of the Renewable Obligation can be assessed.
and Energy Crops, both of which are almost certainly
required for the specified targets. These are at a much

Space for additional notes:

23
 6. ELECTRICITY DEMAND

6.1 TYPICAL DAILY PATTERN:-  Minor variations occur:-

e.g. larger morning peak on Mondays, more spread
out evening peak on Fridays.

 Weather affects demand by shifting curve upwards:-

*Dominant factors:-

EXTERNAL TEMPERATURE (approx. 8%

increase in heating demand for every 1 o C drop
in temperature).

INDUSTRIAL DEMAND (these are usually

constant for a given day)

 Other factors:-
WINTER:-
* Wind chill
* Solar gain
- affect consumption by a few percent at most.

 Seasonal factors shift evening peak to late evening as

daylight hours increase.

6.3 THREE LEVELS OF FORECASTING:-

MADE BY NATIONAL GRID COMPANY.

1) LONG TERM:- Strategic planning of requirements of

period of years. In past CEGB used this for
decisions on building of new plant. Since
privatisation situation is somewhat different.
SUMMER:-
2)SHORT TERM:- (about 1 week ahead) on basis of long
range weather forecasts2424 to ensure sufficient
For an up to date indicaion of actual demand – plant is going to available). It can take up to 36
hours or so to bring a power station from cold
consult [Link] which is to generating status
accessible fro the Energy Web Pages. Detail s of
demand as recently 30 minutes ago can be seen. 3)24-HOUR FORECAST:- (previous afternoon) on basis
of latest weather information. This forecas t
indirectly influences which generating plant are
6.2 FORECASTING DEMAND:- likely to be called upon in the coming 24 hours

Except in relatively small quantities. electricity CANNOT On the basis of the above three, a projection is made for
be stored, and generating capacity at any instant must be ch half hour period in the following day. After this, the
closely matched to demand. generating companies (the Big 2 and other smaller ones)
bid to supply electricity during a given period. This
IMPORTANT TO FORECAST DEMAND AS bidding process will be covered in detail later in the
ACCURATELY AS POSSIBLE. course.

SHORT TERM FLUCTUATIONS:- arising from

equipment failures, television adverts etc. (i.e.
FACTORS AFFECTING DEMAND:- periods of seconds to a few hours). These
variations are dealt with by use of pumped
storage schemes, use of GAS TURBINES etc.
 Weekdays have generally similar demand pattern to
Figures on previous sheet. NOTE:- A reserve of about 0.5 - 1.0% is usually provided
by running generators slightly under full load.
 Weekends have a different but generally consistent This gives scope for reasonable response in cases
demand pattern. of emergency (e.g. failure of a 500/660MW
generating set).
 ENV-2E02 EnergyResources 2003 Section
6
If a station is cold it may need up to 2 days to come on
FORECASTS ARE VERY DIFFICULT TO DO FOR line. Even when hot most will need at least 20 minutes to
SPECIAL OCCASIONS e.g. the Royal Weddings, as these come up to full power.
occur rarely, and the demand in the early 1980's would be
different from a similar occasion now.
 Cheapest marginal plant were run first (i.e. nuclear --
SPECIAL SPORTING EVENTS can cause minor does not mean nuclear is cheapest, merely that marginal
problems (e.g. the CUP FINAL going to extra time), but cost is cheapest).
there is generally sufficient recent historical data to make  Then come base-load Coal - most efficient coal.
reasonable predictions possible. Above plant are run continuously for several days
on end as demand is always above output (at least
in short term)
6.4 MEETING DEMAND - former CEGB method
 The cost for running a particular plant will depend on
Electricity cannot be stored except in small quantities so how warm the plant is (i.e. how long since last
power stations are called into use as needed. generation.
 ENV-2E02 EnergyResources 2004 - 05 Section 7

7. The Electricity Pool and the New Electricity of 1 MW (UEA has a load varying from 1.8 MW to 3.9
Trading Arrangement MW).
 From 1st April 1994, the threshold was reduced to 100
kW.
7.1 Introduction
But Only RECs could supply to small consumers
Currently the majority of electricity supplied in England and
Wales is traded in the "Pool". It is anticipated that the  From 5th September 1998 [and phased across country
POOL will be replace by the New Electricity Trading until June 1999], all consumers including domestic ones
Arrangement during 200 (NETA). can now purchase electricity from any of the above
irrespective of locality or indeed from any licensed
In Scotland the system is very different. supplier.
Organisations supplying electricity to the Pool are:-
7.2 The bidding process operated by National Grid
National Power, PowerGen, Eastern group, Mission Company
Energy, Nuclear Electric, BNFL (Magnox), "The
Independents", Industry and EdF. All these are involving in Each day the NGC publish the expected demand for
the "bidding process" electricity for each half hour period during the following
day, and invite bids from all generators who supply more
Scottish Power and Scottish Hydro supply electricity to the than 100MW.
Pool but supply in Scotland generally does not go through
the POOL. This bids must be in by mid afternoon after which NGC
Purchasers of Electricity from the POOL include:- decide who will generate (and hence get paid).

· PowerGen and INNOGY [formerly National

Each generator will bid for each generating set and the bid
will represent the cost for running the plant. These are then
Power] stacked with the lowest bid at the bottom and successively
· Licensed Suppliers higher bids above. The prices which a generator will bid
will also depend on how long it has been since the
· Regional Electricity Companies (e.g. generating set last generated if it is not generating in the
immediately preceding half hour. This is because it takes
MANWEB, SEEBOARD, SWALEC, YEB,
NEB, EMEB, MEB, EMEB, LEB, SWEB, energy to warm the unit up as well as more man-power in
NWEB, Eastern Electricity, Southern the run up period. Consequently the bid for those units is
Electricity). likely to be higher.

Several of these have seen mergers in recent The highest bid which provides a cumulative generation
years – for instance Eat Midlands Electricity is capacity equal to the projected demand is the SYSTEM
now part of PowerGen, and Midlands is part of MARGINAL PRICE (SMP), and all generators who bid
the nPower Innogy group, while NWEB has below this price will be paid at the SMP irrespective of what
amalgamated with North West Water to form their bid was.
United Utilities, and Scottish and Southern
have joined forces. Eastern purchased several An example of stacked bids is shown after the schematic of
power stations from PowerGen and National the POOL
Power a few years ago and are one of the major
generators. Generators A - E had successful bids and would be all paid
£19.31 per MWh.
 From 1st April 1990 any of above suppliers could
Generators F and G were unsuccessful.
supply to any customer with an average load in excess
Fig. 7.1 The Electricity Pool
Fig. 7.2 Example of bids from different generators

Illustration of operation of the Pool: Generators A:E are LOLP is the loss of load probability. In summer this tends
successful but F and G are not. The System Marginal Price to be very small (e.g. 0.00005) or zero as usually there is
is £19.31 per MWh and will be paid for each unit generated plenty of capacity potentially available to deal with changes
by A – E irrespective of the bid they actually made. in demand. In winter it can become important (~0.001)

There is no reason why a generator should not bid £0 – VOLL is the value of the loss load and is determined by
particularly if it wanted to guarantee a unit ran – i.e. it was OFFER and was initially about £2200 per MWh. It is
kept running and warm to make the bid for the next half now somewhat higher
hour less. If all generators did that, then the SMP would
be £0 and they would have to generate their electricity for If for example, the SMP is £19.31, the LOLP is 0.00005,
nothing! and the VOLL is £2200, then

PIP is 19.31 + 0.00005*(2200 - 19.31)

7.3 The Pool input Price (PIP)
= £19.419/MWh
The Pool input price is a combination of the SMP and a
capacity charge. This latter is paid to generators who make If LOLP rises to 0.002,
capacity available irrespective of whether they generate any
electricity or not. This capacity may be required to cope then the PIP will be £23.67 / MWh
with unexpected demands.
The generators get paid the PIP for units that are actually
generating, but can receive payment for
PIP = SMP + LOLP*(VOLL - SMP)
LOLP*(VOLL-SMP)
if they are asked to have a generator on standby to cope with TWO - WAY CONTRACTS
emergencies.
In a two way contract, there is an upper and lower STRIKE
7.4 UPLIFT price. The generator pays the customer the balance if the
POP is greater than the upper strike price.
The Regional Electricity Companies and Licensed Suppliers
purchase electricity at the Pool Output Price (or POP). Similarly the customer compensates the generator if the PIP
is less than the STRIKE price
POP = PIP + Uplift
The reasoning behind such contracts is to make energy
· The Uplift is an additional cost which accounts for the
charges more predictable
fact that it is not always possible to purchase the A full worked example part of which was set as an exam
cheapest electricity because of technical constraints question is shown in the Appendix Section [Link]. As the
(e.g. number of transmission lines). POOL has now ceased operation, this type of numeric
question is no longer relevant now, but is included to
· Some stations will be CONSTRAINED ON illustrate exactly how the process of payments worked.
irrespective of their bid price as they are critical to security
of supply (e.g. Didcot I nearly days). 7.7 Developments to the Pool

· Others are CONSTRAINED OFF because although they 1) From April 1st 1995, the uplift charges should became
the sole responsibility of NGC so that these are
bid below the system marginal price, they are unable to
minimised. In return NGC received payments for
supply because of transmission constraints.
undertaking this liability.

· Constrained Off stations are paid the full SMP even OFFER was concerned that the UPLIFT has been
though they generate no electricity. allowed to drift upwards under the present arrangement,
 Constrained on stations are paid at their bid price and by placing it wholly under NGC this should lead to
more efficient scheduling and despatching within the
7.5 Problems with the Pool industry.

The Pool has worked fairly well since Privatisation, but 2) Following the fiasco of the capacity charges and bid
both PowerGen and National Power have played silly games prices, OFFER has threatened to take both National
with the system. Power and PowerGen to MMC unless they dispose of
4000 and 2000MW of coal fired generating capacity
1) In early days, both large generators deliberately bid respectively to Independents. The disposal was
high on stations they knew were likely to be completed by 31st December 1995 and this capacity
CONSTRAINED ON. This raised the SMP artificially. was purchased b Eastern who then became an important
OFFER stepped in and bids from Constrained On additional player in the POOL.
stations are not included in determining the SMP.
3) In 1998 a major review has took place with numerous
2) Both big generators saw that it was to their financial consultative documents. The POOL was replaced with
advantage to deliberately make plant temporarily the New Electricity Trading Arrangements (NETA). on
unavailable by additional maintenance so that LOLP 27th March 2001. Essentially NETA introduces a
increased. At one time, the capacity charges amounted bidding process into the process – something that was
to over 20% of total PIP. lacking previously.

4) There have been many consequences of NETA, and the

current problems of Bristish Energy, the demise of
7.6 OPERATION OF ELECTRICITY POOL - TXU, the finnancial difficulties of AES, and the
CONTRACTS significant problems now encountered by embedded
generators such as CHP are a direct result of NETA.
Generators and Large Customers can enter into ONE- or
TWO - way contracts to reduce variations of POOL price 5) In the last four years there have been major changes in
which can change considerably over the day and season. the ownership of power stations. Thus National Power
demerged into Innogy and International Power. The
ONE-WAY CONTRACTS pumped storage schemes operated by National Grid
were sold to Mission Edison Power (trading under the
There is a STRIKE price at which the generator will name of First Hydro). Fiddler’s Ferry Power station
compensate the customer if the POP exceeds the STRIKE was sold by PowerGen to Mission Edison, and latterly
price. to AEP. Etc.
7.8 DEREGULATION - · Profile load of all other customers according to one of 8
or more profiling curves to estimate what each customer
This is a fast moving subject - so watch press, and
has used. Compare the total of all profile customer
documents from OFFER.
loads with the cumulative determined above and
compute a correction ratio.
From April 1st 1990
· Attribute consumption to suppliers according to each of
Customers > 1 MW could obtain supplies from second tier its customers multiplied by this ratio.
suppliers · This represents an initial settlement price to supplier
who can now pay the POOL and the distributor.
From April 1st 1994
· After three months when bills are in, the total for each
Customers > 100 kW were included customer is compared with the aggregated adjusted
profile loads for that customer, and any discrepancy is
All customers in above markets have now to have meters compensated either way in the "RECONCILIATION
which can assess consumption in each 30 minutes period PHASE"
separately.
 Metering by the half hour could lead to more effective
From April 1st 1998 energy conservation and is a welcome step in the right
direction. i.e. electricity at certain times of day could
All customers included become much more expensive, and much cheaper at
others. This will encourage people to shift use from
Customers have three components to their bills - a peak leading to less demand for new power stations. It
distribution charge which is paid to local REC or is in place for large consumers, but ultimately it could
distribution company, and a charge for electricity consumed well come to domestic consumers
- paid to the supplier whoever that may be, and a charge for
reading the meters. 7.10 The New Electricity Trading Arrangement (NETA)
- Background
 The charge for distribution is the same whether the
local REC is the supplier or not. There are numerous very lengthy documents on this
 The local supplier is not allowed to reduce prices more accessible on the WEB. One in particular is quite a good
than a certain amount in the early days of Deregulation. and concise summary of how the system will work. This is
This is to encourage other suppliers and RECs from linked from the List of WEB Pages accessible from the
other areas to get a foothold. Thus in most cases, the Energy Home Page.
local REC is one of the most expensive suppliers in its
own local area, but is likely to be one of the cheaper -Overview of New Trading Arrangements V1.0
ones outside its area. Ultimately this restriction on - this is included as an Appendix to this Section
local RECs will be removed.
 Metering is often still done by the local REC even if NETA was introduced on 27th March 2001, with
they are no longer the Supplier. Ultimately it is modification in July 2002.
expected that specialist metering firms will emerge and
read meters on behalf of several different suppliers. The introduction of NETA was a major overhaul in the
way electricity is traded.
7.9 Payment by Suppliers for Electricity
The critical differences with the POOL are
Electricity will ultimately be charged differentially by the
half-hour. 1. NETA will overcome a deficiency that the prices were
set largely by the generators with little input from
Problem:-installation of suitable meters in short term. suppliers.
Financial payments must be made between suppliers 2. The majority of purchases/sales of electricity will be
and distributors and generators on a 28 day basis - done outside NETA provisions between
which is much shorter than normal - month billing generators/traders/distributors/suppliers. That means
period that for a particular period a supplier will contract with
a generator to purchase a projected amount of
solution: use an assumed profile for those customers not electricity based on expected demands. I.e. this is a
on half hourly meters form of FUTURES market.
3. The projections are unlikely to be accurate and there
Each half hour: will be imbalances arising from changes taking place
after the contracts are made e.g.
· determine consumption from customers with half-hour
 Changes in weather
meters, and  Unforeseen changes in customer demand
· subtract that from total consumed in the REC area.  Breakdowns in the system
This is the net load to be profiled  Etc
 information on changing weather and other physical factors
4. NETA is concerned primarily in assessing the (e.g. sudden plant breakdown) becomes available. These
imbalances which occur at a particular time and provide amounts are the quantities of electricity which each part will
a mechanism for charging. For instance the demand be obliged to supply or generate for the given period.
imposed by customers on the suppliers may increase or Financial Transactions will take place just between the
decrease above the contract position. The suppliers parties concerned.
will then be charged for the imbalance whether it is
positive or negative. Clearly, it is in their interest to Both the IPN and FPN may be at a constant level, but in
minimise these imbalance payments and thus they need many cases, particularly for demand side BM units, the
to predict as accurately as possible what the demand project demand might vary over the half hour period. Thus
from their customers will be. BM units may define a single IPN/FPN for the whole half
hour period, or on a minute by minute basis. Thus from
5. The role of the National Grid Control will be largely to 08:30 to 09:30, the demand on many demand BM untis will
deal with the imbalances as they arise and ensure that increase quite rapidly as work starts for the day, and
the system remains secure and there is collectively over recognition of this can be included in the Physical
the whole system sufficient electricity available. Notifications.

6. NETA will tend to favour those generators which are No change in the contract position is possible after GATE
flexible in the amount they can output, equally if CLOSURE irrespective of changes which may occur. At
suppliers have customers who can load shed, then these that point any trade enters the Balancing Mechanism Period
will be at an advantage. The Magnox Nuclear stations and it is here that NETA fully comes into force. It is
are unlikely to be that flexible and may be at a concerned about charging for electricity generated or no
disadvantage compared to their present position under generated which is above / below the contract position.
NETA. Equally, CHP and Renewable generators are Equally, the difference in the supply above/below the
likely to be at a disadvantage, particularly Wind contract position.
generators as their supply is unpredictable. It is partly
for this reason that the Renewable Obligation is also Since the contract position is the basis for charging, it is for
being introduced – although not until 6 months after the this reason that the amounts contracted are notified in the
introduction of NETA. Physical Notifications. One reason for the two different
Physical Notifications is to allow the National Grid
7. The main basis of NETA is the Balancing Mechanism Company (NGC) responsible for security to check that the
(BM) unit. For a generator a BM unit will normally be contract provide a secure system. Thus if all the contracted
a physical generating set or a collection of smaller sets generators were in the north and the majority of the supply
(many power station have several sets). For a supplier was in the south, then there would be system constraints
the BM unit is likely to be a single large consumer or a which would affect the secure operation. In this way the
collection of consumers. A typical size for a BM Unit NGC can call on generators specifically for security
(either generator or supplier) is about 50 MW or about operation and/or provide cover for emergencies. Such
0.1% of peak demand. generators (or even load shedding suppliers) will be paid for
these services, but these represent an additional
7.11 An brief Overview of NETA – Physical complication of NETA which will not be covered in this
Notifications course.

Most electricity trades will be direct contracts between

generators and suppliers, although there may also be 7.11 NETA OVERVIEW:
Electricity Traders operating to broker deals between the Balancing Mechanism
generators and suppliers.
As electricity demand is transient there will always be
Each supplier and generator will have to project their supply discrepancies between the projects made by Gate Closure
or demand requirements in advance for each 30 minute and the aual electricity generated or supplied at the real
period of each day. These must be done in two stages. time. The Balancing Mechanism provides a means whereby
the NGC can ensure sufficient supply and demand.
1. An Initial Physical Notification (IPN) of the electricity
to be traded by 11:00 am on the day preceding the day All BM Units (whether generators or suppliers) may in
in which the half hour period occurs. addition to their statutory requirement to notify their
2. contracted supply/demand make an OFFER or BID to
3. A Final Physical Notification (FPN) which is made by change their contractual position after GATE CLOSURE.
3.5 hours prior to the real time. For instance if the half For a generating BM unit and OFFER would imply and
hour period is 17:00 – 17:30, then FPN must be made offer to INCREASE generation, whereas from a supplying
by 13:30. The time of 13:30 is known as GATE BM unit, and OFFER would represent an offer to REDUCE
CLOSURE. demand (probably through Load Shedding) - see Fig 7.3.
Though the projected demand is specified on each half hour
Obviously between IPN and FPN, adjustments are likely to period, it is quite probable that the forecast demand might
be made on the contracted supply as more refined change during that period as is also shown.
 supply BM unit thus reflects the discount the supplier has to
A BID will be to reduce the output of a BM generating unit pay to the Load Shedding Consumer.
or increase the demand of a supplying unit.
NOTE: An OFFER (whether from a generating BM Unit
The purpose of these OFFERS and BIDS is to permit or a Supplying BM unit) will always increase the (final
flexibility to cope with the actual demand at the real time Physical Notification Level) FPN level. In the case of the
rather than the projected generation and demand as given at supply, this in effect means reducing the demand (or
GATE CLOSURE. making the demand less –ve). It is for this reason that
the two types of BM unit have opposite signs. Conversely
a BID will reduce the FPN level for both generation and

FPN

Fig. 7.3a The FPN is shown to increase and then remain

steady. The diagram shows that generators can OFFER to
increase their output (at an OFFER Price). Equally, they supply.
may BID to lower their output. Note that OFFERS for
generators increase output, BIDS decrease output. Also that In many cases, a BM unit may have differential OFFER
the increase is +ve and / or BID prices depending on how much the FPN is to
Fig. 7.3b Showing a varying FPN during a 30 minute be raised. Thus to raise the FPN by say 50 MWh over the
period. This diagram is for Suppliers. Once again, there is 30 minute period might be offered at say £30, but to raise
the FPN by a further 50 MWh to 100 MWh would be
offered at say £40.

This procedure is indicated in Fig. 7.4. The FPN is at 50

MW. The offer price to increase the output between the
FPN and 100 MW would be £20 per MWh, but to increase
to between 100 and 200, the offer would be £30 / MWh.

Fig. 7.4 illustrating multiple bids for different ranges. Also

included in this diagram are the Undo Offers and bids.

an OFFER and a BID. However, an OFFER will reduce Two points to note:-
demand and a BID will increase Demand. Thus increasing
1) The Physical Notifications only require the volume of
demand is plotted -ve. This allows both generator and the generation/demand in the relevant contract.
supplier information to be plotted on same diagram. 2) The Bids and Offers must also include the cost.

The OFFER and BID prices from a particular BM unit will

depend on the ability of the BM unit to respond and also the NOTE: The physical notification refers to the rate of
price the generator or supplier is prepared to see the BM production/ consumption of electricity, whereas the prices
unit deviate from the contractual position. Thus to increase are in terms of a physical total quantity. Do remember
demand will require additional fuel in a fossil fuelled station though that we are dealing with 30 minute periods, so if a
and this will tend to be reflected in the OFFER price. The unit was called upon to run at 50 MW above the FPW – i.e.
OFFER price (i.e. the price the BM Unit is willing to be 100MW for the whole 30 minute period, it would generate
paid) to increase the FPN (increased generation or reduced
consumption) and will in general not be the same as the BID (100 – 50) * 0.5 MWh
price.
during the period – the 0.5 referring to the half hour period.
At first site it may appear odd that a Supplier could reduce
demand. In fact many large customers have Load Shedding
arrangements which means that at relatively short notice
these customers are prepared to reduce their demand by a
given amount, and in doing so get a preferential price for
all the electricity they consume. The OFFER price for a
The decision to operate at anything other than the FPN is
taken by the National Grid Company who will require a Once a BM unit and the NGC agree on the
company offering or bidding to make goo on their offer or ACCEPTANCE of an OFFER or BID, this is then binding
bid if the system becomes out of balance after Gate Closure. on both parties (see above for situation with defaulting BM
Obviously the NGC will normally take up those offers and units).
bids which are cheapest.
However,
However:
The NGC cannot cancel an ACCEPTANCE of
1. System constraints may dictate that higher priced BID/OFFER once it has been made. This means that a
offers/bids are taken up (this is a little akin to the problem would occur, if after accepting an offer for more
constrained ON/ constrained OFF situation in the electricity, the demand suddenly falls. To overcome this
POOL. there are UNDO options – i.e. an UNDO BID will remove
2. If a BM Unit fails to deliver on its offer/bid, the NGC an OFFER and conversely an UNDO OFFER will remove
for whatever reason, then the NGC will have to take an the effects of a previous BID. Since this will incur costs on
alternative which will almost certainly be higher and the BM unit (e.g. a generating unit may have kept on staff
the defaulting BM unit will be penalised accordingly to start up a new unit only to have to stand down), the
such neither the NGC nor the consumer is affected in UNDO BIDS and UNDO OFFERS will be less than the
terms of price. corresponding normal OFEERS and BIDS as shown in Fig.
7.4. This means that the NGC picks up the cost for calling
The balancing mechanism begins immediately on Gate on a Bid/Offer only to cancel it later.
Closure and continues throughout the period until the end of
the real time half-hour. Simultaneously, there will be The OFFERS and associated UNDO BIDs are normally
balancing occurring for the following half-hour periods. linked as a pair as shown in Fig. 7.4. These are number
Electricity supply is a very dynamic operation and supply successively +1, +2, +3 on the normall OFFER side (i.e.
and demand is continually changing, and hence many increase generation/decrease consumption) and –1, -2, -3 on
bids/offers may be taken up. the normall BID side.

7.13 Examples of Balancing Mechanism

Fig. 7.5 An example of Offers and Bids in a single half hour. Offers are accepted for the first part of the period which sees the
level rise above FPN into the region covered by Pair +3. Later in the half hour, BIDS are accepted to reduce the FPN into the
region covered by Pair –2. Typical prices of OFFERS/ BIDS are shown in the following table.

It is assumed that FPN is 50 MW The relevant Pair are in operation as follows:-

Bid/Offer OFFER BID Range (MW) A–B OFFER/BID H–I Pair +1

Pair (£/MWh) (£/MWh) No.
+3 50 35* 200 to 400 B-C Pair +1 I–J Pair –1
+2 30 25* 100 to 200 C-D Pair +2 J–K–L– Pair -2
+1 15 13* 50 to 100 M
-1 13* 12 10 to 50 D–E–F-G Pair +3 M-N Pair -1
-2 11* 10 -90 to 10 G-H Pair +2
The *items are not invoked in this example as all OFFERS Now suppose that the demand level changes after
and BIDS are accepted and then not changed. acceptance of the OFFERS and BIDS to that shown in Fig.
7.6
Fig. 7.6 showing revised actual level relative to FPN - A – B – C – P – Q – R – N.

Fig. 7.7 Periods when initial Offers/Bids from Fig. 7.5 have had to be cancelled (see Fig. 7.6)

 Between a and b, part of the original offer in Pair +2  Finally for I – j there will be undo offers covering the
(i.e. at £30/Mwh) is cancelled at a price of £25/MWh – whole range of Pair –1 and part Pair –2 and a new offer
that means the BM unit benefits by £5/MWh). for Pair +1.

 From b – c the original off in Pair +3 is cancelled As electricity demand and supply are changing
entirely and also part of the offer in Pair +2). dynamically, it is expected that there may well be several
changes in requirements for bids/offers or undo offers/bids.
 The situation for c – d is similar to a – b, while d – e Clearly in calculating what is to be paid to, or charged from,
would represent an additional offer in Pair +2. a BM unit depends on all proceeding BID/OFFER
Acceptances.
 From e – f the addition would be the offer price for both
Pair +1 up to its limit and the remainder from Pair +2. 7.14 NETA Concluding Remarks
These are new and first time offers above the original
level so there is not UNDO situation here. The above sections 7.10 – 7.13 refer the proposals which at
present are planned to be implemented as from 23 rd March
 From f-g the is the UNDO offer of Pair –1 + the Offer 2001.
of Pair +1 and Pair +2.
It is expected that with experience, the 3.5 hour period from
 For g – h there is full UNDER offer for Pair –1, a part Gate Closure to the start of real time.
undo offer for Pair – 2, a new OFFER for Pair +1 and
part offer for Pair +2  While the above gives an overview, the actual
mechanisms also have to take note of the dynamic
 For h – I, the are the undo offers for Pair-1 and Pair –2 characteristics of each BM Unit. For instance a
(part), and also a full new offer for Pair +1 generating set takes some time to respond to
instructions to change its output. An example is a 500
 MW unit which if it is fully warm will take up to 90 with the new requirements. On the other hand Wind is
minutes to synchronise and a further 90 minutes to load very variable and could present a problem.
up to maximum load. It is partly for this reason that the
gate closure is set at 3.5 hours. [ A set which is cold Many small scale CHP generation schemes and much of
may well take 24 hours or more to warm up]. smaller renewable generation are what is known as
 Some generating units e.g. Magnox stations, cannot embedded schemes. That means they are connected to the
come back on load in less than a minimum time local distributors network and not the National Transmission
(usually around 24 – 48 hours once their load has been Grid. Under the POOL, these have found favour with the
reduced. local distributors as they do not incur the transmission
 Some demand BM units can be changed almost losses, and thus the schemes (e.g. UEA) were able to be
instantaneously by load management. But in these paid at a price which was above Pool Input Price to allow
cases, a finite warning of a pre-determined period (e.g. for the reduced charges the local distributor would have to
1 hour) is needed. pay for the “embedded” electricity.
 The National Grid Company cannot accept unlimited
power from one part of the country because of This allowed a degree of predication on behalf of CHP
transmission constraints. operators as their contract was likely to be based as the Pool
 All the above must be considered by NGC when Input Price plus a proportion of the savings on the
accepting any particular BID or OFFER. In some cases, transmission. With the NETA, no distributor can yet give a
they may not be able to accept electricity at the best definitive answer about the price to be paid to CHP
price. In the past this has been referred to as NON operators leading to some uncertainty.
OPTIMAL DESPATCH (NOD).
It is true that the majority of the electricity generated by
7.15 Implications of NETA on Renewable and small scale CHP is consumed on the premises, and that over
a 24 hour period schemes such as UEA are net importers of
CHP Generation electricity. Nevertheless NETA is making operation of
CHP more difficult to predict.
The New Electricity Trading Arrangements have had a
significant effect on both the generation of electricity by
renewables and also CHP. In the first year, the effects
7.16 Further Reading on NETA
were generally negative, but this has been partly overcome
with the introduction of the Renewable Obligation. Some There are hundreds of documents from OFFER about
of the renewable generators – e.g. large Hydro can NETA, most of which are on the WEB. A key selection of
accurately predict their output and should be able to cope these papers are directly linked from the INDEX of WEB
LINKS on the Energy Home Page.
 ENV-2E02 EnergyResources 2004 - 05 Appendix Section 7

7.17 Appendix: AN EXAMPLE OF THE OPERATION

OF THE ELECTRICITY POOL TABLE 3. BID PRICES FROM OTHER
COMPANIES
NOTE: This example is mostly for historic interest only.
An exam question similar to this was set in 1995. It does Company Capacity bid price Rank
however, show the intricacies of the operation of the (MW) (£/MWh)
Electricity POOL up to 2001. 1 11500 10.00 1
2 10500 15.00 4
You are a manager of Electric Power plc which operates 6 3 7500 17.00 5
power stations, A, B, C, D, E, and F. For station A, you 4 1500 20.09 22
have a one-way contract with a customer with a strike price 5 180 20.03
of £22.00 per MWh. For station B, you have a two way 6 530 19.84
contract with upper and lower strike prices of £21.50 and
7 300 18.00
£21.20 per MWh respectively.
8 3600 17.50
You are informed by the National Grid Company that the 9 1800 18.37
predicted demand for the 30 minute period (1700 - 1730) the 10 1600 17.91
following day is 42 500 MW. The loss of load probability is 11 900 19.55
0.0005 while the value of lost load is £2400 per MW. 12 900 19.81 17
13 850 19.60 13
Your bid prices for the six stations to supply electricity to 14 450 19.72 15
the Pool are shown in Table 2. Following the bidding you
15 1100 19.51 11
are informed that full power will be required from stations
A, B, C, and D, and that station E will be required on 16 320 19.73 16
standby. Table 3 shows the bid prices from other None of the stations in Table 3 are either constrained on
generators. or off. Company 6 has been informed that it will not be
required as standby.
What are the pool input and output prices for the half hour
period, and what will be the income for your company
during that period? Clearly state any assumptions you Station F is not being asked to generate but Station D is
make. which has a higher bid, Station F must be "constrained
off", so neglect this station temporarily when constructing
[You may neglect transmission losses and assume that the merit order table.
UPLIFT arises solely from additional capacity charges and
sub-optimal scheduling and despatch by the National Grid The maximum bid price which matches predicted demand
Company]. of 42500 is £19.81 which is the System Marginal Price.
The company matching this price is company 12, but for
TABLE 2. POOL BID PRICES BY ELECTRIC this company the generator will be running under low load
(i.e. 660 MW of the potential 900 MW). However, Electric
POWER plc Power D is constrained on so the actual generation
Station Capacity bid price Rank required from company 12 is only 660 - 370 (i.e. 290 MW).
(MW) (£/MWh) Thus the balance of 610 MW and the 470 MW requested
A 470 10.00 1 standby of Electric Power E are the standby capacity (since
B 530 10.00 1 company 6 was not requested for capacity standby and
C 420 19.68 14 neither company 5 or 4 were constrained on).
D 370 20.02 20
The Pool input Price (PIP)
E 470 19.82 18
F 270 19.23 10 = SMP + (VOLL - SMP)*LOLP

= £19.81 + (2400 - 19.81)*0.0005

= £21.00 / MWh
 ENV-2E02 EnergyResources 2004 - 05 Appendix Section 7

The charge for the constrained off and constrained on

Company Capacity bid price Rank Cumul- stations refer only to their bid prices
(MW) (£/MWh ative
) Capacity So total output price for all units generated will be
(MW) (remembering for half an hour!!!)
Electric 470 10.00 1 470
Power A (42500-370)*SMP/2 +370*20.02/2
|
Electric 530 10.00 1 1000
constrained on
Power B
1 11500 10.00 1 12500 + 270*19.23/2 + (42500-370+1080)*2400*0.0005/2
2 10500 15.00 4 23000 | |
3 7500 17.00 5 30500 constrained off capacity payment
8 3600 17.50 6 34100
10 1600 17.91 7 35700 The factor 2 refers to half an hour
7 300 18.00 8 36000
Total cost =
9 1800 18.37 9 37800
£417297.65 + 6299.75 + 25926 = £449523.4
Electric 270 cons- 19.23 10
Power F trained off
Total units generated = 42500/2 = 21250 MWh
15 1100 19.51 11 38900
11 900 19.55 12 39800 so Pool output Price
13 850 19.60 13 40650
Electric 420 19.68 14 41070 (POP) = 449523.4/21250 = £21.15 per MWh
Power C
14 450 19.72 15 or uplift = £0.15 per MWh
16 320 19.73 16
Since the POP is less than £22.00 there will be no payment
12 900 19.81 17
by Electric Power to its customer for the one way contract.
Electric 470 19.82 18 However, since the PIP is less than the lower strike price,
Power E Electric Power will be paid the difference (i.e. £21.20 -
6 530 19.84 19 £21.00 = £0.20) for every unit generated by the two-way
Electric 370 20.02 20 contract partner.
Power D
5 180 20.03 21 So income for electric power in half hour period will be:-
4 1500 20.09 22
Stations A, B, and C at PIP
The maximum bid price which matches predicted demand
of 42500 is £19.81 which is the System Marginal Price. i.e. (470 +530 + 420)*21.00/2 = £14910.00
The company matching this price is company 12, but for
this company the generator will be running under low load Station B supplementary payment from contract
(i.e. 660 MW of the potential 900 MW). However, Electric
Power D is constrained on so the actual generation (530*0.20)/2 = 53.00
required from company 12 is only 660 - 370 (i.e. 290 MW). Capacity payment for station E
Thus the balance of 610 MW and the 470 MW requested
standby of Electric Power E are the standby capacity (since = 470*2400*0.0005/2 = 282.000
company 6 was not requested for capacity standby and
neither company 5 or 4 were constrained on). Constrained off payment for station F

The Pool input Price (PIP) 270*19.23/2 = 2596.05

= SMP + (VOLL - SMP)*LOLP Constrained on payment for stations D

= £19.81 + (2400 - 19.81)*0.0005
= £21.00 / MWh 370* 20.02/2 = 3703.70
================
TOTAL income =
The additional capacity charges refer to the 610+470 MW £21544.75
noted above i.e. 1080 MW ========
=
 ENV-2E02 EnergyResources 2004 - 05 NETA Overview

31 May 2000

An Overview of the New

Electricity Trading
Arrangements
V1.0

A high-level explanation of the New

Electricity Trading Arrangements
(NETA)

Reformmated from original for ENV-2E02 Energy Resources

40
 ENV-2E02 EnergyResources 2004 - 05 NETA Overview

1. INTRODUCTION

This document provides a relatively high-level explanation Furthermore this document is aimed at providing a factual
of the New Electricity Trading Arrangements (NETA). It description of how the New Electricity Trading
should be read in conjunction with a number of other Arrangements will operate, rather than attempting to explain
explanatory documents that have been or will be produced why they will operate in a particular manner. Given the
by the NETA Programme. intended audience, an attempt has been made to avoid using
existing and
The audience for this document is expected to include those new Industry jargon and acronyms, however some basic
who are not familiar with the existing electricity trading understanding of the major processes involved in the
arrangements in England and Wales. This document does electricity supply chain (i.e. generation, transmission,
not, therefore, explain how the New Electricity Trading distribution, and supply) and markets in general is assumed.
Arrangements change from those currently in place.

2. BASIC PRINCIPLES

One of the basic principles of the New Electricity Trading volume (i.e. a surplus or a deficit). It is also necessary to
Arrangements is that those wishing to buy and sell determine a set of prices for settling the surpluses and
electricity should be able to enter into any freely negotiated deficits. Because metered data for generation and wholesale
contracts to do so. It is expected that under the new trading demand is available on a half-hourly basis (i.e. electricity
arrangements, bulk electricity will be traded on one or more meters in England and Wales are set up so that the kWh of
exchanges and through a variety of bilateral and multilateral energy generated or consumed by generators or suppliers is
contracts. Those buying and selling electricity on exchanges measured on a half-hourly integrated basis), Imbalance
and through bilateral contracts are likely to include not only Settlement will also operate half-hourly under.4 NETA.
generators and suppliers (who produce or consume physical Thus imbalance volumes and imbalance prices will all be
quantities of electrical energy), but non-physical traders as calculated on a half-hourly basis, and settled on a daily
well. basis, approximately 28 days in arrears.

The role of the NETA Programme is not to dictate how In addition to Imbalance Settlement, the central elements of
energy will be bought and sold on these exchanges or in the new trading arrangements are designed to fulfil a second
bilateral contracts. Instead it is to provide mechanisms for related role. This second role is to provide a mechanism for
near real-time clearing and settlement of the imbalances adjusting the intended operating levels of generation and
between contractual and physical positions of those buying, demand in real time.
selling, producing and consuming electrical energy. In
practice, traders of electricity may buy more or less energy The requirement to provide this mechanism is twofold. First,
than they have sold; generators may physically generate it is likely that the aggregate level of generation that
more or less than they have sold; and the customers of generators intend to (and/or actually) produce will not
suppliers may consume more or less energy that their match the aggregate level of demand that customers of
supplier has purchased on their behalf. The central NETA suppliers intend to (and/or actually) take at any given time.
systems are designed to measure these surpluses and deficits Second, for a number of detailed technical reasons
(or imbalances) and to determine the prices at which they (including the fact that the transmission network in England
are to be settled in order to send out invoices and payments and Wales has only a finite capacity), it is sometimes
for them. necessary to be able to adjust the level of production or
consumption of individual generators or demands away
The processes involved in calculating and settling these from the level at which the generator or customer would
imbalance volumes is referred to as ‘Imbalance Settlement’. otherwise wish to operate. By adjusting the output or inputs
It should be reiterated that the purpose of Imbalance of generators and demands in this way, localised
Settlement is not to price and settle bulk purchases and sales overloading of the transmission system can be prevented.
of electrical energy. Instead it is to price and settle the
surpluses and deficits arising from the smaller In addition to Imbalance Settlement, the NETA
differences between the contractual and physical positions arrangements therefore provide for the creation of a
of market participants. ‘Balancing Mechanism’. As discussed above, the Balancing
Mechanism provides a means of adjusting the level of
The process of Imbalance Settlement requires a comparison production or consumption of individual generators or
of the quantities of electrical energy that parties have demands. Under NETA, the ‘System Operator’ will
purchased and sold under contract with their metered determine what actions need to be taken in the Balancing
quantities of physical generation and demand. This Mechanism in order to maintain the required national and
comparison is needed in order to determine an imbalance local balances of generation and consumption.

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 ENV-2E02 EnergyResources 2004 - 05 NETA Overview

3. THE BALANCING AND SETTLEMENT CODE (BSC)

The central elements of the new trading arrangements Those persons that are bound by the terms of the Balancing
provide for two basic functions: the Balancing Mechanism and Settlement Code are collectively referred to as parties.
and Imbalance Settlement. The rules that govern how these It is anticipated that holders of generation, transmission,
two functions are carried out are set down in the Balancing distribution/PES and supply licences will be required to be
and Settlement Code. parties to the Balancing and Settlement Code whilst traders
and others may choose to become parties to the Code.

4. GATE CLOSURE

It is intended that bulk electricity will be traded by purchase and sale for the settlement period 16:30 – 17:00
generators, suppliers and traders via a variety of means, must be received before 13:00 on the same day. Every half-
including exchanges and bilateral contracts. The quantities hour period has its own Gate Closure, set 3 ½ hours [1 hour
of energy purchased and sold in these trades must be after July 2002] prior to the start of the half-hour.
notified into the Imbalance Settlement mechanisms in order
that they may be taken into account in determining the Because quantities of purchases and sales for a particular
imbalance position of the parties. Furthermore, because settlement period must be notified prior to Gate Closure,
Imbalance Settlement operates half-hourly, the traded physical trading of electricity on exchanges and under
quantities will be notified in respect of each half-hour. bilateral contracts is effectively prevented after this time. If,
for example, at 14:00, a supplier purchased energy for the
It is expected that these trades may, in some cases, be made period 16:30 – 17:00, it would not be possible for that
a year or more in advance of the half-hour to which they purchase to be taken into account when determining the
relate. Whilst trades may be notified some time in advance imbalance position of that supplier in Imbalance Settlement.
they cannot be notified after the event (i.e. after the half- This is because the latest time for notification of contract
hour to which they relate has passed). Instead, trades must volumes relating to 16:30 – 17:00 is 13:00. The supplier
be notified in advance of the half-hour to which they relate. would therefore have to buy the energy to meet its physical
The time limit by which information relating to trades needs demand from the Imbalance Settlement mechanism.
to be notified into Imbalance Settlement is called ‘Gate
Closure’ and is initially set at 3 ½ hours [reduced to 1 hour Gate Closure also has a significance that relates to the
in July 2002] prior to the start of the half-hour to which it operation of the Balancing Mechanism. This is discussed
relates. Thus notifications of quantities of electricity further in section 6.

5. THE BALANCING MECHANISM

5.1. Overview Once generators and suppliers have decided on the levels at
which they wish to operate, they are required to notify these
Generators and suppliers differ from pure traders of levels to the System Operator. In practice not all generation
electricity in that not only do they buy and sell electrical and demand will be required to notify these operating levels.
energy under contract, they produce and have customers that This is discussed further in section 6.3.
consume physical quantities of energy as well. Under
NETA, generators will, in general, be free to determine for When notifying their proposed operating level to the System
themselves the level at which their individual generating Operator, generators and suppliers may, if they wish, also
units will operate. Similarly suppliers will, in consultation indicate a willingness to deviate from these operating levels.
with their customers, generally be free to specify their In exchange for payment, generators may be willing to
intended levels of demand. increase or decrease the output of their generating units, and
suppliers may have in place arrangements for their
It is likely (although it is not a requirement) that the customers to be able to increase or decrease their demand.
proposed level of physical operation of generation or
demand will be related to the overall contractual position of To this end, generators and suppliers may submit Offers and
the associated generator or supplier. Thus, it may be Bids into the Balancing Mechanism. Generators and
expected that a generator will wish to sell a net amount of suppliers may both submit Offers and Bids. Offers indicate a
energy that is related to its intended level of physical willingness to increase the level of generation or reduce the
generation. Similarly a supplier may wish to buy an amount level of demand. Conversely, Bids indicate a willingness to
of energy that is related to the expected level of physical reduce the level of generation or increase the level of
demand taken by its customers. Again, whilst this may be demand.
likely, it is not a requirement, and parties can elect
deliberately to be in imbalance should they wish to do so. The System Operator may ‘accept’ particular Offers and
Bids placed by generators and suppliers in order to control

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 ENV-2E02 EnergyResources 2004 - 05 NETA Overview

the national and local balance of generation and demand.

This process is described in more detail in the next section. Parties responsible for wholesale electricity production and
consumption will not necessarily be required to submit
5.2. Physical Notifications Physical Notifications to the System Operator for all
generation and demand. In practice, the System Operator
Generators and suppliers that are required to notify the does not need information relating to smaller plant
System Operator of their intended operating level do so by (generation and demand) in order to ensure safe operation.
submitting ‘Initial Physical Notifications’ (IPNs) and ‘Final For this reason Physical Notifications are only needed when
Physical Notifications’ (FPNs), in accordance with the the ‘relevant plant’ is above a de minimis limit of 50MW.
requirements of the Grid Code.
In this context, ‘relevant plant’ means a ‘BM Unit’. The
An Initial Physical Notification relating to expected definition of a BM Unit is discussed in more detail in
operating levels throughout the whole day must be section 6.4.
submitted to the System Operator by 11.00am on the day
before trading.
5.4. BM Units
A Final Physical Notification relating to proposed operating
levels in a particular half-hour must be submitted to the The term ‘BM Unit’ is used to describe collections of
System Operator by Gate Closure. generation plant and ‘demand plant’ that import and/or
export electricity, so that physical imports and exports can
This information is in addition to the contract information be treated appropriately under the Balancing and Settlement
relating to purchases and sales of electricity to Imbalance Code. Because of the number of different types of
Settlement (as described above) which must also be generation and demand that it must cover the exact
submitted by this time (although in the case of contracts, the definition of a BM Unit is somewhat involved. However, for
information is submitted to central settlement and not to the generating plant, a BM Unit is typically a single generating
System Operator). unit. For demand the definition of a BM Unit is largely
dictated by the metering information available to Imbalance
Where submitted, Final Physical Notifications must Settlement. For large demands, separate metering
normally be submitted for individual generating units and information is available on a half-hourly basis. In this case,
for individual demands. This is because the System the associated BM Unit is essentially defined as the
Operator needs locationally specific information in order to aggregate of a party’s demand behind a single point of
ensure that generation and demand is safely matched locally connection to the transmission or distribution system. For
as well as nationally. smaller demand, half-hourly metering information is not
available on a site-by-site basis for Imbalance Settlement.
Final Physical Notifications take the form of a minute-by- Instead, the metering information that is available is the
minute profile of the expected power output or consumption aggregate of small demands supplied by a demand on
of the relevant generation or demand across each settlement individual suppliers over 12 different ‘GSP Groups’. In this
period. The information is specified to the nearest MW. A case, the relevant BM Unit is the aggregate of a particular
graphical example of the Final Physical Notification data for supplier’s demand in each of the GSP Groups.
a generator and a demand is given below.
Parties to the Balancing and Settlement Code are required to
Figure 1 – An example of Final Physical submit Initial Physical Notifications and Final Physical
Notifications to the System Operator by Gate Closure if the
Notifications for Generation and Demand. associated BM Unit is larger than 50MW (i.e. the BM Unit
has a maximum associated import or export in excess of
50MW).

5.5. Participation in the Balancing Mechanism

The BM Unit is the basic unit of participation in the

Balancing Mechanism. In order for a BM Unit to be used to
provide services to the System Operator in the Balancing
Mechanism a Final Physical Notification must be submitted
for that BM Unit. Consequently, some parties may also
choose to submit Final Physical Notifications for BM Units
that are smaller than 50MW if they wish to use these BM
Units to offer services in the Balancing Mechanism.
The convention used is that power exports are expressed as
positive values, whereas imports are expressed as negative
Another pre-requisite for BM Unit participation in the
values. Thus it is likely that generators will have positive
Balancing Mechanism is the requirement to establish
FPNs, and demand will have negative FPNs.
appropriate electronic communication links with the System
Operator. Under NETA, these links must be electronic in
5.3. Requirement to Submit Physical Notifications order to handle the large amounts of data transfer. The links
43
 ENV-2E02 EnergyResources 2004 - 05 NETA Overview

are needed for two reasons: first for a party to submit Final If a BM Unit is to be used to offer services in the Balancing
Physical Notifications and Bids and Offers for individual Mechanism, in addition to the Final Physical Notifications,
BM Units to the System Operator; and second for the the party also submits Offers and Bids for that BM Unit.
System Operator to inform the party when it wishes to call
off (or ‘accept’) Offers and Bids. These issues are discussed Offers and Bids indicate a party’s willingness to operate the
in more detail in the next section. BM Unit at a level other than the Final Physical Notification
in exchange for payment. They take the form of a set of
5.6. Offers and Bids prices and volumes. An example is given in Figure 2 below.

Figure 2 – An example of Offers and Bids

Figure 2 shows a simplified set of Offers and Bids for a between 100MW and 200MW above Final Physical
generation BM Unit and a demand BM Unit. Offers indicate Notification, the price may be £40/MWh.
a willingness to operate above the level of Final Physical
Notification, and Bids to operate at a level below Final A further feature of the Balancing Mechanism is the fact
Physical Notification. (Note that the consumption FPN is a that it is ‘firm’ on the System Operator. This means, for
negative value, so ‘operating above the FPN’ actually means example, that once the System Operator has informed the
consuming less). If the System Operator wishes to increase relevant party that it wishes to accept an Offer from a BM
the net amount of energy being delivered to the system it Unit it is committed to purchasing that Offer. If the System
may accept an Offer from a BM Unit. If this is a generating Operator subsequently decides that the initial decision to
BM Unit, then the BM Unit should increase its level of purchase an Offer was incorrect, then, instead of simply
export. If it is a demand BM Unit, then the demand should cancelling the original purchase, it must accept a Bid (either
reduce its level of import. from the same BM Unit, or from a different BM Unit if it is
economically more efficient as well as physically suitable).
If the System Operator wishes to decrease the net amount of This means that for every Offer, there is a complementary
energy being delivered to the system, then it may accept a ‘undo’ Bid. Furthermore for every Bid there is an associated
Bid from a BM Unit. If this is a generating BM Unit, then ‘undo’ Offer. For this reason, Offers and Bids are submitted
the BM Unit should decrease its level of export. If it is a in pairs. These pairs are given numbers to identify them.
demand BM Unit, then the demand should increase its level The numbering convention is such that where the Offers and
of import. Bids are for operation above Final Physical Notification, the
pair numbers are positive. If they are for operation below
The diagrams in Figure 2 above are simplified because in Final Physical Notification, the pair numbers are negative.
practice, a party may submit several Offers and Bids for a
single BM Unit for a particular settlement period. This A more detailed example of the Offers and Bids submitted
means, for example, that the price for operating a generating for a generating BM Unit is shown in figure 3. This
BM Unit at a level up to 100MW above Final Physical highlights the pairing of Offers and Bids.
Notification may be £30/MWh, whereas for operating

44
 ENV-2E02 EnergyResources 2004 - 05 NETA Overview

Figure 3 – More detailed example of pairs of Offers and Bids for a generating BM Unit

Offers and Bids therefore indicate the price for Operator may accept all or part of any Offer or Bid at
different levels of operation relative to the Final any time after Gate Closure up until real time.
Physical Notification. As may be seen from figure 3,
an initial restriction under the new electricity trading Whilst the System Operator is generally free to accept
arrangements is that the level of any pair of Bids and any Offer or Bid at any time between Gate Closure and
Offers is fixed (relative to FPN) for the duration of the real time, the System Operator is required to ensure
settlement period. In common with Final Physical that
Notifications, Offers and Bids for a BM Unit applying any acceptance it makes is consistent with the dynamic
to a particular half-hour must be submitted by Gate parameters of the associated BM Unit. The dynamic
Closure for that half-hour. parameters of a BM Unit give information relating to
the limitations on physical operation of the BM Unit.
5.7. Operation of the Balancing Mechanism This include the rates for increasing and decreasing
output and input levels, information relating to stable
The purpose of the Balancing Mechanism is to provide levels of operation, and the maximum levels of import
the System Operator with a means of undertaking and export that each BM Unit is capable of.
several functions as follows: matching system-wide
imbalances between electricity production and In accepting Offers and Bids, the System Operator will
consumption; adjusting local and bulk power flows to inform the relevant party of the absolute level at which
ensure the security of the transmission network; it wishes the BM Unit to operate. In doing so, the
placing BM Units in a position to deliver other System Operator may accept several Offers and/or Bids
Balancing Services. Balancing Services are technical at once. The set of data issued by the System Operator
services, purchased by the System Operator. They are to the party is called a Bid-Offer Acceptance. A Bid-
required in order to maintain the reliability and Offer acceptance is illustrated in Figure 4.
security of the transmission and distribution networks.
They include services to operate generation and In figure 4, a single Bid-Offer Acceptance has been
demand plant in a manner that will support system issued by the System Operator that affects three of the
voltage and system frequency. Offers and Bids submitted for the settlement period.
From this, the shaded areas in figure 5 show the
The operation of the Balancing Mechanism for a quantities of Offers 1 and 2, and Bid –1 that are all
particular half-hour starts after Final Physical accepted by the single Bid-Offer Acceptance.
Notifications and Offers and Bids have been submitted
to the System Operator for that half-hour – i.e. after Note the numbering convention for Bid-Offer Pairs is
Gate Closure. The System Operator is solely that those above FPN are given positive numbers and
responsible for determining which Offers and Bids are those below FPN are given negative numbers.
accepted in the Balancing Mechanism. The System

Figure 4 – Accepting Offers and Bids

45
 ENV-2E02 EnergyResources 2004 - 05 NETA Overview

Figure 5 – Volumes of Offers and Bids Accepted

Offers are purchased where the System Operator has In some extreme circumstances, (e.g. if there are
requested operation above the level of FPN. Bids are insufficient Offers and/or Bids available for the System
purchased where the requested level is below FPN. Operator to balance the system) it may be necessary for
Thus in the above diagram, parts of Offers 1 and 2 are the System Operator to require certain BM Units to
initially purchased. Later, half-way through the operate at a level other than FPN, even if no Offers or
settlement period, when the requested operating level Bids have been submitted for those BM Units. In this
falls below FPN Bid number –1 is purchased. case, the System Operator will not log an acceptance
for the BM Unit in question (because there are no
As shown in Figure 5 above, the volume of accepted Offers or Bids against which the acceptance may be
Offers or Bids determined from a single Bid-Offer settled). In most situations there will be an impact on
Acceptance is calculated on a minute by minute basis the imbalance position of a party instructed by the
across the half-hour. System Operator in this way.

46
 ENV-2E02 EnergyResources 2004 - 05 NETA Overview

The detailed operation of the Balancing Mechanism output, or for reducing its demand. If a negatively
and the interface between parties and the System priced Bid was accepted, the party would be paid for
Operator will be set down in the Grid Code, and in the increasing its demand, or for reducing its generation.
Balancing Principles. The Grid Code is a technical
document describing the interfaces between those 5.9. Arbitrage Offers and Bids
parties that connect to and use the electricity
transmission network. It is anticipated that the Because parties are paid for accepted Offers at Offer
Balancing Principles will be produced by the System Price and are charged for accepted Bids at Bid price, if
Operator (as a requirement of the Transmission one BM Unit has an Offer Price that is less than the
Licence). Bid
Price of another, the System Operator can in fact save
5.8. Payment for Offers and Bids money by making an ‘arbitrage’ trade. This involves
simply accepting both the Offer and the Bid.
The volume of an accepted Offer or Bid is determined
as the volume of the shaded areas in Figure 5. Thus in Note that both parties (i.e. from whom the Offer and
the example in Figure 5, three MWh values would be the Bid were accepted) should be satisfied with the
determined as a result of the single Bid-Offer arbitrage, because they have freely submitted Offers
Acceptance. These are the MWh of purchase of Offers and Bids into the Balancing Mechanism indicating the
1 and 2 and the MWh of purchase of Bid –1. price at which they are prepared to take the balancing
action.
Accepted Offers and Bids (adjusted to reflect
transmission losses) will be settled at the relevant Offer Arbitrage Offers and Bids are treated slightly
or Bid Price. In the case of Offers, the party differently from other Offers and Bids
responsible for the BM Unit will be paid at the relevant when calculating energy imbalance prices (see below).
Offer price multiplied by the losses adjusted volume of
the accepted Offer. 5.10. Non-Delivery Charges

In the case of Bids, the party responsible for the BM A number of Offers and Bids may be accepted from a
Unit will pay (rather than be paid) at the prevailing Bid particular BM Unit in any particular settlement period.
price multiplied by the losses adjusted volume of the Furthermore, as discussed above, accepted Offers and
accepted Bid. The reason why parties are paid for Bids may be ‘undone’ by accepting an Offer or Bid in
Offers, but are charged for Bids is explained as the opposite direction. The net amount of Offers and/or
follows: Bids accepted in a particular half-hour from a BM Unit
will result in a net expected profile for the operation of
A demand BM Unit from which a Bid is accepted is the BM Unit in that half-hour.
expected to increase its demand. The Bid price
therefore simply represents the price that the party is If a BM Unit has a net volume of accepted Offers (i.e.
willing to pay for an additional MWh of demand that it more accepted Offers than Bids), then if the BM Unit
had not already purchased under a bilateral contract. shortfalls (i.e. generates less than expected, or imports
more than expected) it will be subject to non-delivered
If a Bid is accepted from a generation BM Unit, a Offer charges. If a BM Unit has a net volume of
reduction in the generation from that unit is expected. accepted Bids, then it may be subject to non-delivered
The Bid price in this case, simply represents the price Bid charges.
that the party is willing to pay to avoid having to
actually generate a MWh of energy. Thus non-delivery charges are made if the meter
reading for a BM Unit reveals that the BM Unit has
Note that it is possible for both Offer and Bid prices to failed to deliver its Offers or Bids on an aggregate
be negative. If a negatively priced Offer was accepted, basis across the half-hour. In the event of non-delivery,
the party would be charged for increasing its the part of any Offer or Bid that is not delivered is
generating charged a non-delivery charge.

6. INFORMATION IMBALANCE CHARGES

Information Imbalance Charges are intended to provide which the BM Unit should have been operating in
an incentive for parties to operate their BM Units in aggregate over the half-hour period, given its Final
accordance with their Final Physical Notification Physical Notification and any accepted Offers and
modified by any accepted Offers or Bids. Bids.

The Information Imbalance Volume for a BM Unit is The Information Imbalance Charge is the same
simply the difference between the metered output irrespective of whether a party generated or consumed
recorded over the settlement period, and the level at above or below its expected level. Thus a BM Unit that

47
 ENV-2E02 EnergyResources 2004 - 05 NETA Overview

‘spills’ by 1 MWh is charged the same Information irrespective of whether the metered output of the BM
Imbalance Charge as a BM Unit that is in deficit for Unit has been assigned to another party (see section 7).
1MWh. Initially, the Information Imbalance Price will be set at
Information Imbalance Charges are levied on the party zero, and consequently no charges will actually apply.
that registers the BM Unit in the settlement system,

7. ENERGY IMBALANCE
7.1. Overview to each of the accounts and the contract quantities
allocated to each of the accounts.
In addition to the provision of a Balancing Mechanism,
the Balancing and Settlement Code provides for the The Production Energy Imbalance will be the
settlement of imbalances between the actual and difference between the aggregate metered Production
contractual positions of parties in each settlement allocated to the party, and the net of contract volumes
period. notified to the Production Energy Account. Similarly
the Consumption Energy Imbalance will be the
As explained in section 3 above, under the new difference between the aggregate metered
electricity trading arrangements it is expected that bulk Consumption allocated to the party and the net contract
purchases and sales of electricity will be made under volume notified to the Consumption Energy Account.
the terms of bilateral contracts and via electricity
trading exchanges. Generators, suppliers and electricity 7.2. Energy Contract Volume Notification
traders are expected to be active in this trading activity.
In addition to striking contracts for purchase and sale In order to take account of the quantities of purchase
of electricity, generators and suppliers will also be and sale of electrical energy in a particular settlement
responsible for physical quantities of electricity period in Energy Imbalance, it is necessary for such
production and consumption. Energy Imbalances contract quantities to be notified into central
settlement is needed in order to settle the differences settlement.
between the net contractual and net physical position
of all parties. If two parties trade electricity (either via a bilateral
contract or through an exchange), it is necessary for the
Thus, in order to settle Energy Imbalances, it is parties to notify central settlement of the volume of the
necessary to determine the metered production or contract (in kWh), and to identify which party has
consumption of each party and the net contractual purchased the energy and which party has sold it. Note
position for each party in each settlement period. It is that it is not necessary for central settlement to have
also necessary to determine the prices at which Energy any information relating to the price at which energy
Imbalances will be settled. was bought and sold under the contract in order to
determine Energy Imbalance volumes.
Under the new trading arrangements a two-part cashout
of imbalances will be undertaken. The price paid to Under the new trading arrangements, both parties to a
parties that have a net surplus of imbalance energy will contract must notify the relevant volumes into central
be different from the price that is paid by parties that settlement through a single agent. The Energy Contract
have a net deficit of imbalance energy. Volume Notification Agent (ECVNA) acts on behalf of
the trading parties, and notifies information relating to
A further feature of Imbalance Settlement under NETA the electricity trade into central settlement. This
is that for a single party, two Energy Imbalances will information includes details of the trading parties and
be calculated. Energy Imbalances for ‘Production’ the kWh quantities of trade (in addition to passwords
related activities and ‘Consumption’ related activities etc.). Contract volumes for a particular settlement
are treated separately. Broadly speaking, ‘Production’ period must be notified into central settlement
relates to generation and ‘Consumption’ relates to (specifically to the Energy Contract Volume
demand. The calculation of Energy Imbalance Prices Aggregation Agent, ECVAA) by the notification agent
is described in section 8.7 below. prior to Gate Closure for that settlement period.

This two-part imbalance arrangement is effected by the A single pair of trading parties may nominate any
calculation of a ‘Production Energy Imbalance’ and a number of Energy Contract Volume Notification
‘Consumption Energy Imbalance’ for each party. Agents to act on their behalf. (One of the parties
Parties are said to hold two Energy Imbalance themselves could be an Energy Contract Volume
Accounts, a Production account and a Consumption Notification Agent).
account.
The level of the Energy Imbalance for each of a party’s In practice, the information contained in contract
accounts is calculated as the difference between the volume notifications needs to be slightly more specific
metered quantities of generation and demand allocated about the parties involved in the contract trade. It is

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 ENV-2E02 EnergyResources 2004 - 05 NETA Overview

necessary to not only identify the parties involved, but Units in the Trading Unit is determined on a collective
the specific Energy Accounts of the parties to which basis.
the trade relates. Thus the Energy Contract Volume
Notification Agent must identify both the parties and The metered quantities from the BM Unit will be
either their Production Energy Account or the allocated to the Energy Account type that matches the
Consumption Energy Account. Note that it is possible type of the BM Unit (i.e. Production or Consumption).
not only for the Production Energy Account of one Thus metered quantities for Production BM Units will
party to sell to the Consumption Energy Account of be allocated to Production Energy Accounts, and
another and vice versa, but also for a single party to metered quantities for Consumption BM Units will be
notify energy ‘purchases’ and ‘sales’ between its own allocated to Consumption Energy Accounts.
two Energy Accounts.
It should be recognised that Production BM Units may,
Subject to some credit monitoring, there are no in some settlement periods, import electricity and
restrictions on the energy contract volumes that may be Consumption BM Units may export electricity. The
notified to and from each account. difference between import and export and Production
and Consumption for a BM Unit is animportant feature
7.3. Energy Contract Volume Aggregation of the trading rules.

Once received by central settlement, the notified Whether the metered volume associated with a
contract volumes are aggregated for each of the particular BM Unit is treated as an import or an export
Production and Consumption Energy Accounts of each for settlement purposes depends upon whether its
party to determine a net contractual position for each associated Trading Unit has, in aggregate, imported or
of the accounts. These net contractual positions will be exported in that particular settlement period. The
compared to the net metered quantities allocated to classification as an import or export affects the
each of the Energy Accounts in order to determine the treatment of the BM Unit Metered Volume for
Energy Imbalance for each Production and purposes of transmission loss factor application, and
Consumption Account. revenue surplus reallocation (see section 10 below).

7.4. Production and Consumption and Imports and 7.5. Metered Volume Reallocation Notification
Exports
So as not to restrict parties’ commercial freedom, it
In order to determine the metered quantities that need will be possible for the energy flowing to or from an
to be taken into account when calculating Energy individual BM Unit to be allocated between two or
Imbalances, it is necessary to collect metering data for more different parties for the purpose of calculating
each BM Unit in each settlement period. This metered energy imbalances. (This would allow, as an example,
data is collected in a number of different ways, but is a supplier to notify volumes relating to a share of a
ultimately used to establish a metered volume for each customer’s meter, in order to meet that customer’s
BM Unit in each settlement period. requirements for partial supply).

Whether the metered volume of a BM Unit will be By default, the party registering the BM Unit is
treated as Production or Consumption (and responsible for the metered quantities arising from the
consequently whether it will be aggregated to the BM Unit. Thus by default, the metered quantities from
Production or Consumption energy account for Production BM Units will be allocated to the party’s
imbalance purposes) depends upon the ‘Type’ of the Production Energy Account, whereas the metered
BM Unit - i.e. whether the BM Unit itself is either a quantity from Consumption BM Units will be allocated
Production or Consumption BM Unit. to a party’s Consumption Energy Account.

The Type of a BM Unit is based upon whether, over It is also possible for the party responsible for a BM
the year, the maximum level at which it is expected to Unit to reallocate some or all of the metered volume
be exporting over any settlement period is more or less for the BM Unit to another party for any given
than the maximum level at which it is expected to be settlement period(s). As with contract volume
importing over any settlement period. It is generally notifications, metered volume reallocations must be
intended that BM Units that comprise generating plant notified into central settlement by Gate Closure. The
will be Production BM Units and BM Units that information contained within a metered volume
comprise supplies will be Consumption BM Units. In reallocation includes identification of the relevant BM
practice some BM Units will also be permitted to Unit and the name of the party and associated Energy
choose their Type freely. Account to which the metered volume is to be
A further factor to be taken into account in determining reallocated. The information may also contain either a
the Type of a BM Unit is whether the BM Unit is to be fixed number of kWh to be reallocated from the BM
aggregated with a number of other BM Units within a Unit, or a percentage of the metered volume to be
single Trading Unit. In this case, the type of all the BM reallocated.

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The party responsible for a BM Unit is termed the Energy Imbalance prices are derived from the prices of
Lead Party, whereas the party receiving the metered Offers and Bids accepted by the System Operator in
volume reallocation is termed the Subsidiary Party. the Balancing Mechanism. System Buy Price for a
particular settlement period is calculated as the volume
If a metered volume fixed reallocation is made, the weighted average of accepted Offers relating to that
fixed amount is reallocated to the relevant Energy settlement period. System Sell Price for a particular
Account of the Subsidiary Party. If a percentage settlement period is the volume weighted average of
reallocation is made the appropriate percentage of the accepted Bids relating to that settlement period.
actual meter reading for the BM Unit is reallocated to
the relevant Energy Account of the Subsidiary Party. In In fact, not all accepted Offers and Bids are necessarily
each case, the relevant Energy Account of the Lead used in the calculation of Energy Imbalance Prices.
party is credited with the actual metered output less the Some accepted Offers and Bids may be excluded from
reallocated amount. the weighted average calculation because they are
flagged as being either ‘arbitrage’ trades or as ‘System
Any number of percentage reallocation notifications Balancing’ trades, (as opposed to ‘Energy Balancing’
may be made for a particular settlement period for a trades).
given BM Unit, however the aggregate of all the
percentages must not exceed 100%, nor may negative Arbitrage trades are those trades described in section
percentages be reallocated. There are no restrictions on 6.9. Arbitrage trades are easily identified as those
the number or sign of fixed reallocations that may be accepted Bids and Offers for which the Offer Price is
made in relation to a single BM Unit. less than (or equal to) the Bid Price.

7.6. Energy Imbalance Volumes ‘System Balancing’ trades are more complicated to
identify. They exist because the Balancing Mechanism
The Energy Imbalance Volume for a particular energy is used not just to deal with system-wide energy
account is the net of all metered quantities and contract imbalances. It is also needed in order to provide the
volumes allocated to that account. The Energy System Operator with a means of meeting a variety of
Imbalance Volume for an account may be positive more complex system requirements (for example to
(showing that a net surplus of energy accrued to the change a generator’s output so as to change power
account), or negative (showing that a net deficit of flows on the transmission system, so that voltages
energy accrued to the account). For the purposes of remain within reasonable limits).
aggregation, metered exports are treated as positive
values and metered imports as negative. System Balancing trades are excluded from accepted
Bids and Offers prior to calculating the Energy
It is possible for a single party to have a net surplus of Imbalance Prices. They are excluded by simply
energy in one Energy Account and a net deficit in the disregarding some of the extremely priced accepted
other in the same settlement period. Two separate Offers and Bids (i.e. some of the highest prices
charges would be applied in this situation, as discussed accepted Offers and some of the lowest priced
further in section 8.7. accepted Bids).

7.7. Energy Imbalance Price Calculation There are a number of other detailed adjustments in the
calculation of the prices, for example transmission
Energy Imbalance Prices are the prices used to settle losses are taken into account in the weighted averaging
the Energy Imbalance surpluses or deficits. There are calculation of Energy Imbalance Prices, and
two Energy Imbalance Prices – the System Buy Price adjustments may be made if the System Operator has
and the System Sell Price. entered into certain contracts before Gate Closure.

The System Buy Price is the price at which deficits are Under normal circumstances, System Buy Price is
charged. It is intended to reflect the average price at expected to exceed System Sell Price.
which the system had to buy in order to make good the
deficit on behalf of the party. Thus if an Energy 7.8. Energy Imbalance Cashflows
Account has a negative Energy Imbalance, this is
charged for at System Buy Price. The term ‘Energy Imbalance Cashflow’ is used to
describe the charges or payments that arise as a result
The System Sell Price is the price at which surpluses of settling Energy Imbalances. Where an Energy
are charged. It is intended to reflect the average price Account has a positive Energy Imbalance, it is paid at
at which the system had to sell in order to dispense System Sell Price, and where it has a negative Energy
with the surplus spill energy. If an Energy Account has Imbalance, it is charged at System Buy Price.
a positive Energy Imbalance, this is paid for at System
Sell Price.

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8. SYSTEM OPERATOR CHARGES

Whilst accepted Offers and Bids are used to determine The System Operator is required to pay for the net cost
Energy Imbalance Prices, the costs of operating the of all accepted Offers and Bids (less any charges
Balancing Mechanism are in fact met by the System arising from non-delivery).
Operator.

9. REVENUE SURPLUS REALLOCATION

A variety of payments and charges arise relating to surplus of funds in each settlement period. This surplus
various aspects of the Balancing Mechanism and is reallocated to parties, pro-rated across all metered
Energy Imbalance settlement for every settlement imports and exports for which each party is responsible
period. These include payments and charges for in each settlement period.
accepted Offers and Bids and for positive and negative
Energy Imbalances. Furthermore, there are charges for Note that in the case where a party reallocates metered
non-delivery of Offers and Bids and for Information quantities to a second party via a metered volume
Imbalance. Finally the System Operator is charged for reallocation, then it is the second party that receives
the total cost of Balancing Mechanism action. the pro-rated revenue surplus reallocation. It is
The net of all these charges and payments in any anticipated that this may be taken into account when
settlement period is not zero. In general, the net of all the parties agree the price for the metered volume
the charges and payments will result in an overall reallocation in the first instance.

10. SUMMARY
One of the basic principles of the New Electricity or in bilateral contracts. It is to provide mechanisms for
Trading Arrangements is that those wishing to buy and near real-time clearing and settlement of differences
sell electricity should be able to enter into any freely between contractual and physical positions of those
negotiated contracts to do so. It is expected that under buying, selling, producing and consuming energy. The
the new trading arrangements, bulk electricity will be following two mechanisms are therefore required: a
traded on one or more exchanges and through a variety mechanism by which the System Operator can change
of bilateral and multilateral contracts. Those buying proposed operating levels of generation and demand
and selling electricity on exchanges and through near to real time – the Balancing Mechanism - and a
bilateral contracts are likely to include not only mechanism for settling the differences between net
generators and suppliers (who produce or consume physical and net contractual positions of parties –
physical quantities of electrical energy), but non- Imbalance Settlement. The detailed rules associated
physical traders as well. with these mechanisms will be contained in the
Balancing and Settlement Code (BSC).
The objective of the new arrangements is not to dictate
how energy will be bought and sold on these exchanges

11.
Any information in this document is offered in good of drafts of these documents. Accordingly, the
faith to assist interested parties in their preparation for information contained herein should be viewed as
the introduction of the New Electricity Trading provisional. No warranty nor representation is given as
Arrangements. to the accuracy of completeness of any of the
information provided in this document, and none of the
However, readers should be aware that some details of DGES, DTI, NGC, participants in the NETA
the Trading Arrangements may be subject to Programme nor advisors to any of them shall be liable
modification. Readers should also be aware that for error, mis-statement or omission.
implementation of the New Arrangements is dependent
on the timetable of the Utilities Bill; and that the new This document has been produced in accordance with
Balancing and Settlement Code (BSC), as well as the the terms set out in paper DISG 05/010 dated March 1
Implementation Scheme which will govern aspects of 1999 and which is available from the Programme
the transition from the current Arrangements to the Director's Office.
BSC, will only be designated by the Secretary of State
after consultation, review (and consequent amendment)

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