European Power Balancing Markets: an Overview

Table of Contents

How Balancing Works in European Power Markets

The growth of renewable energy sources in the European power system increases the volumes of energy traded in spot markets. While Day-Ahead and Intraday Continuous markets are laying the foundation for an efficient power system, TSOs are required to counteract supply and demand deviations in near real-time.

Let’s zoom in on the predominant instruments applied in balancing markets.

Balancing market structure and participants

Balancing Services Procurement

Counterparty involved: balancing service providers (BSPs; e.g. generation units, storage and demand response facilities)

While a perfect balance without regulation is possible in theory, the power system is virtually always subject to either a positive or negative imbalance that leads to frequency deviations:

  • Positive imbalance = supply > demand (i.e. downward regulation is required) 
  • Negative imbalance = supply < demand (i.e. upward regulation is required) 
Upward and downward regulation in balancing markets
Illustrative example of upward/downward regulation

To restore system frequency to a nominal 50 Hertz, TSOs procure balancing services from BSPs to balance the system through the continuous activation of reserve energy and to ensure sufficient available capacity of such energy at all times:

1. Balancing energy bids collection. BSPs submit bids — which are further defined by direction (upwards or downwards) and price — to a connecting TSO’s balancing tender. Each balancing energy product (e.g. FCR, aFRR, mFRR) has a corresponding gate closure time after which no bids can be submitted or modified.

2. Balancing energy settlement. After gate closure, submitted bids are shared on TSO-regulated platforms (e.g. PICASSO, MARI) where they are grouped by direction and listed in a merit order — i.e. every new BSP that is activated creates higher balancing costs. If a BSP’s bid is accepted in the context of the required capacity, TSOs are free to activate it for a given time period.

A typical merit order list for a balancing energy product
Illustrative example of a merit order list for a balancing energy product

Imbalance Settlement

Counterparty involved: balance responsible parties (BRPs; e.g. power producers, suppliers, consumers or their representatives who do not supply balancing services)

In addition to reserve energy activations carried out by TSOs on the system side, regulations require BRPs to reduce individual portfolio imbalances — i.e. differences between the contracted and actual amount of electricity produced/consumed by a particular BRP.

Therefore, whenever a BRP creates a shortage or surplus of electricity after gate closure, it will be exposed to an imbalance settlement — a financial mechanism which automatically assigns a TSO-induced price to any portfolio imbalance within a particular settlement period (60, 30 or 15 minutes). This price can be either positive or negative based on the direction of the system imbalance:

Imbalance settlement: payment flows
BRP payment flows

Imbalance prices correlate with the cost of control reserve capacities and activations and constitute what is referred to as the “system price”. One of the following two pricing calculations is usually applied by TSOs: 

  • Single imbalance pricing (e.g. applied in Germany or Ireland) — assigns a single price to BRPs with both positive and negative imbalances. This approach financially incentivizes BRPs who contribute to restoring system balance.
  • Dual imbalance pricing (e.g. applied in France or Netherlands) — assigns one price for imbalances which oppose the direction of the system imbalance (usually a market price) and another price for imbalances which coincide with the direction of the system imbalance (usually a system price). 

While incentivized in some markets and prohibited in others, system price speculation is often one of the most important drivers of electricity pricing.

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