Today, National Grid Electricity system Operator (ESO) has published our review of the key cost drivers on some of the highest cost days in 2021 in the UK Electricity Balancing Market (BM) - a key tool used to balance energy demand and supply close to real-time. 

Frontier Economics led the review alongside LCP and Cornwall Insight, and engaged widely with stakeholders across the electricity sector.

During 2021, ESO spent £1.5 billion on energy balancing in the BM - a 134% increase on 2020, and on the highest cost day November 24^th, ESO spent £60m. We identified a number of key drivers of the high costs, including:

• The margin of available capacity relative to demand was very tight on all of the days examined, leading to market participants offering power at very high prices during the peak hours (up £4,000/MWh); and
• The ESO must take account of the technical characteristics of plants when choosing which actions to take (e.g. the minimum time a plant must be generate for), and as such, with respect to significant volumes of gas and coal plants, it had to accept these very high prices across a large part of the afternoon and evening, to ensure sufficient capacity was available just to cover the tightest period of the evening peak.

Based on the information available to us, we found no clear evidence of behaviour by market participants that was inconsistent with the market rules.  However, we did recommend that a number of potential reforms to the rules which guide how participants offer power into the market, should be considered further, in particular in relation to how plants represent technical characteristics in their bids and offers. 

We also assessed the impact of a range of other options which the ESO or government may choose to consider, including in the short-term for this winter (e.g. bidding code of practice or offer price caps).  Consistent with a strong stakeholder view to avoid a “knee-jerk” policy response to the high costs, we set out an assessment of the pros and cons of these options, identifying their potential impact on high BM costs as well as the risks of unintended consequences across the wider electricity market. 

For more information, please contact media@frontier-economics.com or call +44 (0) 20 7031 7000.