How Does Imbalance Work?

How does imbalance work?

Energy Trading · May 12, 2024 · 10-minute read

Grid Balancing

All interconnected European power grids are considered to be in balance when they operate at a frequency of 50 Hz. Inherent uncertainties in power consumption and generation cause the grid frequency to fluctuate constantly. When more power is generated than consumed, the nominal frequency of the grid increases; conversely, when there is a power deficit, it decreases. Maintaining the frequency within a tolerance range of 0.05 Hz is essential for system stability (see European Decision eur-lex.europa.eu, ANNEX III, Table I). To ensure system stability, TSOs can activate balancing mechanisms and ancillary services when an overall system imbalance is detected. Once physical equilibrium has been restored, the costs incurred by the balancing operations are passed on to the balance responsibility parties (BSP) through the ISP, as we will see later in this article.

Balance Responsibility Party

Let’s start by reviewing some important concepts. A balancing responsibility party is a market participant in the electricity market that enters into a contractual agreement with the TSO to ensure that it will cover the costs associated with the difference between injections and withdrawals within its balancing perimeter. The balancing perimeter consists of injections (physical generation sites, purchases on the power exchange, downward flexibility, etc.) and withdrawals (physical consumption sites, sales on the power exchange or to other market participants, exports, etc.) contracted by the market participant.

When a market participant is not balanced, it is charged an amount of energy corresponding to its remaining open position at the Imbalance Settlement Price, based on the overall trend of the system and its open position.

Definition of Imbalance Settlement Price

The ISP is designed to limit the scope for arbitration between the financial settlement for the certification perimeter manager’s deviation and the financial settlement for supplier rebalancing (Energy Code, Article R335-32). In other words, a BSP is penalized at the ISP price if it delivers less energy than it sells. Conversely, the BSP can earn revenue from the ISP if it produces more energy than it sells. However, the ISP price differs between overproduction and underproduction to incentivize balanced production by the BSP. The difference stems from a coefficient that is added to the ISP calculation and depends on the balancing trend, the volume-weighted average price (VWAP) of balancing costs, and the imbalance sign of the market participant. This is explained in greater detail later.

ISP+ corresponds to the price at which the producer's additional volume V+ is sold. The producer then earns ISP+ × V+. Note that ISP+ is unsigned and can be negative in rare cases; in such cases, it becomes a penalty.
ISP- corresponds to the price at which the producer's missing volume V- is purchased. The producer is then penalized by an amount equal to ISP- × V-. Note that ISP- is unsigned and can be positive in rare cases, in which case it becomes a gain.

Currently, the ISP is calculated for each half-hour, but will switch to 15-minute intervals before 2025 to comply with the European guideline: 2017/2195 “Guideline on Electricity Balancing” (EBGL).

VWAP Definition

VWAP definition

The VWAP component of the ISP is intended to reflect balancing operation costs. RTE (the French TSO) takes into account the following types of balancing energy
s (_Ei)_{i ∈ I} and the associated prices (_{_PEi})_{i ∈ I} for both upward (U) and downward (D) operations
(www.services-rte.com section 0.O.2.3.):

Specific balancing bids (defined only for balancing needs in mainland France)
Balancing bid standards (shared at the European level)
Backup Reserve Exchange Contracts
RR Energy Standard
Automatic Frequency Restoration Reserves (aFRR)
Manual frequency restoration reserves (mFRR)

VWAP are then calculated using the following formulas:

_VWAPU =

^{_∑i(_Ei,U ×_{_PEi,U})}
/
_{_∑iEi,U}

_VWAPD =

^{_∑i(_Ei,D ×_{_PEi,D})}
/
_{_∑iEi,D}

Coefficient

The factor k is a parameter of the imbalance settlement price. It is defined ex ante with the aim of balancing the revenue and expenses of the energy component of the balancing-imbalances account based on historical data. – RTE

Since January 1, 2023, the parameter k has been calculated each month based on the cumulative balancing imbalance account (BIA), denoted S, which aggregates the revenues and expenses generated by the imbalances of various market participants. Each month M, k is calculated from the BIA up to the end of the previous month and will be applicable for the following three months. It evolves according to the following piecewise-linear function.

The goal of this new definition is to encourage not only the actors to be balance, but also the global system to move towards long-term stability by penalizing less imbalances that are opposed to the system imbalance. For example, if the system is globally in an energy deficit (generation < production), then S increases, and k decreases. Looking at the definition of the ISP in the table

What's in it for me?

Due to the uncertainty surrounding battery activation, most aggregators do not factor in imbalance costs when optimizing the asset on frequency restoration reserve markets, but these costs can be enormous! For a 2-hour battery optimized across markets, these costs amount to 25% of the battery’s revenue! Moreover, because of RTE’s billing system, you won’t see the associated costs until the end of the month, and the consolidated data won’t be available until a year later—leaving you with an unpleasant surprise. At StackEase, not only do we provide you with a clear view of imbalance costs, but we also adjust our bidding strategy across the aFRR, FCR, Day-Ahead, and Intraday markets to maximize your asset’s profits after balancing adjustments. If you’d like to learn more about how we can optimize your battery and help you maximize profits through cross-market optimization, please contact us here.