Balancing costs

At National Energy System Operator (NESO), our role is to ‘balance’ the grid. We must ensure supply meets demand every second and manage the network's physical constraints.

We need a wide range of tools to be able to balance the grid effectively and economically. This process involves NESO energy trading, balancing services, and the Balancing Mechanism. Self-dispatch and re-dispatch strategies are used in the UK energy market to handle supply and demand imbalances and and system constraints.

Balancing costs are those expenses associated with (A) the Balancing Mechanism, (B) balancing services, and (C) energy trading.

(A) Due to the complex nature of balancing the grid, many segments contribute to the overall Balancing Mechanism costs. These actions can include costs in the following categories:

• Energy actions fix system imbalance by moving generators to make generation match supply.
• System actions link to the physical parameters of the network or grid constraints. Operators interpret these activities as re-dispatching generators to balance the system’s voltage, heat, frequency, and inertia in the short term.

The costs of these actions depend on the bids and offers submitted in the BM by the market participants. We dispatch BMUs in the most economically efficient way.

(B) Balancing services are services we procure outside of the Balancing Mechanism to provide specific market and procurement efficiencies

(C) We conduct energy trading to balance the system with a foreseen energy need. This way, we secure the system, expect constraints, and minimise costs to meet our balancing requirements. While trading with our counterparties during the day and intraday, in the short term, and close to real time, our ultimate goal is to minimise the total cost of our balancing actions.

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The last few years have seen considerable increases in balancing costs. The most notable drivers of the rise in costs are associated with the procured ancillary services, higher wholesale prices of electricity, and higher bids and offer prices submitted in the BM. It’s important to note the substantial increases in wholesale prices over the last few years, their knock-on effect on the Balancing Mechanism, and their impact on the marginal generation of electricity.

Further, the electricity system is becoming more volatile on the generation side of balancing (increasing variable sources of electricity) and on the demand side of balancing (more significant variability from DER participation and integration).

While we do not control electricity prices, we undertake many significant endeavours, initiatives, and reforms to equip ourselves and the industry with the suitable systems and markets. And the capabilities to manage an evolving electricity market and system at the optimal cost.

You’ll find more information on our cost balancing analysis of our reports and data.  

Read our balancing costs strategy

Balancing costs have risen significantly over the last few years due to a multitude of factors. We have developed a strategy to minimise these rising costs by leveraging initiatives in: