Grid Balancing Costs Rocket

By Paul Homewood


An interesting article from Elexon about the costs incurred in balancing the grid:



The Electricity System Operator (ESO) plays an essential role in balancing supply and demand using the Balancing Mechanism (BM). Matching supply and demand requires payments to be made between the ESO and participating consumers and generators. Consumers and generators submit prices for volumes of energy they can provide within a half-hour period (Settlement Period) to balance the system. In this Insight article, analyst Angus Fairbairn looks at balancing costs of ESO since 2015.

System Operator role is becoming more challenging

The ESO role in Great Britain, performed by National Grid ESO, is becoming more challenging and costly. All electricity consumers pay for these costs as part of their bills. In 2020, some contributing factors were the move to a more decentralised system and increases in intermittent generation with a push to a net zero future. The ESO also faced forecasting challenges with changing demand profiles due to COVID-19.

Generation sources used to keep the system in balance

The graph below shows how payments for balancing energy produced from different fuel types has contributed to net balancing costs since 2015. This graph only includes payments for utilised balancing energy in the BM and outside the BM in Balancing Services Adjustment Actions. Additional payments, such as availability fees or start-up costs have not been included.

Net balancing costs were £506m in 2015. The system pressures mentioned above have pushed the net cost in 2020 to £1.3Bn, 67% higher than 2019 (£794m).


Net Bid and Offer cashflow

The graph below shows changes in net Bid and Offer cash flow between 2015 and 2020. Bids have a negative volume as they are a reduction in energy on the system. The Bid price represents the amount paid to the ESO by the balancing services provider and therefore the lower the Bid price, the more expensive it is to the ESO and a negative price will represent a payment to a BM Participant.

Bid cashflow is the price (£/MWh) of a Bid multiplied by the volume of the Bid (MWh). A net positive Bid cashflow across a year means more money was paid to Balancing Service providers for negatively priced Bids by the ESO than the ESO received from positively priced Bids.

Prior to 2020, the yearly net cost attributed to Bids was negative. This means more money was received by National Grid ESO for reducing energy on the system than was paid to Balancing Service providers to reduce energy on the system. Balancing Service providers will pay to reduce their generation as they may save costs of operation and/or fuel. They may also pay to consume more electricity.

The negative net Bid Cashflow from Bids reduced the overall cost of balancing the system by an average of £125m per year from 2015 to 2019. This trend significantly switched in 2020 with a positive net Bid cashflow, of £257m being paid from the ESO to Balancing Service providers to reduce energy on the system. This represented an additional 19% of cost on top of Offer costs.

Net positive Bid cashflow means more money is being paid to BM Participants from the ESO than Balancing Service providers are paying to the ESO to reduce energy on the system. Bids which result in payment from the ESO to the Balancing Service provider will have a negative price in £/MWh.

Bids with negative prices usually come from wind generators as they have no fuel costs and will lose payments from their Renewable Obligations Certificates (ROCs). ROCs are paid to certain renewable generators for each MWh of electricity generation delivered to the grid.

The Offer price represents the amount paid from the ESO to the Balancing Services provider. The higher the Offer price, the more expensive it is to the ESO. Offers have a positive volume as they are an increase in energy on the system. Offer cashflow is the price (£/MWh) of an Offer multiplied by the volume of the Offer (MWh).

Yearly net Offer cashflow has always been positive as it is very unlikely for Participants to pay to increase electricity on the system; to consume less or generate more.

Since 2016, net Offer cashflow has been rising. From 2019 to 2020, net Offer costs rose by 23%. As the cost increased for both Bids and Offers, this meant that balancing costs rose by 50% from 2019 to 2020.



Expenditure on balancing energy for the ESO has risen significantly in 2020. There has been more expenditure on all Bid and Offer volume with the greatest changes seen in money spent on reducing the energy on the system through Bids. Reducing energy on the system in 2020 came with significant financial expenditure rather than benefit to the ESO. More Bid volume was required, and at a higher price.

Low demand due to the impact of COVID-19, combined with the difficulty in forecasting new demand profiles in 2020 is likely to have increased the need for balancing energy. This looks set to be a short term influence on the system. As lockdown restrictions ease and working behaviours return to normal, balancing the system may become more predictable and less costly.

Significant increases in balancing costs from low carbon sources, such as biomass and wind were seen in 2020. This has been a long-term trend, with the cost of biomass balancing energy rising from 2017 and wind from 2016.

Economic incentives for renewable generation with low fuel and operational costs result in the costs for turning down generation from these sources being more expensive. This was seen with wind Bids where no fuel costs and financial benefits of generating (ROCs) contributed to the lowest (most expensive) Bid prices in February and November 2020.

Increased costs for managing renewable generation looks set to continue with the push to a net zero future. National Grid ESO is addressing these costs with projects like the ‘4D Heat project’ with Scottish and Southern Electricity Networks (SSEN) mentioned in their 5-Point Plan. Also, new technologies such as battery storage) may also provide new tools that help to  integrate wind and other intermittent generation into the system.


The chart is actually highly misleading, because it implies most balancing payments were for natural gas. In reality, payments to gas are to ramp up output when supply is short.

The real takeaway comment is :

 Net balancing costs were £506m in 2015. The system pressures mentioned above have pushed the net cost in 2020 to £1.3Bn, 67% higher than 2019 (£794m).

This figure will continue to rise as more and more intermittent generation is brought in.


January 20, 2022 at 01:18PM

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