I-SEM Update: Imbalance Prices and How They are Calculated

    The Irish power imbalance market has seen significant volatility since it went live on 1 October with thirty minute prices ranging from a high of €1,453.1/MWh to a low of negative €272.7/MWh. One of the most common questions that we have been asked since 1 October is “How are Imbalance Prices calculated?”. The purpose of this Insight is to provide an overview of the complex rules which governs the Imbalance Price calculation.     Day Ahead and Balancing Market Settlement Period Prices for the first week of I-SEM.

1. Real-time Management of the Balancing Market

To understand how the Imbalance Price is set, we need to first understand how the Balancing Market operates. In their role managing the Irish power system, the Transmission System Operators (TSO), EirGrid and SONI, take multiple actions in real-time to keep the physical power system balanced and functional. These actions can be described as:

• Energy Actions – actions taken to ensure that the energy system is balanced and the lights stay on – here the TSO needs to react to changes in production (e.g. due to different wind outturn) or changes in demand usage, or
• Non-Energy Actions – actions necessary to maintain the system – such as reacting to local grid constraints, managing voltage control on the network and maintaining system inertia. Each of these actions results in an instruction which the TSO issues to generators or demand side response units to increase/decrease power output or increase/decrease demand respectively.

2. Balancing Market Bid/Offer Curves

Each unit in the market submits the price at which it is prepared to accept to increase its power output, its Incremental Offer Curve (known as an “Inc”), or the price at which it is prepared to pay back to decrease its output, its Decremental Bid Curve (known as a “Dec”). SEMO has recently published an interesting graph (see Fig. 2) which provides an overview of all of the actions taken over the course of 9 October 2018 and demonstrates the relevant Inc and Dec for each action based on those offers/bids submitted by the affected plants.     The left axis shows the volume of MWh that were increased or decreased, the colour of the bar segment demonstrates the price of the relevant action (i.e. the Inc offer or Dec bid) (note: the colour scale on the right has been cropped in the image published by SEMO). As can be seen, the TSO issued instructions to turn on up to 110MW of plant (at 18:00) and to turn down up to 120MW at 05:00 hours. In parallel at these times, other plants are being turned down or turned off to react to other system issues.  

3. Flagging & Tagging

Through a process known as “Flagging and Tagging”, the TSO determines which actions are included in the Imbalance Price. In general, energy actions, i.e. the actions required to keep the system balanced are flagged in to the imbalance calculation, and those non-energy actions that have occurred are flagged out, thereby excluded from the pricing calculations. Certain energy actions are also flagged out, such as TSO actions for managing system constraints. The Imbalance Price is calculated for each five-minute period of the day based on the cost of the marginal 60MW of action that has been flagged in. In turn, the Imbalance Price for each half hour Settlement Period, is calculated based on the average of the six five-minute periods within that half hour. The impact of Flagging and Tagging is demonstrated in another graph issued by SEMO (see Fig. 3) which takes the same bid/offer stack as presented in Fig.2 and shows which of these actions have been flagged in by the TSO to contribute to the calculation of the Imbalance Price (marked in colour). The grey data shows what price are flagged out of the Imbalance Calculation.     This demonstrates that a relatively small portion of the actions being taken are energy actions that are being flagged to be included in the Imbalance Price.  

4. 9 October – €1,453.1/MWh Imbalance Price

To explore this in more detail we have analysed the cause of the peak Imbalance Price of €1,453.1/MWh which was achieved at 16:30 on Tuesday 9 October. Fig. 4 shows the Imbalance Price that was calculated for each five-minute period within the half-hour.     Earlier in the afternoon on this day, a thermal unit in Northern Ireland tripped, an Amber Alert was then issued and the TSO had to call on a number of replacement units at short notice in Northern Ireland. One of these units that was called was an older unit which had submitted an Inc of over €5,000 per MWh. During the 16:30-17:00 half hour, the Incs of this unit were not flagged out and therefore fed into the pricing algorithm and was marginal (i.e. price setting) for a number of five-minute periods.  

5. Conclusion

As can be seen, the Imbalance Price is a function of a number of variables including wind forecast error, differences in system demand and ultimately the cost of the various actions taken by the TSO to maintain and balance the system. We are now in week three of the new market and the volatility seen over the first few days of the new market has continued to occur. It remains to be seen whether this will settle down to some extent over time or whether this volatility will persist due to the inherent characteristics of an energy market located on a small island with a lot of intermittent generation and limited interconnection.   In its next Insights, ElectroRoute will continue its analysis of the new I-SEM market. Please subscribe by contacting ElectroRoute Media or use the subscription box on the right to continue reading our Insights!   Please contact Client Services team if you would like to explore the trading, forecasting and balancing services that ElectroRoute can offer to help you minimise the impacts of market volatility on your assets.