What Will Balancing Costs Be in I-SEM? 09 May 2016

I-SEM go-live is fast approaching and in a climate of enthusiastic development of wind generation this is the burning, unanswered question which is keeping some windfarm owners, developers and investors up at night.

On the face of it, it’s a fairly simple question. Just tell me a number!

That, however, is easier said than done at this early stage. At the time of writing this article, key factors that will influence the design of the Balancing Market remain unknown, such as how imbalance price calculations will work in practise, how REFIT will interact with the Balancing Market and to what level constraint actions taken by EirGrid will impact the market. 

Given the similarities between many aspects of the I-SEM and the design of our neighbouring GB market, there are some interesting insight that can be gained by examining the balancing costs of wind generators in GB.

As will be the case in the I-SEM, wind generators in the GB market typically trade volumes in the Day Ahead and Intraday Markets based on forecasts and any imbalances due to forecast error or outage are cleared in the Balancing Market at a single imbalance price. 

ElectroRoute has analysed the balancing costs of four GB windfarms, three onshore and one offshore, in 2015 using publically available data from Elexon and National Grid.  The analysis assumes the windfarms trade day ahead, do not trade intraday and clear any forecast error in the Balancing Market. As demonstrated by the table below, balancing costs for the three onshore windfarms range from 7-9% of energy market revenues for the year.  As you would expect, the offshore windfarm has a lower balancing cost due to higher capacity factors and more consistent wind speeds.

In 2015 ElectroRoute traded 1,419 GWh of power in the GB market predominately on interconnectors.  While not directly comparable, there are parallels to wind generation as both are price taking (the underlying asset’s generation levels cannot be controlled), involve trading based on day ahead forecasts, re-trading in the Intraday Market due to fluctuating forecasts and outages and ultimately being exposed to imbalances.  Over the course of 2015, ElectroRoute achieved a balancing cost of just 0.50 £/MWh on these traded volumes.

While the GB market can hint at the range of balancing costs we could expect, the comparison is not perfect due to some fundamental differences - the Irish market is ten times smaller than the GB market and has less participants.

These differences may lead to poorer liquidity in the Intraday and Balancing Markets, i.e. limited participants present who can set prices, which may lead to more volatile prices.   This illiquidity may be compounded further unless the generation feet improves some of its technical capabilities such as reduced start-up times and increased flexibility. 

The Intraday Market will be a continuous power exchange and is likely to be a very important trading venue as participants attempt to optimise their contracted position. Supplemental intraday auctions coupled to the GB market will offer the opportunity to import additional and much needed liquidity.

With this in mind, it will be crucial for wind generators which are concerned about balancing costs to actively forecast and trade on a 24/7 basis in the Day Ahead and Intraday Markets, thus minimising balancing costs and maximising market revenues in the long term.

Analysis using our in-house I-SEM model confirms this logic.  We compared the balancing costs for an indicative year of operation in the I-SEM for two different trading strategies and found that a windfarm which actively trades 24/7 in the Intraday Market can achieve significantly lower balancing costs compared to a more passive strategy, depending on levels of liquidity in the market, as demonstrated in the table below.

While the model results should only be viewed as indicative, it is clear that balancing cost optimisation is possible through thoughtful active trading.  These savings represent considerable value to windfarm owners in an investment climate of tightening margins. In order to optimise balancing costs in the I-SEM, now is the time for asset owners to consider how to access the capability to trade 24/7 on a continuous basis, either through establishment of in-house trading operations or outsourcing to a trusted third party trading services provider.