The GB power system is always out of balance. This means that supply and demand are never completely aligned. There are many reasons for this - power stations may be unexpectedly unavailable, the wind might blow less than was forecasted, the nation could all turn on their tellies at the same time in response to a major news story. The possibilities are endless. Because of this, National Grid Electricity System Operator, or ESO, puts provisions in place to make sure that the system is balanced enough to prevent a blackout and keep the frequency at 50 Hz.

Established in 2001 alongside the Balancing and Settlement Code, or BSC, as part of the New Electricity Trading Agreements in England and Wales, the Balancing Mechanism, or BM, is the system that the ESO uses to balance the electricity market in real-time. Participants can register assets - called Balancing Mechanism Units or BMUs - with Elexon, the organisation responsible for managing the BSC. Registered participants - for example, power stations or energy suppliers - can submit bids and offers in the BM. These are the prices at which they will be prepared to increase or reduce generation or demand of a given BMU in order to help balance the system. Basically, when necessary, the ESO decides to take balancing actions by paying participants to flex up or flex down.

As our system increasingly relies on intermittent technologies like wind and solar power, system imbalance becomes more volatile. The main function of the BM is to make small adjustments on top of the wider power market, so that the ESO can keep the lights on. Most electricity trading takes place in the wholesale market, up to one hour before power is scheduled to be delivered. Generators and suppliers will make trading agreements for every half-hour settlement period of each day, sometimes years in advance. One hour before the agreed delivery period, the market closes. This is known as gate closure.

Generators and suppliers must publish details of their intended generation or demand for each settlement period. These are called Physical Notifications. At gate closure, these Physical Notifications are locked in, and locked-in details are called Final Physical Notifications, or FPNs. FPNs give the ESO a forward plan of projected imbalance levels, allowing them to forecast generation and demand. This is where the BM comes in, in order to balance any discrepancies between supply and demand.

The BM covers the period of time between gate closure and the end of a settlement period. Following gate closure, the ESO accepts Bids and Offers in the BM. Bids are to flex down - which means to increase demand or decrease generation. Most of the time, participants pay to flex down, but they can also bid negative amounts, which, if accepted, mean the ESO pays participants to deploy BMUs to decrease generation or increase demand. Offers are to flex up - which means to increase generation or decrease demand. In these cases, the ESO pays participants to deploy BMUs to increase generation or decrease demand.

Bid Offer Acceptances, or BOAs, are then delivered to BM participants, who must ensure that their BMUs are able to flex up or flex down, as required, to balance the system. If generators haven't delivered in line with their FPNs and BOAs, Elexon must find additional volume to make up for any shortfall caused by non-delivery, and this costs them. To recover that cost, BM participants that were "out of position", meaning they did not match their contracted and physical delivery, must pay Elexon. Out of position participants are charged at the system price, which is a value determined by Elexon in a process known as 'cash-out'. While being charged the system price is often considered a penalty, there is still an opportunity for participants to generate revenues when this happens. This is known as NIV chasing, but that’s a story for another day and another video.

To learn more about how the Balancing Mechanism works, and to see the rest of our Modo Academy video series, be sure to explore the Modo platform.