Balancing Energy

If you face the challenge or need to actively manage your energy procurement, you’ll encounter many topics demanding your attention. This certainly includes balancing energy and the potential costs and risks associated with it. You can understand balancing energy as a risk contribution that may or may not be added to your procurement costs. In the following, I will go into detail about the pricing of balancing energy and explain why we believe we can contribute to your self-sufficient energy procurement. At the same time, I will outline the conditions under which balancing energy seems to have little impact on your operating result and why you still benefit from good market connectivity.

To understand the concept of balancing energy and its pricing, it’s worth considering the dichotomy of the electricity grid into its physical and economic parts. Operating a physical system economically results in exciting and complex challenges. This is also the case with the electricity grid, which is often phrased as the “most complex and largest machine ever built” link .

Many of the topics you encounter when dealing with the electricity grid, such as the question of balancing energy, can, in my opinion, be best understood after a tl;dr paragraph.

What do I mean by the physical system being operated economically? In our daily experience, the electricity grid is, of course, the energy available at any given time that lights our lamps, makes the sockets “work,” drives machines, and is essential for (digital) infrastructure like radio masts. Here, the often-quoted credo applies that the injected power is equal to the extracted power (I deliberately write “is” and not “must be”). This image of the “now” forms the physical part, which is only one aspect of the “electricity grid” machine. Another aspect is the coordination of all actors involved in the grid, whose (planned) actions in the run-up to the “now” moment influence the grid. Simply put, the coordination of all actors (electricity producers and consumers) is about ensuring that the planned produced quantity corresponds to the planned consumed quantity — that the balance is even. This aspect represents the economic part. Sounds complicated? Unfortunately, it is.

To maintain the physical equilibrium, there are explicit and implicit mechanisms. Explicit mechanisms include primary and secondary reserves, as well as capacity reserves (see link and link for more details). The most important implicit mechanism is certainly the inherent inertia of the system, which is mainly due to the rotating masses of conventional power plants (which is another exciting topic that is becoming increasingly important; see e.g., link ). For the economic equilibrium, which of course has a direct impact on the physical equilibrium, there are also various mechanisms and instruments (such as the SPOT markets of EPEX and Nord Pool). So much for the tl;dr.

If you are considering taking energy procurement into your own hands, you will automatically become an active participant in the electricity grid. As an active participant, one of the mechanisms designed to maintain the economic equilibrium of the grid becomes relevant to you: balancing energy . Why is this relevant in the context of the MPC energy forecast?

As mentioned above, the transmission system operators (TSOs) keep power reserves available to stabilize the electricity grid. The costs incurred as a result are covered by the revenues from the so-called balancing energy. It is important to note that balancing energy is not energy in the physical sense but rather a construct of the economic side of the electricity grid. The grid is divided into (economic) balancing zones, whose energy inflows and outflows must be balanced every fifteen minutes. For example, energy consumption must be offset by energy purchases to balance a balancing zone. If a balancing zone is not balanced, balancing energy must be recorded to balance the account. If you make the energy purchases yourself and are your own balancing zone manager, you also bear the costs of the balancing energy incurred.

What does MPC have to do with balancing energy? As a balane zone manager, you are obliged to report quarterly forecasts of your energy requirements to the TSOs. If the forecast deviates from the actual energy flow, balancing energy is incurred (to balance the account). Since balancing energy means costs on average, you have a financial incentive to have as little balancing energy as possible. Either you forecast your energy demand as precisely as possible, or, even better, you adjust your energy flow as cleverly as possible to your most precise forecast. MPC to the rescue? We think so, too!

The price of balancing energy in Germany is determined by the four TSOs (50Hertz, Amprion, TransnetBW, TenneT) using a complex set of rules link . Not only is the determination complex, it can also only be done ex-post, and the possible costs incurred by the balancing energy are difficult to anticipate (what a financial nightmare). The price essentially consists of three so-called modules, each of which is intended to fulfill its own function in pricing. The final price is then set as the minimum (for a negative balance of the German control reserve association (NRV) – in the event of overfeed, i.e., more energy production than demand) or maximum (for a positive NRV balance) of the three modules. The exact mechanism for calculating the prices per module is not the subject of this blog entry; the following only describes the functions that the modules are intended to fulfill:

• Module 1: The Basic Component For the basic component, the quarterly price that the TSOs have to pay for the ancillary services aFRR and mFRR is used. It thus reflects the basic costs incurred for system stabilization.

To understand why this one module cannot be used to determine the price, it is helpful to recall the two sides of the electricity grid, i.e., the physical and the economic sides. The economic view aims purely at the price to determine whether measures to avoid balancing energy are worthwhile or not. It could therefore be advantageous to deliberately incur a balancing zone imbalance if the costs of providing aFRR and mFRR are estimated to be low. However, the actual number of reserves is limited, and the classic supply and demand equilibrium of economics can only occur up to a certain point. Demand for reserve energy beyond that leads to system instability or even a blackout. This module is therefore supplemented by two further modules to counteract this problem.

• Module 2: The Incentive Component This module is based on the German Intraday Spot Market price. With sufficient liquidity on the spot markets, balancing zone managers can compensate for short-term changes to their schedule by trading on the spot market. Assume you have an unexpected failure of a production machine and cannot consume the planned amount of electricity. In this case, you would have the option of selling it on the spot market. However, you only have the incentive to do this as long as the costs of the balancing energy incurred are greater than the possible losses you would have to accept from trading. To ensure this, there is a minimum difference between the intraday price and the incentive component of 25% and at least €10/MWh.

Even if the name “incentive component” does not directly suggest it, the incentive to balance one’s balance via the spot market is not equally given for buying and selling energy. The reason lies in the minimum difference from the intraday price - if the price is higher, it may be worthwhile to record one’s own position as balancing energy instead of selling it on the spot market (and vice versa). More on this later.

Building on these two rather economically oriented modules, there is another component in the pricing that is due to the physical properties of the electricity grid.

• Module 3: The Scarcity Component Since the reserves that can be used by the TSOs are limited, it is important not to have to use them to the maximum to continue to have reserves available for any unforeseen emergencies such as power plant failures. This is where the scarcity component comes into play, which further increases the costs of balancing energy as soon as the control power used reaches 80% of the maximum available power.

The last factor to mention is the Capacity Reserve Ordinance, which takes effect as soon as the actual capacity reserves , i.e., power plant capacities that do not participate in the market, have to be activated. This is only the case when all other mechanisms have been exhausted, and the price of balancing energy is then raised to the maximum to counteract the occurrence of this case.

Taken together, the three modules and the Capacity Reserve Ordinance form the price of balancing energy so that it is cheaper to have no or only a small amount of balancing energy and instead use other options to balance one’s own balance. One special feature that should be mentioned here is that an unbalanced balance can also lead to income. In two cases, the TSO pays the balancing zone managers with a positive reBAP and an over-covered BK balance, as well as with a negative reBAP and an under-covered BK balance.

If you look at the historical data of the reBAP, you quickly realize that it was predominantly positive, and an over-covered balancing zone can accordingly expect income from the balancing energy payments. Accordingly, you could align your purchasing to buy more than your forecast demand. In most cases, you would be reimbursed for the surplus energy purchased. However, this strategy is not only risky (there is no guarantee that the reBAP will continue to be predominantly positive), but you also incur opportunity costs! These stem from the minimum difference from Module 2, which you could receive as additional revenue when balancing your balancing zone imbalance via the spot market. The sign of the NRV balance (which is actually quite evenly positive and negative) is decisive for whether the price of balancing energy is raised or lowered compared to the spot market. Accordingly, you would often achieve higher prices via the spot market. In other words, you could also understand this incentive as your margin for direct trading on the intraday market ;)

If you are now looking for reliable ways to optimize your balancing energy, we would be happy to discuss with you how we can help!