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February 23, 2016

Nordic imbalance settlement – what is it?

Imbalance settlement as part of the electricity market

The starting point of a functioning electricity grid system is that the alternating current frequency transmitted in the grid stays within nationally permitted levels, so a balance (or a state of near balance) must exist between electricity production and consumption at all times. The Transmission System Operator (TSO) maintains power balance through frequency-controlled reserves and manual regulations, which are made in the Nordic Balancing Market. The Nordic Balancing Market determines the up- and down-regulating prices for each hour. Up-regulation occurs when consumption exceeds production, whereas down-regulation occurs when production exceeds consumption. Up- and down-regulating prices determine the price used in the imbalance settlement for each hour.

Imbalance settlement refers to the commercial processing of balancing power, which identifies electricity deliveries between market participants operating in the electricity market. Energy that is used to balance the difference between market participants’ actual hourly consumption and sales as well as production and procurement is referred to as balancing power. Each party must have an open supplier that is responsible for balancing their power, so that consumption and production remain equal. An open supplier must, in turn, have a contract with another open supplier to cover its own open delivery. An open supplier that has a balance service agreement, that is, an agreement on the trade of balancing power with the TSO’s imbalance settlement unit – Fingrid Oyj in Finland – is referred to as a Balance Responsible Party (BRP). Imbalance settlement is performed once market participants’ consumption and production data is available, at which point, they will be charged or paid the imbalance amount. A production balance and a consumption balance are calculated separately for BRPs.

Nordic electricity market

The Nordic Council of Ministers has for several years supported the development of an integrated Nordic electricity market. The Council of Ministers gave their support to the report on common consumers and other end users in the electricity market, including a common Nordic imbalance settlement solution, by the Nordic energy regulators (NordREG). In 2010, the national TSOs – Fingrid, Svenska Kraftnät, Statnett, and Energinet.dk – decided on the establishment of the Nordic Imbalance Settlement (NBS) project in order to develop a common Nordic imbalance settlement model. The Danish TSO, Energinet.dk, left the project during the planning stage. However, it works in cooperation with the project and may join the Nordic imbalance settlement at a later stage. The planning stage of the project was completed in 2011. As the situation currently stands, the Nordic imbalance settlement model would be introduced in the autumn of 2016 in all three countries.

A common operational unit, eSett Oy, was founded to carry out imbalance settlement in electricity markets across the three countries, whose operations will initially be supported by Fingrid Oyj. eSett Oy is jointly owned by the three national TSOs. The common Nordic imbalance settlement process will replace the various country-specific settlement procedures. The aim is to determine the power balance of each market participant on an hourly basis, based on its electricity production, procurement, consumption and sales. The distribution service operators (DSOs) and other market participants will complete imbalance settlements according to this model, and TSOs are responsible for doing so at a national level.

In addition to improving the end user market, the Nordic imbalance settlement model is intended to act as a forerunner and an example at the European level. Its objective is to provide harmonised and well-functioning operational preconditions for all BRPs, regardless of country or price area, as well as similar standards and rules for information exchange among all market participants. Common and simplified practices for BRPs will make it easier for operators to enter the market, increase competition and lower costs, as market participants will have more BRPs to choose from.

Read our next energy blog out in March. In this blog, our expert Jukka Ohtonen will answer the question: ‘ Nordic imbalance settlement – what is changing? ’ Get to know the rest of the Fondia energy team here:http://www.fondia.com/expertise/energy.