The Balancing Mechanism is a market operated and utilised by National Grid Electricity System Operator (NGESO) to help them maintain the safe operation of the UK electricity network. The electricity network must be balanced at all times i.e. generation and demand must be equal, otherwise power failures and infrastructure failures may result. As electricity is not readily stored (pumped storage and battery storage are some exceptions), National Grid requires power stations to provide services to help maintain this balance. NGESO have two options to obtain these services: in real-time via the Balancing Mechanism; or through contracting for the services in advance (LINK).
The Balancing Mechanism is a competitive market, whereby power plant connected to the grid can submit ‘Bids’ to reduce output, or ‘Offers’ to increase output. In times of system imbalance, National Grid can look to the available plant to increase/decrease generation. Generator’s can charge eye-watering prices to turn-on/off their power plant (up to £9999/MWh!!) The Balancing Mechanism is one of a number of potential revenue streams for power plants – the price they charge to be turned on/off in the Balancing Mechanism will be valued against the price that they could potentially make elsewhere in the market (i.e. selling the power they generate to a retail supplier of electricity who needs power, or keeping their plant off to save fuel for a time in the future where they forecast power prices will be higher).
In 2019, National Grid spent £588m in Balancing Mechanism. Forecasts show that this number is expected to increase and could potentially double by 2030, with balancing the market becoming more difficult due to the increasing number of renewable sources connecting to the network and their intermittent nature (not always windy or sunny!). The most shocking fact about this is that consumers foot 50% of the bill for these payments! In essence, £294m was added to customers electricity bills in 2019. The other 50% is socialised amongst participating generators.