<aside> 💬 Unlike any other commodity electricity cannot be stored along its distribution path. To ensure grid stability, power generation must match at all time power consumption levels. Transmission System Operators (TSO) are responsible for this physical equilibrium of the system. In decentralized markets, they hold market participants accountable for their participation to this equilibrium through the imbalance settlement price (ISP). This article offers a comprehensive guide on how this price is defined on the French market.
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All interconnected European power networks are said to be balanced when they operate at a frequency of 50Hz. Inherent uncertainties in power consumption and generation cause the network frequency to permanently fluctuate. When more power is produced than consumed, the nominal frequency of the grid increases, whereas in a power deficit it decreases. Maintaining the frequency within a 0.05 Hz tolerance range is essential to the system stability (see European decision https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32017R1485 ANNEX III, Table I). To ensure steadiness, TSOs can activate adjustment mechanisms and ancillary services when overall system imbalance is observed. Once the physical equilibrium has been guaranteed, the costs generated by the balancing operations are passed on to the balance responsibility parties (BSP) through the ISP as we will see later in the article.
Let’s start by recalling some important notions. A balance responsibility party is an actor of the electricity market who enters into a contractual agreement with the TSO to ensure that they will cover the costs associated with the difference between injections and extractions on its balancing perimeter. The balancing perimeter is made up of injections (physical production sites, purchases on the stock exchange, downward flexibility…) and withdrawals (physical consumer sites, sales on the stock exchange or to other market participants, exports, …) contracted by the actor.
source : Imbalance settlement price article - RTE
When the actor is not balanced, it is charged the amount of energy corresponding to its remaining open position at Imbalance Settlement Price, depending on the global trend of the system and its open position.
The ISP is designed to limit the scope for arbitration between the financial settlement for the certification perimeter manager's deviation and the financial settlement for supplier rebalancing (Code de l’énergie, Article R335-32). In other words, a BSP is penalized at the ISP price if it delivers less energy than it sells. Conversely, the BSP can earn revenue from the ISP if it produces more energy than it sells. However, the ISP price differs between overproduction and underproduction to incentivize balanced production by the BSP. The difference comes from a coefficient that is added to the calculation of the ISP and that depends on the balancing trend, the volume weighted average price (VWAP) of balancing costs, and the imbalance sign of the market actor. It is explained in more details later.
<aside> 💡 ISP+ corresponds to the price at which the extra volume V+ of the producer is sold. The producer then earns ISP+ x V+. Beware that ISP+ is not signed and can be negative in some rare occasions, in which case this turns into a penalty.
ISP- corresponds to the price at which the missing volume V- of the producer is bought. The producer is then penalized at ISP- x V-. Beware that ISP- is not signed and can be positive in some rare occasions, in which case this turns into an earning.
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Currently the ISP is computed for each half-hour, but will switch to 15 min before 2025 to comply with the European guideline : 2017/2195 « Guideline on Electricity Balancing » (EBGL).
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The $VWAP$ component of the ISP aims at reflecting the balancing operation costs. RTE (the French TSO) takes into account the following types of balancing energies $(E_i){i \in I}$ and the associated prices $(P{E_i})_{i \in I}$ for both upward $U$ and downward $D$ operations (https://www.services-rte.com/files/live/sites/services-rte/files/RM_0_GENERAL PROVISIONS_V01_20240401.pdf section 0.O.2.3.):