The ‘Balancing Mechanism’ is the name of the trading system which is operated by National Grid and used to match electricity demand to electricity supply. The system is necessary because electricity cannot be stored in any significant volume. Consequently, as demand for electricity goes up and down during the day, electricity supply must also be increased and decreased to match, on a second by second basis.
The Balancing Mechanism allows National Grid to accept bids and offers from participating electricity generators to decrease or increase electricity generation. These trades take place in a succession of trading periods which comprise each half hour of the day. Most of the participating electricity generators are nuclear, gas, and coal fired power stations, but the number of wind farms joining the BM is increasing, particularly as more large offshore wind farms are built.
Electricity generators may occasionally be asked to reduce their output, even if they are contracted in to the market, because there is an error in the demand forecast and less electricity is required than was expected.
In such cases, a conventional generator will actually pay to reduce its output, because it is saving fuel. If a fossil-fuelled power station reduces output, savings are made on the cost of the fuel which need not be used. As a result of this, fossil-fuelled power stations submit negative bids to the system operator indicating they will pay National Grid a certain sum per MWh if asked to reduce output.
Conversely, wind farms do not have fuel costs, but if they are called upon to reduce output, they lose subsidies such as the Renewable Obligation Certificates (ROC) and the Climate Change Levy Exemption Certificates (referred to as Levy Exemption Certificates, LECs).
Wind generator participants in the Balancing Mechanism are therefore permitted to submit positive bids to the system operator, indicating that they need to be paid by National Grid to reduce their output.
These payments are called ‘constraint payments’ and the cost is eventually passed on to the consumer. It is part of the price we pay per kWh for the electricity we use.
Figures released by the Renewable Energy Foundation, a registered UK charity promoting sustainable development for the benefit of the public by means of energy conservation and the use of renewable energy, show that over £5.9 million was paid in ‘constraint payments’ to wind turbine operators during 2012. In the first six months of 2013 they have already received over £8.2 million.
For producing nothing.
Money for nothing? Thank you. That will do nicely.
