Imbalance Markets

An imbalance market describes the pricing and trading as well as the use of reserve energy according to the imbalance settlement in balancing markets.

An imbalance market describes not a real market but is rather a part of balancing markets that serve the function to balance the energy grid and optimizes the use of renewable energy resources. It is a part of a real-time energy supply market that offers electricity generation as well as transmission services. The participants include multiple balancing authority areas as well as utility territories and are a part of the imbalance settlement. 

Let’s take a step back: What is an energy market?

To understand an imbalance market, you must first know what an energy market is. Energy markets are commodity markets in which energy is bought and sold. In the past, this meant trading physical energy commodities such as coal or wood, but in today’s electrified world it is more complex. 

Energy markets are a key pillar for balancing the consumption and production of energy. Unlike other commodities, electricity cannot be stored in large quantities and thus requires grid operators to continuously balance the output from electricity generation with the demand from customers. To do this, energy markets can be divided into different market types based on pricing:

Forward electricity market

In forward markets (also called a futures market), electricity is traded either months or years  before delivery. The prices are settled against spot market prices of future delivery periods. This is meant to protect buyers from fluctuating prices and provide more stable costs.

Day-ahead market 

A day-ahead market (also called an auction market) refers to the trading of electricity for the following day. Prices are determined by the last accepted bid on the market. These trades are anonymous and take place daily – even on public holidays.

Intraday market

In an intraday market, the trading and delivery of electricity occurs on the same day. Within these markets there are no fixed prices. Instead, the price of every transaction is continuously assessed throughout the day. 

Balance and imbalance markets

The balance and the imbalance market, contrary to the other trade based markets above, aim to balance energy and forecast potential errors and deviations by activating reserve energy. Thus their focus isn’t monetary, but will also save costs by preventing grid strains that can lead to higher costs.

Balancing market 

In Europe, balancing markets try to keep electricity grids within a frequency of 50 hertz (Hz). Even deviations as tiny as 0.2 Hz can lead to potential outages. To keep the frequency within the set range, balancing energy is used. There are different types of balancing markets: 

• Frequency Containment Reserve (FCR), a primary control reserve that reacts to deviations within 10 seconds.
• Automatic Frequency Restoration Reserve (aFFR) the secondary frequency control mechanism which is automatically activated within 30 seconds.
• Manual Frequency Restoration Reserve (mFRR) the tertiary control reserve which restores the primary and secondary control reserve to counteract bottlenecks in the transmission grid. 

In the context of imbalance and counteracting occurring imbalances we differentiate between two scenarios:

Active imbalance describes the scenario in which market participants will intentionally adjust their positions to manage the imbalances. This can be done either by engaging in market transactions or by deploying own flexible resources. 

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Passive imbalance refers to situations, in which market participants (BRPs in this case) allow deviations from their defined schedules to occur voluntarily or due to external factors without actively acting to correct these imbalances.

This is a more decentralized process because different market participants make predictions and decisions independently which then collectively influence the grid’s balance.

So, what exactly is the imbalance market? 

An imbalance market used to only be for large energy consumers, but no longer. It is similar to a balancing market in that its purpose is to stabilize the electricity grid, but functions rather as a financial settlement for Balancing Responsible Parties (BRPs) . It comes into play whenever the wrong estimate occurs and either too much or too little power is purchased. When this happens, the imbalance market is traded.

Energy in an imbalance market is traded within 15 minute intervals. Should there be a difference between the planned production and the actual consumption, the difference must be corrected to maintain the grid’s stability. The prices within an imbalance market might vary quarterly – depending on supply and demand. But the reserve energy is only activating balancing products if imbalances actually occur, not in response to forecasted imbalances.

Causes of imbalances

Imbalances in the energy grid can occur due to several aspects: 

• Unexpected spikes in demand or supply.
• Infrastructure disruptions due to issues within the energy grid.
• Weather conditions, especially with renewable resources that might depend on  certain weather conditions, such as solar panels.

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Imbalances are also categorized into positive and negative imbalances:

Positive imbalances: The supply exceeds demand (requires downward regulation)

Negative imbalances: Demand exceeds supply (upward regulation required).

Prices in imbalance markets

Pricing in imbalance markets can vary in correlation with the supply and demand of the grid. Especially because there are no set prices, but only settlements and regulatory framework. And instead of determining a set price  in balance and imbalance markets, the price is set in ranges, according to how much of the balancing energy has been used to counteract deviations in the grid. The pricing within imbalance markets are either set within the imbalance settlement or the balancing energy price. 

The imbalance settlement is a financial mechanism which assigns Transmission System Operators (TSOs) prices to portfolio imbalances within a certain settlement period. This can be from 15 to 60 minutes in quarter-hour steps. Every TSO calculates the overall imbalance for every responsible party in its imbalance area and defines the price accordingly.

On the other hand, the balancing energy price (in Germany) is used to compensate for deviations that correlate with control reserve capacities and activations and forms the system price – thus it represents the price of the activated reserves to balance the system.

Balancing responsibility

Balancing responsibility, a part of settlement within the participating BRPs, ensures that supply and demand are coordinated in order to stabilize the grid. It is an agreement between the market participants in the balancing and imbalance markets. These BRPs are responsible for balancing electricity supply and demand. The balancing responsible party must be connected to each supplier or buyer connected to the grid so that such imbalances can be avoided. They are also financially responsible for all imbalances in their portfolio of grid allocation points.

They develop the schedules and manage the imbalances via the TSO. These services are often dependent on flexibility in order to be able to adapt quickly to changes in grid stability.

Flexibility in balancing services

Flexibility is the ability to increase or decrease electricity consumption and generation in response to fluctuations to ensure a stable and reliable electricity supply. The intermittent nature of renewable energy makes flexible demand crucial to balance fluctuating supply, especially in combination with balancing markets. An imbalance market in the Netherlands, for example, can take one of two positions: either balancing or system support. Due to the congested grid and long connection times, the flexibility of small-scale assets must be leveraged and used on a large scale via balancing markets. When dealing with variable renewable energy sources, it is crucial that these markets enable real-time adjustments and settlements for discrepancies between expected and actual electricity consumption. The data published within two minutes, such as system balances and activation of balancing energy, helps electricity suppliers to make accurate estimates. This increases the effectiveness of their balancing measures and supports system stability. BRPs optimize their portfolios and potentially earn more by adapting to market conditions in real time. They activate flexibility through their assets and trading activities, create business opportunities and relieve the grid. Although the market for balancing energy can be riskier than the day-ahead market, it offers higher earnings potential.