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Proposed Reforms to the Balancing Mechanism Are Unlikely to Be Effective in Addressing the Issues the GB Electricity Market Is Facing

Some proposals might actually worsen, rather than alleviate, the transmission constraint problem

A key issue with the current electricity market design in GB is the cost of transmission constraints, which has risen eight-fold since 2010, from under £170m to over £1.3bn in 2022. These costs originate from the fact that the physical limitations of the transmission network are currently not considered when electricity is traded in the wholesale market.

One solution to this problem is the introduction of a locational wholesale market in GB. Some commentators have instead proposed reforms to the balancing mechanism (“BM”) as an alternative. In this report, we create a taxonomy of BM reform proposals and assess their merits. We group the reform proposals into three broad buckets, as shown below.

Infographics

We find that none of the proposals are likely to be effective in addressing the underlying problems of the current market design. They are unlikely to reduce constraint costs significantly, and may lead to unintended consequences – including inefficiencies in market trading, gaming opportunities, the imposition of arbitrary costs, and discrimination between classes of market participants. Some proposals might actually worsen, rather than alleviate, the constraint problem.

Apart from some of the more extreme variants of the proposals in Bucket 2, none of the proposals address materially the significant financial transfers from consumers to generators that occur under the current market design. Therefore, aside from being an ongoing burden on consumer bills, this means that market participants receive locational signals that fail to reflect the value or cost that they bring to the system, with adverse effects on their siting decisions.

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