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Before it reaches you, electricity has already been traded between electricity producers and suppliers in the wholesale market. This market ensures that there's enough electricity to go round every second of the day and night. Discover how it works.
Electricity producers sell their electricity to suppliers in the wholesale market. A single set of wholesale electricity market arrangements, known as the British Electricity Trading and Transmission Arrangements (BETTA), operates across England, Wales and Scotland. The wholesale electricity market operates in half-hourly blocks and is based on a system of bilateral trades. Under these arrangements, electricity producers determine when to run their plant on the basis of economic considerations, with the System Operator able to secure additional or reduced electricity production close to real time in order to make sure that supply equals demand at all times.
In the wholesale market, the majority of electricity (over 90%) is sold directly from generators to suppliers in bilateral contracts. Most of these contracts are made from a year or more ahead of delivery up to a day ahead of delivery. The contracts can take any form and there is no formal obligation to disclose the prices contained within them.
About 3% of electricity is sold through Power Exchanges. These computer-based trading systems allow generators and suppliers to fine tune their contracted positions by buying and selling standardised blocks of electricity. Trading on the Power Exchanges tends to be concentrated within the last 24 hours before delivery.
Market participants can continue to make contracts to buy and sell electricity up to a point known as ‘gate closure’, which is one hour before the half hour in which that electricity is delivered. At gate closure, generators and suppliers must provide the System Operator (National Grid) with a final notification of the volumes of electricity they are contracted to generate or consume in the relevant half hour period.
After gate closure, the System Operator prepares to balance the predicted level of generation and demand in the relevant half hour. The Balancing Mechanism operates from gate closure through to real time to ensure that supply and demand can be continuously matched. Through this mechanism, market participants can submit ‘offers’ to increase generation or reduce demand and ‘bids’ to decrease generation or increase demand. National Grid purchases these bids and offers as necessary on a ‘pay as bid’ basis. Some 2-3% of electricity is traded in this way.
The System Operator can also purchase other balancing services in order to deal with sudden, unpredictable variations in generation or demand. The costs of procuring these services are recovered from generators and suppliers.
The volume of electricity actually generated and consumed by each market participant is metered for every half hour. Where this varies from a generator or supplier’s contracted position (including bids and offers under the Balancing Mechanism), payments are made or received at one of two prices to cover the difference. These prices are intended to encourage market participants to limit their imbalance.
Since 2007, Northern Ireland has been part of a Single Electricity Market which operates across both the Republic of Ireland and the Province. This market is an electricity ‘pool’ and is very different to the bilateral market that operates in Britain. In the Irish market all electricity generated is sold into a central pool and then bought by suppliers at a single clearing price.