Balancing and Settlement: How the Electricity Market Keeps the Lights On

Introduction

Electricity is unique among commodities: it must be produced and consumed in real time, with supply and demand balanced every second. In Great Britain, this delicate equilibrium is maintained through a sophisticated system of balancing and settlement, overseen by National Grid Electricity System Operator (ESO) and Elexon. In this article, I’ll explain how these processes work, why they matter, and how they’ve been tested during recent market turbulence. I’ll also explore the regulatory codes that underpin the system, the impact of the P272 modification, and how these changes are facilitating the transition to Market-wide Half-Hourly Settlement (MHHS).

The Challenge of Balancing Electricity

Unlike gas, electricity cannot be stored at scale (at least not yet, outside of limited battery and pumped storage). This means that, at every moment, the amount of electricity generated must match what is being consumed. If the system falls out of balance, it can lead to frequency deviations, blackouts, or equipment damage.

National Grid ESO is responsible for real-time system balancing, while Elexon manages the financial settlement of imbalances between market participants.

For a detailed overview, see National Grid ESO: How the Electricity System Works.

The Role of National Grid ESO

National Grid ESO forecasts demand and instructs generators to increase or decrease output as needed. It uses a range of tools, including:

Balancing Mechanism (BM): The primary market for real-time balancing. Generators and large consumers submit bids and offers to adjust their output or demand. The ESO accepts these in real time to keep the system balanced.
Ancillary Services: Contracts for frequency response, reserve, and other services that support system stability. These include services like Fast Reserve, Short Term Operating Reserve (STOR), and Enhanced Frequency Response (EFR).

For more, see National Grid ESO: Balancing Services.

The Role of Elexon and the Balancing and Settlement Code (BSC)

Elexon administers the Balancing and Settlement Code (BSC), which governs how electricity market participants are paid for the energy they generate or consume, and how imbalances are settled. The BSC is a central pillar of the GB electricity market, setting out the rules for metering, data collection, imbalance calculation, and financial settlement.

Key Processes:

Metering: Accurate measurement of generation and consumption at every site. Metering data is collected and validated by accredited agents.
Imbalance Settlement: If a supplier delivers more or less electricity than their customers use, Elexon calculates the difference and settles payments accordingly. This incentivises accurate forecasting and trading.
Settlement Periods: The market operates in half-hourly settlement periods, with all imbalances reconciled after the fact. Each day is divided into 48 settlement periods.

The BSC is a living document, regularly updated through industry modifications to reflect market evolution. For a technical introduction, see Elexon: Introduction to Settlement and the BSC itself.

The Importance of Industry Codes

The BSC is just one of several industry codes that underpin the electricity market. Others include:

Grid Code: Sets out the technical requirements for connecting to and operating within the transmission system (National Grid: Grid Code).
Distribution Code: Governs the operation of the distribution networks.
Connection and Use of System Code (CUSC): Covers the contractual arrangements for using the transmission system.

These codes ensure that all market participants operate to common standards, supporting system reliability and fair competition.

Why Balancing and Settlement Matter

Balancing and settlement ensure that:

The system remains stable and secure.
Market participants are incentivised to forecast and match supply and demand accurately.
The true cost of imbalances is reflected in market prices, encouraging efficient behaviour.
The financial flows between generators, suppliers, and traders are transparent and robust.

Case Study: The August 2019 Frequency Event

On 9 August 2019, a lightning strike caused the simultaneous loss of two large generators (Hornsea offshore wind farm and Little Barford gas station), leading to a rapid drop in system frequency. National Grid ESO activated frequency response services, but the frequency fell below statutory limits, resulting in automatic load shedding and power cuts for over a million customers.

Elexon’s settlement processes ensured that the costs of the event were allocated to the parties responsible for the imbalance, highlighting the importance of robust balancing and settlement arrangements (Ofgem: Investigation into 9 August 2019 Power Outage).

The Impact of P272: A Step Towards Granularity

A major milestone in the evolution of settlement was the implementation of Modification P272. Introduced in April 2017, P272 required that all Profile Class 5–8 non-domestic electricity meters (typically small businesses) move from Non-Half-Hourly (NHH) to Half-Hourly (HH) settlement.

Why Was P272 Important?

Accuracy: NHH settlement relied on estimated consumption profiles, which could be inaccurate and did not reflect actual usage patterns. HH settlement uses real metered data for every half-hour period.
Incentivising Flexibility: By exposing suppliers and customers to the true cost of consumption at different times, P272 encouraged demand-side response and more efficient use of the system.
Data Infrastructure: The rollout of advanced metering and data collection systems under P272 laid the groundwork for more granular settlement across the market.

For more, see Elexon: P272 Implementation.

Challenges and Lessons Learned

Data Management: The transition required significant upgrades to data collection and processing systems.
Market Readiness: Some suppliers and agents faced challenges in adapting to the new requirements, highlighting the need for robust change management.

P272 as a Foundation for Market-wide Half-Hourly Settlement (MHHS)

The experience gained from P272 has been instrumental in shaping the industry’s approach to Market-wide Half-Hourly Settlement (MHHS). MHHS will extend HH settlement to all customers, including domestic households, leveraging the national rollout of smart meters.

How P272 Facilitates MHHS

Proven Processes: The systems and processes developed for P272 provide a template for scaling up to the entire market.
Stakeholder Engagement: Lessons from P272’s implementation have informed stakeholder engagement and readiness planning for MHHS.
Regulatory Confidence: The successful transition of Profile Class 5–8 customers demonstrated that large-scale settlement reform is achievable.

For more on MHHS, see Ofgem: Market-wide Half-Hourly Settlement and Elexon: MHHS Programme.

Recent Developments: Market-wide Half-Hourly Settlement (MHHS)

MHHS is one of the most significant reforms in the GB electricity market’s history. It will:

Enable Flexibility: By settling all customers on a half-hourly basis, MHHS will support time-of-use tariffs, demand-side response, and the integration of distributed energy resources.
Support Decarbonisation: More granular settlement will help manage the variability of renewables and encourage consumers to shift demand to periods of high renewable output.
Drive Innovation: Suppliers and technology providers will be able to offer new products and services, such as automated load shifting and peer-to-peer trading.

The MHHS programme is currently in the design and implementation phase, with full market go-live targeted for the mid-2020s.

The Impact of the 2021–22 Crisis

During the recent energy crisis, balancing costs soared as National Grid ESO procured more reserve and frequency response to manage system risks. Elexon’s settlement processes were tested by the wave of supplier failures, requiring rapid reallocation of settlement obligations and data. The crisis has underscored the importance of accurate, timely data and robust settlement systems—capabilities that will be further enhanced by MHHS.

For a summary of recent system balancing costs, see Elexon: System Price Analysis.

Conclusion

Balancing and settlement are the unsung heroes of the GB electricity market, ensuring that the lights stay on and that market participants are held accountable for their actions. The evolution from NHH to HH settlement, driven by P272, has paved the way for the transformative potential of MHHS. As the system becomes more complex—with more renewables, storage, and flexible demand—these processes and the codes that underpin them will only grow in importance.

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