Balancing Contracts and Balance Group Contracts
(1)
Dept. of Accounting and Commercial Law, Hanken School of Economics, Vaasa, Finland
9.1 General Remarks
The TSO uses contracts to facilitate the maintenance of the system frequency, that is, balance in the system. One can roughly distinguish between two kinds of contracts.
First, there are contracts designed to reduce imbalances in advance. For instance, a supplier cannot have access to the grid without undertaking a duty to balance electricity inflows and outflows, and a balance responsible party must undertake to balance electricity flows in a group.
The use of balance groups and the partial delegation of monitoring to a balance responsible party can increase both the proximity and quality of monitoring and market participants’ incentives to keep supply and demand in balance.
Second, there are balancing contracts that facilitate real-time balancing (the ancillary services of market participants) after the closing of the spot market. Such contracts could include bilaterally negotiated long-term reserves, which are framework contracts combined with an allocation mechanism for the use of capacity real-time. Electricity suppliers or large end consumers can provide demand-side management services under long-term demand management contracts.1
9.2 Balance Responsible Party and Balance Group Contracts
In the EU, electricity grid users must form groups with one of the group members responsible for balancing the difference between electricity inflows and outflows for the whole group. This requirement applies even to balancing service providers.2 Balance group requirements would be reflected in the rules of a spot market. For instance, some participants in EPEX Spot are balance responsible parties responsible for balance groups.3
Regulation
The role of balance responsible parties is regulated by ACER Framework Guidelines on Electricity Balancing that set out principles for the development of network codes4 and ENTSO-E Network Code on Electricity Balancing.5 While ACER Framework Guidelines define the function of balance responsible parties6 and set out the main principles that govern the role of balance responsible parties7 and imbalance pricing (Sect. 4.10.3),8 ENTSO-E Network Code on Electricity Balancing lays down the duties of balance responsible parties.
Rules of the TSO
The TSO must have rules for balance responsible parties. Their minimum contents have been set out in ENTSO-E Network Code on Electricity Balancing.
The rules must contain at least: (a) the requirements for becoming a balance responsible party; (b) the requirement that a balance responsible party is financially responsible for the imbalance to be settled with the connecting TSO; (c) the data and information required by the connecting TSO to calculate imbalance; (d) the rules for changing the position; (e) the settlement procedures; and (f) the consequences for non-compliance.9
Imbalances are calculated on the basis of the volumes allocated to the balance responsible party.10 Imbalances are defined as the difference, within a given imbalance settlement period, between: (a) the allocated volume attributed to the balance responsible party; and (b) its final position and any imbalance adjustment applied to the balance responsible party.
Contract
There must be a contract between a balance responsible party and the TSO. The contract provides that the balance responsible party is responsible for imbalances.11
A balance responsible party has several duties according to the Network Code.12 Each balance responsible party:
must be balanced or help the power system to be balanced in accordance with the TSO’s terms and conditions related to balancing;
must provide a balanced position in the day ahead timeframe on the request of its connecting TSO13;
may change its position prior to Intraday Cross Zonal Gate Closure Time pursuant to the TSO’s terms and conditions related to balancing;
must not change its position after the Intraday Cross Zonal Gate Closure Time without the consent of its connecting TSO;
must submit any change of the position to the connecting TSO; and
is financially responsible for the imbalance to be settled with the connecting TSO.
In addition, each connecting TSO may include certain additional terms in its terms and conditions according to the Network Code.14
Particular Aspects
The core duties of the balance responsible party are thus laid down in the Network Code on Electricity Balancing.
One may ask whether an obligation to take reasonable measures to keep imbalances to a minimum (a duty to use skill and care) would comply with the requirements under the Network Code. The answer seems to be no. Although the balance responsible party might prefer to dilute its obligations in this way, the wording of the Network Code requires an obligation to achieve a balanced position and pay for imbalances. This obligation is a duty to achieve a result.
In Germany, the duty has been limited to the use of best efforts. (a) The Energy Economy Act (EnWG) requires electricity traders that supply to delivery points within the control area of a transmission system operator (or trade with electric energy within the control area) to belong to a balance group (the electricity trader’s own balance group or another balance group).15 The conclusion of balance group contracts is thus a legal requirement.16 A balance group contract regulates the relationship between the balance responsible party and the system operator. (b) The minimum contents of the contract have been regulated in an ordinance (the Electricity Grid Access Ordinance, Stromnetzzugangsverordnung, StromNZV).17 The core terms of the contract lay down the duty of the balance responsible (1) to use its best efforts to maintain balance in the balance group and (2) to settle the cost of remaining imbalances.18 A balance group contract thus facilitates financial settlement.19 (c) The terms have been standardised by the Federal Network Agency (BNetzA) that has issued a model contract.20
The core duties are complemented by other terms, (a) The TSO can reduce imbalances in advance by requiring the balance responsible party to balance flows in the day-ahead market and limiting the use of the balance market. The use of the balance market can be limited to unforeseen differences. (b) The TSO may interrupt unauthorised flows according to its own rules.21 The TSO should have a corresponding duty in the light of its general obligations under the Third Electricity Directive.22 (c) Both parties know that there will be unplanned outages. The balance responsible party needs a grace period to balance the group to the extent that differences are caused by unplanned outages. The parties should also regulate the effect of congestion. (d) The contract must contain an imbalance pricing term.23
The contract must even regulate necessary modalities that reflect the mandatory duties of the TSO. Generally, the TSO is responsible for the operation of the system and balancing it.24 Where balance groups are used, the TSO will remain responsible for modalities such as disclosure of information, maintaining accounts, and billing. Moreover, the contract may need to address further issues characteristic of balance responsible agreements such as the use of sub-balance groups.
There are also contract terms that are customary in long-term contracts in electricity markets. For instance, the parties may need to regulate the question of collateral, including the term and termination of the contract and sanctions for breach of contract.25
9.3 Balancing Contracts
9.3.1 General Remarks
There are differences between the scheduled and actual volumes. The parties can reduce the differences by trading in the day-ahead and the intraday market. Where the operator of the spot market increases the trading of contracts in the intraday market close to delivery, the TSO may need to trade less in the balancing market.26
The TSO is responsible for the real-time balancing of the system. The TSO uses balancing contracts to facilitate real-time balancing and to allocate the costs of real-time balancing to the market participant that caused them (imbalance settlement, see also Sect. 4.5.8). Parties may not trade in the physical wholesale market without a balancing contract with the TSO.27
In principle, the contracts that facilitate real-time balancing can be (1) bilaterally negotiated long-term reserve capacity contracts and long-term demand response contracts or (2) auctioned reserves.
Long-Term Contracts for Peak Generation or Demand Response
Bilaterally negotiated contracts are long-term framework agreements. They facilitate peak generation or demand response.
In principle, the contracts could be (a) between the TSO and a party that owns the designated installations itself, or (b) between the TSO and a middleman (an energy merchant or a control center) that aggregates small individual capacities of third parties into volumes that a big enough to be tradable.
In the latter case, the available capacity varies as the portfolio of third parties and their installations changes over time. However, the TSO needs a fixed capacity. The parties would manage this inherent problem in the contract.28 The TSO could, alternatively, limit the use of aggregators and rely on more reliable service providers.29 An alternative for the aggregator would be to transfer this risk upstream and agree on fixed capacity with the third parties that own the installations.30
Comparison with EFET, EEI, ISDA
The framework agreements for the provision of balancing services facilitate simple physical transactions. They lack some of the core clauses customarily used in master trading agreements such as the EFET General Agreement, the EEI Agreement (Sects. 8.4 and 8.5), and the ISDA Master Agreement (Sect. 11.6).
While these master trading agreements are based on the single agreement principle and provide for close-out netting for the purpose of managing counterparty and systemic risk, such provisions are not necessary in balancing contracts. Neither are there any provisions on margining.
This is because the exposure of market participants to counterparty and systemic risk is minimal. Market participants supply ancillary services to the TSO. Whether the TSO activates the reserves is in the discretion of the TSO. The ability of the TSO to fulfil its obligations to the supplier of ancillary services under the framework agreement or individual contracts is not dependent on the behaviour of any other supplier of ancillary services.
These bilateral contracts nevertheless need to address the same characteristic issues as standard products used for the same purpose in the EU.
Standard Products in the EU
The Third Electricity Directive requires the TSO to purchase reserve capacity according to “transparent, non-discriminatory and market-based procedures”.31 Market-based methods must be used for the procurement of Frequency Containment Reserves (FCR), Frequency Restoration Reserves (FRR), and Replacement Reserves (RR). Moreover, each TSO must use standard products and specific products for this purpose.32
ENTSO-E Network Code on Electricity Balancing lays down the issues that are characteristic of the standard products without defining their contents. The characteristic issues include the following33:
the preparation period (period of time between the TSO’s request and start of the energy delivery);
the ramping period;
the full activation time (period of time between the TSO’s activation request and the full activation of the product);
minimum and maximum quantity;