Fossil fuels do not have the ability to store electricity in significant quantities. Consequently, a continual balance between supply and demand is essential. In the UK, generators, suppliers, traders, and customers actively manage this equilibrium by participating in the wholesale electricity market.
Trading purchase of electricity in this market occurs through various mechanisms. Bilateral agreements, for instance, involve contracts negotiated between generators and suppliers for the procurement of electricity.
Typically, companies structure these agreements under a master contract for a specified duration, establishing overarching trading principles. Individual trading agreements then stipulate the quantities of electricity to be purchased, along with the agreed-upon trading prices. To prevent imbalances in supply and demand, generators inform the National Grid of the traded electricity volume before its delivery.
Wholesale electricity trading can also occur through same-day or next-day exchanges, employing an auction process that aligns selling prices offered by generators with bids from suppliers. Once again, the National Grid monitors traded retail electricity market volumes to prevent market imbalances.
In a more long-term electricity market context, electricity is traded through electricity brokers, with wholesale prices determined based on forecasted market developments.
Functioning as the ‘residual balancer,’ the National Grid Electricity Transmission (NGET) is tasked with ensuring real-time alignment of the electricity system between supply and demand. The Balancing Mechanism is one of the tools used by NGET, allowing it to accept offers of electricity and bid for energy at very short notice, thereby maintaining the necessary equilibrium.