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 The Balancing and
Settlement Code
Elexon Special Edition

by Steve Kaelble
Plus Elexon Contributors

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 The Balancing and Settlement Code For Dummies®,
Elexon Special Edition

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 Introduction
W
ho hasn’t heard a lightbulb joke, or maybe a hundred of
them? ‘How many (fill in the blank) does it take to change
a lightbulb?’ There are countless variations, but the
common thread is that installing a lightbulb is incredibly simple.

People take for granted the simplicity of many aspects of the

electricity system. After all, electricity is nearly as reliable as the
sunrise: it’s there at the flick of a switch and pretty much any
competent individual can change a lightbulb.

If you picked up this book, though, you probably already know

that the electricity system is actually incredibly complex. In Great
Britain, there is a competitive market, with a variety of suppliers
to choose from. Many other companies perform different roles in
the energy system to help gas and electricity reach end users. And
eleven (yes, eleven!) major codes govern how the energy system
operates.

One of those codes, known as the Balancing and Settlement Code,

is key to making sure that consumers will see the light after they
change the bulb and flick the switch. Known in short as the BSC,
it’s been around since the turn of the millennium, and it under-
pins the wholesale market in which power is generated, sold and
purchased across the nation’s electricity system. It’s a contractual
agreement signed by Parties that play a role in the electricity sys-
tem. When we refer to Parties in this book, we mean companies
such as suppliers and generators that have signed up to the BSC
and agree to be bound by its terms.

The BSC sets the ground rules for an electricity system in which
suppliers can purchase electricity from the generator of their
choice, and consumers can choose which supplier provides them
with power. The code takes into account the fact that contracts
can be agreed between generators and suppliers in advance, but
no one really knows precisely how much power will be generated
or used until the moment it all plays out in real life.

Elexon’s job is to compare how much electricity generators said

they would produce and suppliers said they would consume, with
the actual volumes that are generated and used. Elexon makes
sure that everyone is paid or billed accurately for any differences.

Introduction 1

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 These payments act as an incentive for suppliers and generators
to help keep the electricity system in balance. That is important,
as it means that National Grid, the electricity system operator,
has to spend less money on taking last-minute actions to balance
supply and demand.

Elexon provides an ‘end-to-end’ management service for the

BSC.  This means it offers a full range of services from helping
companies to enter the market, to making sure that they’re meet-
ing the rules of the BSC once they’re operating in it.

Elexon is an independent, not-for-profit organisation that serves

as a ‘critical friend’ to market participants, providing advice and
lots of technical support. Elexon is responsible for the systems
that are needed to deliver services under the BSC, and it helps to
develop changes to the code to reflect market developments and
shifting regulations. It also supports the government and Ofgem
(the energy regulator) in policy development and implementation.

About This Book

The Balancing and Settlement Code For Dummies, Elexon Special
Edition, is a primer with insights into the BSC and the arrange­
ments that make it work. It describes the various components of
the BSC, how the electricity system balances supply and demand,
and how Britain’s Balancing Mechanism makes sure that energy
is always there when the user needs it.

The book explains how the various Parties within the market
forecast demand and contract for the power they’ll generate or
use. You’ll learn about how they make bids and offers to balance
out the peaks and troughs in demand, and what happens when
actual usage doesn’t match what’s in the contracts. You’ll find
out how Elexon stays on top of what works well in the BSC and
what may need to change so that it works better. And you’ll see
how Elexon’s expertise is helping the electricity sector to achieve
‘net-zero’ emissions targets and create the energy markets of
tomorrow, enabling new technologies to emerge.

This book was written with insight from Elexon experts. It makes
the complex just a bit easier to understand. It doesn’t have
answers for absolutely every question you might have, which is
why it’s a good thing Elexon’s tailored, expert assistance is easily
available at www.elexon.co.uk.

2 The Balancing and Settlement Code For Dummies, Elexon Special Edition

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 Other sites that you may find useful are www.national
grideso.com, www.ofgem.gov.uk and www.gov.uk/government/
organisations/department-for-business-energy-and-
industrial-strategy.

Foolish Assumptions
In creating this book, we make a few assumptions about you, the
reader, so that we share the right information at the right level.
Those assumptions are that:

»» You’re involved in the wholesale electricity market, or you’d

like to be in the foreseeable future.
»» You have a professional interest in learning more about
how the market operates, and the rules and processes that
underpin it.
»» You don’t have all the time in the world to go into the
microscopic details of the BSC, but you’d really appreciate
a good overview.

Icons Used in This Book

The idea here is to make it easy for you to find the information
you want and need. Check out the margins and you’ll see icons
that help make that happen.

You might not choose to read every single word on these pages.
But try not to miss the words next to this icon.

This book is here to offer some pointers, including the tips right
next to this icon.

The BSC is more complicated than changing a lightbulb, and you’ll

find some of the more technical details next to this icon.

In some places we capitalise the initial letters in certain words or

terms like Party, Settlement, or Market-wide Half Hourly Settle-
ment. That’s because they are defined terms in the BSC.

Introduction 3

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 How This Book Is Organised
This book is divided into chapters exploring different aspects of
the BSC:

»» Chapter 1: Getting to Know the BSC – A summary of who

the code serves, an introduction to how balancing and
Settlement works and how the code originated.
»» Chapter 2: Delving Deeper into the Current and Future
Electricity Market – Understanding more about the
Settlement process and how changes can be made to the
BSC to support the evolution of the market.
»» Chapter 3: Understanding Other Aspects of the BSC –
How the code, and Elexon, make the system work so that all
Parties meet performance expectations. We also look at how
changes to BSC rules are made.
»» Chapter 4: Supporting Companies in the Electricity
Market – A look at how Elexon provides an end-to-end
service and shares trusted expertise and information.
»» Chapter 5: Evolving the BSC for the Future Energy
Market – How Elexon is working to digitalise BSC systems,
expanding on the BSC’s concepts. This chapter also looks at
improvements to the process so that electricity Settlement is
as accurate as possible, and how Elexon supports moves to a
smarter energy system.
»» Chapter 6: Charting the Future of the Energy Codes –
The case for reforming the energy codes to better support
companies in the energy market.
»» Chapter 7: Ten Key Takeaways about the Energy Sector –
Important points to remember as you finish reading.

Where to Go from Here

Time to turn the page! Your journey could certainly start on the
next page, or elsewhere in the book, depending on what you want
to learn. If you’re not in the mood to read cover-to-cover, that’s
fine. Just check the topic listing above and flip to the place that
matches your interest. Wherever you turn, enjoy reading, and
enjoy your journey towards a better understanding of the BSC!

4 The Balancing and Settlement Code For Dummies, Elexon Special Edition

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 IN THIS CHAPTER
»» Understanding who the BSC serves

»» Balancing and settling

»» Spelling out the arrangements

Chapter  1
Getting to Know the BSC

L
ife as a consumer can seem pretty simple. You go to the shop
and pick up a container of milk. There may be different vari-
eties and brands to choose from, and you also have a choice
of which shop to buy from. But you don’t have to think much
about the process that got the milk from the cows on the farm to
the container in your shopping basket.

Likewise, when you flick on the light switch in the kitchen, you
barely give any thought to the complicated process through which
electricity gets from a power station to your home, so that your
fridge can keep the milk cold.

This chapter sheds a little light on that process, particularly the

way different players in the electricity system contract with one
another to get that power to you. It discusses the Balancing and
Settlement Code (BSC) which makes sure that energy companies
pay or collect the right amounts of money, how those calculations
are made and how the industry works to get electricity to you.

Suppliers agree contracts with generators to buy electricity to

supply to their customers.

Other entities are involved in buying and selling of electricity too,

known as non-physical traders. These organisations don’t gener-
ate electricity, nor do they have customers to sell it to. For them,
trading electricity is more of an investment proposition, and so

CHAPTER 1 Getting to Know the BSC 5

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 it’s no surprise that banks are among the non-physical traders
involved in this activity. Electricity is also available to buy from
other sources such as operators of battery storage.

The BSC is an agreement that helps make all of this possible. It

is a multi-party contract with rules and processes to make sure
that payments for imbalances in wholesale electricity supply and
demand are settled accurately. It is signed by the companies that
operate in Great Britain’s wholesale electricity market.

These include:

»» Generators that produce most of the electricity

»» Suppliers that sell electricity to most retail customers
»» Non-physical traders (as outlined earlier)
»» Electricity Distribution Network Operators (owners of local
networks that take electricity from the high-voltage networks
and transport it to homes and businesses)
»» Users of electricity interconnectors (wires that connect Britain
to other European countries) that take part in the BSC to trade
»» Independent aggregators that act on behalf of consumers
that want to offer ‘demand-side response’ to the electricity
system (where homes and businesses agree to reduce
or increase consumption in exchange for payments).
Independent aggregators can now participate in the
Balancing Mechanism by registering as Virtual Lead
Parties (find out more about this in Chapter 5).
»» Third party companies including owners of the high voltage
networks or companies that want access to market data

Balancing and Settlement – What’s It

All About?
There are many different paths a container of milk might take on
its way to a buyer’s refrigerator. Any particular shop must fore-
cast how much milk customers will want to buy on any given day,
and obtain that milk from a supply chain that eventually leads as
far back as the cows on a dairy farm. The system is most efficient
when the shopkeeper’s estimate is right on target.

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 As for the electricity that powers the refrigerator, there’s just one
set of wires connecting the premises to the electricity system, and
the electricity arrives through those same wires regardless of who
the supplier might be.

And while it’s accepted that anything you want to buy in a partic-
ular shop might be in short supply at any given time, in the elec-
tricity market it’s absolutely essential that electricity is always
available whenever the customer demands it.

Like the shopkeeper selling milk, suppliers of electricity must

forecast how much electricity their customers will require at any
particular time.

Normally, they decide which generators to obtain that electricity

from, and contract to buy a specific amount of electricity from
a specific generator at a particular time. That’s about where the
similarities between milk and electricity end.

If the shopkeeper doesn’t order enough milk to meet customer

demand, the shop will run out and have no milk until the next
delivery. If the shopkeeper orders too much, the milk will stay in
the refrigerator until it’s eventually sold (or goes sour).

Nobody wants to run out of electricity, and it can’t be stored

economically in a large-scale way yet either. Therefore, electric-
ity supply and demand have to be balanced every half-hour of
every day.

If demand from a supplier’s customers is higher than the amount

of electricity that the supplier has bought from generators, cus-
tomers will still get the electricity they need.

This is because National Grid Electricity System Operator (National

Grid ESO for short) makes sure that the level of generation meets
total demand from customers. If a generator is unable to produce
the amount of electricity that it has contracted to produce for a
supplier, National Grid ESO will call for another generator to step
in to make up for the shortfall. Suppliers could also be asked to
reduce their demand. So overall, National Grid ESO’s job is to bal-
ance electricity supply and demand in real time.

Suppliers and generators are then billed later on for their part in
creating any imbalances between supply and demand, and that is
where the BSC comes in.

CHAPTER 1 Getting to Know the BSC 7

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 National Grid owns the high-voltage networks in England and
Wales (known as transmission networks). They are like the motor-
ways of the electricity system. SSE and Scottish Power own the
transmission and lower-voltage electricity distribution networks in
Northern and Southern Scotland respectively. A range of companies
own the distribution networks in England and Wales. The lower-
voltage grids are like the A and B roads and country lanes.

National Grid ESO is a legally separate company within the

National Grid group, and it uses a sophisticated Balancing Mech-
anism to match supply and demand in each half-hour trading
period of every day (See Figure 1-1.).

FIGURE 1-1: National Grid Electricity System Operator manages supply and

demand through the Balancing Mechanism.

For each half-hour period, National Grid ESO works out what the
difference will be between the amount of electricity produced, and
electricity demand. It may then accept a ‘bid’ or ‘offer’ to either
increase or decrease generation, or demand to close any gaps and
keep the system in balance. (We explain more about bids and
offers in a moment.)

Elexon’s job as the BSC manager is to settle the score, so to speak.

Elexon compares how much electricity generators and suppliers
said they would produce, or contract for, with actual volumes that
were produced and used. Elexon works out the prices for these
differences and then makes sure that generators and suppliers
either pay, or are paid, to settle any differences.

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 Matching supply with demand
The electricity market measures usage in half-hour periods. For
each half-hour of the day, suppliers forecast how much electricity
their customers will need. They then buy that volume of electricity
from generators to precisely cover each half-hour period of usage.

Once the contracts are arranged and the contract submission

deadline has passed, everyone should keep to the contracts. Gen-
erators are expected to generate and deliver what the contracts
say they will, and suppliers’ customers are expected to use the
amount of electricity that they said they would.

It’s not surprising that real life doesn’t always work out quite as
planned. For example:

»» Suppliers may have got their forecasts for the amount of

electricity required wrong
»» Generators may not be able to deliver the amount they
expected; for example, if there’s a problem with their plant
»» There may be a difficulty in transporting electricity on the
networks

National Grid ESO balances supply and demand in a number of

ways, including the use of ‘bids’ and ‘offers’:

»» Bids: A generator can reduce the amount of electricity it

produces if National Grid ESO asks it to, for a proposed price.
Suppliers that can be flexible with how much electricity their
consumers use can also increase their demand for a proposed
price if asked by National Grid ESO.
»» Offers: This is where generators agree to produce more
electricity than they were contracted to provide, or when
suppliers agree to reduce demand from their customers.
Again, these are in exchange for payments from National
Grid ESO.

National Grid ESO has other tools for balancing supply and
demand including Frequency Control by Demand Management
and Firm Frequency Response. You can find more information on
those here: www.nationalgrideso.com/balancing-services/
reserve-services/short-term-operating-reserve-stor ,
www.nationalgrideso.com/balancing-services/frequency-
response-services.

CHAPTER 1 Getting to Know the BSC 9

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 Settling up
The whole process of contracting electricity happens in advance
of the actual usage and is agreed for every half-hour period. Once
each half-hour period has ended, the Settlement process begins.

Once the period is over, actual metered volumes are available.

There are measurements for how much electricity each genera-
tor produced, and for how much each supplier’s customers used.
Metered volumes are the backbone of the Settlement process.

Elexon receives details of all of the contracted volumes for a par-

ticular half-hour. They show what the generators contracted to
generate, and what the suppliers contracted to buy. Elexon adjusts
for the various bids and offers that were accepted in the process
of balancing supply and demand. The figures are compared with
the actual volumes recorded by the meters for each half-hour.
The difference between the actual volume and the contracted
­volume is called the imbalance volume.

Here are the various scenarios or imbalances that might emerge:

»» A supplier’s customers have used more electricity than the

supplier had contracted for. So it must pay for more
electricity to cover the imbalance.
»» A supplier has contracted for more electricity than it used, so
it will be paid for that additional electricity.
»» A generator didn’t produce as much electricity as it had
contracted to do. So it must pay for the additional electricity
to make up for the shortfall.
»» A generator produced more power than it contracted for.
So it will be paid for the extra power that was available
(and possibly used by a supplier in the first scenario).

Each of these different imbalances carries a price tag. It is Elex-

on’s job to calculate the volumes of the imbalances and determine
that price. This is known as the imbalance price.

As time passes, more data about how much electricity was pro-
duced and how much was used becomes available, as customer
meters are read. (Chapter 2 explains how the Settlement process
works in more detail.)

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 Determining the imbalance price
The Settlement concept is simple enough – payments go back and
forth to cover the actual volumes of electricity that don’t match
what was in the contracts agreed in advance by generators and
suppliers. Making that happen is anything but simple, of course!

Elexon has to work out what the imbalance price is for each half-
hour period so that it knows what the Settlement costs should be.
In each Settlement Period, every imbalance is charged for, or paid
at the same imbalance price.

The imbalance price reflects the wholesale electricity price dur-

ing any half-hour (which, of course, varies depending on market
factors). It is also impacted by the Balancing Mechanism bids and
offers that National Grid ESO has selected in order to balance sup-
ply and demand on the transmission system.

Complex as it might sound, there’s at least one fairly simple take-

away. The cost of energy imbalances creates a financial incentive
for generators and suppliers to be as accurate as possible when
forecasting how much electricity they need to produce, and how
much consumers are likely to use. The contracts that they agree
should match those forecasts as much as possible.

THE STORY OF THE BSC

The BSC was first introduced as part of the New Electricity Trading
Arrangements, or NETA, which took effect in March 2001. These are
the current rules for the wholesale electricity market in England and
Wales. Prior to this was the Electricity Pool, which introduced a com-
petitive electricity market in 1990.

Four years later, these arrangements were extended to cover

Scotland and so the name changed to the British Electricity Trading
and Transmission Arrangements, or BETTA.

The aim of NETA and BETTA was to have a more transparent and
competitive wholesale market with clearer governance arrangements
through Ofgem, the energy regulator.

Millions of consumers enjoy the benefits of the BSC, whether they’re

familiar with those three initials or not. The BSC helps to make sure
that supply and demand on the electricity system are kept in balance,
so that ­consumers receive reliable supplies.

CHAPTER 1 Getting to Know the BSC 11

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 IN THIS CHAPTER
»» How Settlement works to protect the
industry and consumers

»» Supporting evolution of the market

Chapter  2
Delving Deeper into
the Current and Future
Electricity Market

I
f you read Chapter 1, you have a feel for who is impacted by the
Balancing and Settlement Code, as well as an overview of the
way it works. But the ultimate question always is, ‘why?’

In the case of the BSC, two key parts can help to answer that ques-
tion. There’s the ‘right now’ part, which is how the BSC helps
the energy markets to operate smoothly. By doing so it provides
assurance to electricity companies that sign up to the code, and
ultimately for electricity consumers.

The ‘for the future’ part has to do with how the BSC should adapt to
support the evolution of market arrangements and the improve-
ments they’ll bring to industry players and customers alike.

This chapter explores in more detail how electricity Settlement

works and how the process protects the industry and consum-
ers. It also provides a quick overview of the importance of looking
ahead, anticipating changes that will be needed in the BSC, and
laying the groundwork for evolution in market arrangements.

CHAPTER 2 Delving Deeper into the Current and Future Electricity Market 13

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 How Does Electricity Settlement Work?
Chapter  1 talked briefly about how Settlement works. In this
chapter we go into a bit more detail.

Each of the half-hour Settlement Periods are settled in isolation

from all the other periods around them. Elexon processes meter
readings to calculate the generator or supplier’s imbalance posi-
tion. This is simply done by comparing the metered volumes to
the volumes in the contracts agreed between Parties for each half-
hour Settlement Period.

Elexon then works out the imbalance prices for each Settlement
Period, based on the cost National Grid ESO incurred for the bal-
ancing actions it took. Parties are paid (or charged) that price per
volume of imbalance.

Electricity companies that are signed up to the BSC (known as

Parties) are paid (or charged) through a series of six Settlement
Runs – calculations carried out between one and 14 months after
the Settlement Period (unless there is a dispute over data, in
which case it is 28 months after). See Figure 2-1.

FIGURE 2-1: Settlement Runs.

Some customers (particularly larger consumers and power sta-

tions) know the impact it has on them quickly. This is because
their volumes are recorded every half-hour (by meters which reg-
ister consumption or generation in half-hour intervals) and are
submitted into the Settlement process.

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 Many meters in households or smaller businesses are non half-
hourly meters which can only record energy use over longer inter-
vals. These meters are only read once or twice a year, so as time
passes their actual volumes replace estimated volumes. As the
Settlement Runs progress, the more accurate the picture becomes.

Elexon specifies the rules for all Metering Systems through

metering Codes of Practice (CoP). It is responsible for compliance
testing of these meters and assuring the communication proto-
cols used to retrieve metered data.

A risk-based approach is used where the requirements, such as

accuracy, become stricter the higher the volumes of energy being
measured.

For a meter to be used for Half-Hourly Settlement it must be capa-

ble of meeting the requirements of the relevant CoPs and be able
to provide information which can be downloaded and validated by
a Half Hourly Data Collector (HHDC) or the Central Data Collec-
tion Agent (CDCA) so that data can be submitted into Settlement.
A HHDC works on behalf of a supplier to retrieve, validate and
process meter readings. The CDCA collects meter readings from
sites connected directly to the transmission system, licensable
generators connected to an electricity distribution system (one of
the lower-voltage networks) and some license-exempt genera-
tors connected to a distribution system.

For Non Half Hourly Meters (for example, those used in many
homes) it is up to the Registrant of the meter (for example, a
Supplier) to be certain that the method for collecting data from
it is suitable.

Supporting the Evolution of Market

Arrangements
Among its many important roles, Elexon works with industry
participants to develop proposals to change BSC rules. This is
critical for ensuring that BSC rules continue to evolve, to meet
changing requirements and technologies, as well as mitigate con-
cerns, issues or problems.

CHAPTER 2 Delving Deeper into the Current and Future Electricity Market 15

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 You can find a lot more detail about how that change happens
in practice in Chapter  3. But in the meantime, it’s worth con-
sidering some of the reasons why the code needs to be readily
changeable.

The bottom line is, it’s essential to have the ability to adapt BSC
rules, as they underpin the way the electricity sector is run. If the
administration of the electricity markets gets stuck in the past,
how could the industry accommodate new technology and busi-
ness models?

Take, for example, the Government’s commitment to ‘net zero’

emissions by 2050. That’s key to combating climate change,
which has enormous quality-of-life implications for every
human being on the planet. Those aspects of decarbonising the
economy that involve energy will require new business models
and new technologies, along with changes to the rules to enable
those developments.

Alternative generation models, such as solar panels at home, will

almost certainly be part of that ultimate societal goal. So might
peer-to-peer energy trading, as neighbours agree to share elec-
tricity that they generate. Advances in battery technology will
make home electricity storage more feasible. Owners of electric
vehicles will have a keen interest in how and when those vehicles
are charged and at what cost.

That’s just the beginning of the potential for change in the energy
sector. There are plenty more changes on the way. Elexon, the
energy regulator and the Government, are exploring whether
retail market arrangements need to be changed to allow new
types of energy service companies into the market, that look very
different from the suppliers we know today. Read Chapter  5 for
more details on changes like this.

All of these advances are tremendous opportunities for the future,

and all will have a significant impact on the way energy is traded
and balanced. Experts at Elexon are always anticipating the way
market arrangements might evolve, and how the rules will need
to evolve to stay ahead.

Change of this type doesn’t necessarily happen overnight (which

is why people think of it in terms of evolution). Major reforms may

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 come with significant lead times, but it’s never too early to start
thinking about them. That’s a key focus of Elexon expertise  –
how changes to the BSC both today and in the future can unlock
benefits for consumers. That kind of thinking benefits suppliers
and people with innovative ideas that they want to bring to the
electricity market. Ultimately, changing the rules can make the
system better for all consumers.

CHAPTER 2 Delving Deeper into the Current and Future Electricity Market 17

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 IN THIS CHAPTER
»» Credit cover

»» Delivering change to the BSC

»» Assuring performance and handling

non-compliance

»» Reporting on the electricity system

Chapter  3
Understanding Other
Aspects of the BSC

C
hapter 1 went into detail about how the electricity market
works in terms of contracting for generation, balancing
supply and demand, and settling up the imbalances between
what was planned in advance, and what actually happened. The
BSC also spells out a lot of additional arrangements and processes
so that the market operates smoothly.

This chapter discusses the collateral that Parties operating in the

markets must put up to guard against any risk that they can’t pay
their bills for imbalance charges. It talks about how the BSC can
be changed to fix problems and evolve with the times. It provides
insights into mechanisms for ensuring that all Parties are per-
forming as expected. And it spotlights the kind of market report-
ing that keeps everyone properly informed.

Credit Cover
The electricity market moves at a fast pace. When it comes to
imbalance Settlement, there’s a new story to tell every half-hour
of every single day. That’s a lot of opportunities for the various
market players to experience swings in cash flow. BSC Parties
therefore need to maintain enough credit cover.

CHAPTER 3 Understanding Other Aspects of the BSC 19

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 Credit cover essentially refers to collateral that’s lodged by BSC
Parties to cover any payments that will be required to settle
imbalances.

If any Party involved in the electricity market can’t meet its imbal-
ance charges for whatever reason – that is to say, if it defaults on
the payments it owes – all of the other Parties may have to pick
up that cost proportionally.

Credit cover is basically a security deposit that reduces the risk

those other Parties (and their shareholders and customers) face.
Credit cover can be arranged via cash deposited with Elexon, a let-
ter of credit or an approved insurance product. If a Party defaults,
the amount owed is recovered from that credit cover, so that the
other Parties don’t lose out.

Companies should put up funds roughly equivalent to a month’s

worth of their potential imbalance Settlement costs with a 25 per
cent top up to act as additional headroom. This should be enough
to cover all of the potential debts that could be run up during the
time between when a debt is incurred and when payment is ulti-
mately due.

How much credit cover are Parties required to put up? Actually,
the precise amount is not specified or mandated, and a company
can suffer consequences if it doesn’t lodge enough. Elexon offers
guidance on how to calculate the amount of credit cover required.

Under the BSC, that billing time frame is 29 days. Therefore, Par-
ties are required to pay their imbalance Settlement no more than
29 days after the Settlement date (the date that the actual flow of
electricity took place). This means that in most cases Parties get
a new bill every day.

Imagine that a Party is required to pay an imbalance Settlement

covering a flow of electricity that was measured on 1 June. That
means the bill must be paid within 29 days, or by 30 June. Now,
imagine that the Party on 30 June declares that it’s not able to pay.
By that point in time, 29 additional days of potential imbalances
have occurred. That’s why Parties should plan to put up enough
collateral to cover their potential indebtedness for a 29-day period.

There are other things to consider too. For example, how a Party’s
imbalance would be affected if there was a plant trip or system
outage. Demand for electricity can also spike during an unex-
pected cold snap. That’s why it’s wise to prepare to put up more

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 credit cover at short notice for these events. The credit cover can
be increased during business hours.

Delivering Change to the BSC

The BSC dates back to about the beginning of the current millen-
nium. It’s not exactly new. But it’s vital to note that the BSC is a
living, breathing document, not something that was carved into
stone, never to change.

The people who wrote the BSC knew that it would need to evolve.
For that reason, the BSC includes its own change process, so that
it can react to any concerns or issues and be able to proactively
change to meet future needs.

The change process allows for changes to be made to the BSC

itself, its systems and its Code Subsidiary Documents (CSDs). Most
changes are decided by Ofgem, unless they’re not material in nature.

While the BSC provides high level rules for how balancing and Set-
tlement is carried out, the CSDs provide additional detail on the
obligations in the code. One of the most important types of CSDs are
the BSC Procedures (BSCPs). The BSCPs define the relationships,
timescales and interactions between electricity market participants.
They also specify the information and other outputs to be exchanged
between them, and the method for providing the information.

The process involves development of, and consultation on rule

change proposals. These proposals are then referred to the inde-
pendent BSC Panel, made up of industry experts and consumer
representatives who vote on whether to approve or reject a pro-
posal (or make a recommendation to Ofgem on whether the change
should be approved). When making recommendations, Panel mem-
bers have obligations to consider if the proposal better facilitates a
number of objectives for the BSC, including efficient operation of
the high voltage system and promoting effective competition.

The Panel also has a non-voting representative from Ofgem,

National Grid ESO and the electricity distribution network
operators.

BSC Parties raise the majority of change proposals for the code,
while Elexon raises the majority of changes to the CSDs.

CHAPTER 3 Understanding Other Aspects of the BSC 21

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 Proposals have different progression routes depending on the
complexity, urgency and nature of the change.

For example, housekeeping changes can follow an expedited pro-

cess. Large, complex changes are assessed by work groups made
up of industry experts before the proposals are brought before the
Panel for a recommendation.

There are also different procedures that depend on whether or not

the change will alter the legal text of the BSC itself, or the CSDs.

If the legal text needs to be revised, it’s called a Modification. Oth-

erwise, the term is a Change Proposal. Elexon cannot raise Modi-
fications itself, but it does analyse issues and propose solutions,
which can be adopted by a BSC Party and raised as a Modification.
Elexon can raise Change Proposals, as these are more practical
changes to BSC processes. Under the BSC arrangements, once a
solution has been developed for a Modification, or a Change Pro-
posal, Elexon must consult on it and assess the impact on BSC
documents as well as systems and processes used by Elexon and
the industry.

BSC Parties need to complete the Standard Modification Template

if they’re proposing changes that would alter any part of the legal
text of the BSC. If the proposed change is approved, any related
BSC systems or CSDs would be updated as well.

If a BSC Party has a problem but isn’t sure what the solution should
be, it can raise an issue. Elexon looks at the current arrangements
and possible solutions, and then brings its findings to a group of
industry experts for consideration.

If you’re not a Party to the BSC and you have a change to propose,
there’s a process for that, too. Non-BSC Parties can encourage
a BSC Party to raise a Modification or Change Proposal on their
behalf. Or, they can apply to the BSC Panel as a third-party appli-
cant to raise a Modification Proposal.

The Panel will decide whether or not to accept the request. If it

does, the Modification Proposal can be raised and it will follow the
usual process and timetable for a Proposal. If the Panel rejects the
request, the third party is free to appeal that decision to Ofgem,
which has powers to overturn it. Parties can appeal to Ofgem too,
where they believe the Panel has wrongly designated a non-Party
to raise a Modification.

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 Assuring Performance and Handling
Non-Compliance
As you can see, Settlement is a complex process and Elexon’s job
is to make sure that it is as accurate as possible for both electricity
companies and consumers.

To achieve this, part of Elexon’s role involves checking that all

BSC Parties (and the agents that work for them) follow rules
on accurate submission of data to the process. Elexon does this
through the Performance Assurance Framework (PAF).

The PAF requires that:

»» Suppliers and supplier agents (that provide services such as

installing and reading meters and processing meter data)
must exchange data between each other efficiently and
accurately
»» Volumes of generation and consumption and trading
charges must be calculated and allocated correctly

Elexon carries out this Settlement assurance on behalf of the

Performance Assurance Board (PAB) whose role is to oversee the
assurance framework. The PAB is made up of industry experts. It
is a sub-committee of the BSC Panel.

Elexon carries out a variety of performance assurance activi-

ties through the year, at the direction of the PAB, to assess and
prioritise risks to Settlement. This includes confirming whether
Parties are complying, and identifying any issues that need to be
addressed.

The annual cycle for performance assurance activities begins with

a methodology Elexon maintains for identifying and evaluating
Settlement risks – held in the risk register. For example, one risk
is that meters aren’t registered correctly, or at all. This could
result in errors in recording consumption, which leads to inac-
curate Settlement.

Elexon drafts an operating plan for the PAB, which sets the risk
mitigation priorities for the year. Elexon uses a set of Performance
Assurance Techniques (PATs) to help mitigate these risks.

CHAPTER 3 Understanding Other Aspects of the BSC 23

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 These techniques include reviewing performance data, auditing
Parties against their obligations and requesting action by Parties
to rectify issues. The PATs that are best suited to mitigate each
risk are described in the operating plan.

These techniques are divided into four categories:

»» Incentive: Gives participants and their agents an added

reason to comply with the BSC.
»» Preventive: Designed to stop risks manifesting in the first
place.
»» Detective: Detective techniques, as the name suggests,
allow Elexon to detect risks to Settlement and any non-
compliance with the code.
»» Remedial: Remedial techniques are used to correct issues
that occur once risks manifest.

PATs are applied to the Parties which could cause, or help control
a risk. These performance assurance Parties are:

»» Suppliers
»» Meter Operator Agents (which install, commission, test and
maintain meters)
»» Data Collectors (appointed by Suppliers to retrieve, validate
and process metering data)
»» Data Aggregators (appointed by Suppliers to aggregate
metering data received from Data Collectors)
»» Distribution Network Operators (owners of lower-voltage
electricity networks)

Using the PATs, Elexon assesses whether there are any issues that
might impact on the accuracy of the Settlement process, or result
in a Party not sufficiently meeting its obligations under the BSC.

These obligations include sending data flows on consumption or

generation and taking action to correct things. Corrections can
come in the form of amending the data submitted to Settlement to
fix errors. They can also involve a company needing to physically
fix meters if they aren’t registering electricity flows properly. The

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 test is whether any risk to Settlement will manifest in a signifi-
cant way.

Ultimately, if a company is found in breach of the BSC it could be

expelled from the code (or have its ‘qualified’ status removed if
it’s a Party agent) and not be able to operate. It could also have its
license removed by Ofgem.

The results and findings of these PATs and how well they’ve miti-
gated the risks are reported to the PAB, with proposals for any
further action. They’re also summarised in the Annual Perfor-
mance Assurance Report.

The BSC Panel and the PAB produce a series of documents each
year that identify the steps in the performance assurance process
(and report on it):

»» Risk Evaluation Methodology: Known as the REM for short,

this document sets out how the PAB identifies, evaluates and
assesses the materiality of Settlement risks.
»» Risk Evaluation Register: RER for short, it describes the
risks identified by the methodology. It sets out the root
causes, available controls, affected Party types and a
forecast financial impact for the coming year.
»» Risk Operating Plan: It describes how the PAB is prioritising
the risks and the plan for how Elexon should deploy the PATs
to mitigate them.
»» Annual Performance Assurance Report: This report
outlines the results of the risk evaluation and risk assurance
procedures for the BSC year.

Reporting on the Electricity System

Elexon provides a wide variety of detailed information on the
electricity market. As the electricity system becomes smarter,
access to (and use of) this data is becoming ever more important.

The data Elexon provides includes information on the operation

of the wholesale electricity market and trading arrangements.

CHAPTER 3 Understanding Other Aspects of the BSC 25

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 Elexon uses a variety of channels to make the data available to
BSC Parties and other market participants:

»» Data available at www.elexon.co.uk, including insight

articles where Elexon staff draw attention to key trends.

»» Publicly available data provided through the Balancing

Mechanism Reporting Service (BMRS) website (www.
bmreports.com). It includes up-to-the-minute information
on the electricity system, and historic data.
»» Party-specific Settlement information available to companies
via the Elexon Portal (www.elexonportal.co.uk) or web
service interfaces from Elexon IT applications.

The BMRS is a free online resource, which is the one-stop shop

for operational data related to the electricity Balancing and Set-
tlement arrangements.

The BMRS is used extensively by BSC Parties, traders, energy ana-

lysts and academics as a means to understand the dynamics of the
electricity market.

The data is used to support trading decisions and help market

participants understand balancing activities by National Grid
ESO. It also provides real-time and forecast insights about gen-
erators’ capacity.

The BMRS is also the Inside Information Platform (IIP) for Great
Britain. This means that market participants use the BMRS as the
reporting service for ‘inside information’ to comply with the EU’s
regulation on energy market integrity and transparency (REMIT
for short). An example of what REMIT requires participants to
disclose is information about planned or unplanned outages for
electricity infrastructure. The BMRS therefore improves trans-
parency of the wholesale market arrangements.

Other information on the BMRS includes fuel mix data, which can
show real-time, forecast and historical generation information by
fuel type (wind or nuclear for example) and generating plant.

Elexon also publishes indicative Settlement data such as market

imbalance volume and imbalance prices. All data on the BMRS
platform can be accessed via Elexon’s Application Programming
Interfaces (API) and through a real-time messaging system.

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 IN THIS CHAPTER
»» Serving from beginning to end

»» Providing trusted expertise and

information

Chapter  4
Supporting Companies
in the Electricity Market

T
he introduction mentioned that Elexon provides an ‘end-
to-end’ management service for the BSC. In this chapter we
explain what that means.

Providing Trusted Expertise and

Information
Elexon manages the operation of electricity Settlement and the
process to change the BSC.  It is an independent not-for-profit
organisation serving as an unbiased ‘critical friend’ to market
participants. Elexon also advises companies that want to enter
the electricity market. This includes explaining their obligations
to them under the BSC. For new entrants and innovators, Elexon
can help them to understand how their particular business model
can fit in with the existing rules.

In addition, Elexon’s role involves providing expert support

advice and solutions to the Government and the energy regulator
Ofgem on policy development and implementation. For example,
Elexon is playing a key role in delivering reforms that support

CHAPTER 4 Supporting Companies in the Electricity Market 27

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 development of electricity storage, new business models entering
the market and the roll-out of smart meters.

These services are rated highly by market users (in fact, Elexon
has achieved the highest net satisfaction rating among all of the
energy code bodies for three years running (2017-19) in Ofgem’s
code administrators’ performance survey).

Those entering the electricity market quickly recognise that

Elexon exists for a whole lot more than just the BSC and Settle-
ment. The organisation provides a wide range of expertise and
information to help companies in the market to succeed.

Meeting the OSMs

Elexon’s Operational Support Managers (OSMs) provide ded-
icated, high quality customer support and guidance on BSC
arrangements.

Each Supplier, Supplier Agent or Distribution Network Opera-

tor that signs onto the BSC is appointed a dedicated OSM who
becomes their primary contact at Elexon.

The OSM is there for each of these companies to provide dedicated

support and answer questions. OSMs also deliver regular, tailored
reporting information and provide guidance to companies.

The OSMs can help Parties understand what’s expected of them

with regard to compliance, but it’s important to note that the
responsibility for compliance rests with each BSC Party.

OSMs do not provide advice on business practices or commercial

interactions, but can provide a wealth of detail on industry and
Settlement processes.

Here’s some of the information that BSC Parties can expect to

receive from their OSM:

»» Weekly performance reports for Suppliers: These come

out on Mondays and include a range of performance data
relating to each Supplier. The OSM is available to review the
reports as needed, to discuss how performance is progress-
ing, what the market trends are and other topics.
»» Monthly dashboards for Suppliers and Meter Operator
Agents: These include details of the company’s performance

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 against Settlement risks identified by the Performance
Assurance Board (PAB) (see Chapter 3 for an explanation of
the PAB’s role). Risks are colour-coded with red, amber or
green marks.
»» Scheduled calls and visits: OSMs typically schedule a
catch-up call on a quarterly basis, and a face-to-face visit
once or twice a year.

Getting help from the OSM

In addition to the services outlined above, the OSM is there to
provide support during the BSC audit for those who are required
to have one annually. The BSC audit is one of the Performance
Assurance Techniques that Elexon and the Performance Assurance
Board (PAB) use to make sure the companies are following the
BSC processes properly, such as sending and processing the data
in the right way and within the prescribed timescales.

Elexon contracts out this audit service and selects the companies
to be audited based on a number of factors, including size, growth
rate and performance against the other performance assurance
techniques. The OSM notifies those who are subject to an audit
and can participate in an audit planning meeting as needed.

All communications between the company being audited and the

auditor should include a copy to the OSM. There’s an audit clo-
sure meeting to wrap things up, and the OSM will participate in
that too.

The OSM is also there to support Elexon’s Error and Failure

Resolution (EFR) team and the Parties that must enter EFR for
underperformance. This might be if a Party isn’t meeting the
Settlement performance obligations, or the BSC audit identifies
a process that isn’t being carried out. OSMs monitor information
to identify concerns at an early stage. They work closely with
Parties, the EFR team and the PAB to address the issues.

There are various reasons why Parties enter the EFR process
including earning three consecutive red marks on a particular
risk, as noted in the monthly dashboard (or the BSC audit), high-
lighting that a process isn’t being carried out correctly. The EFR
process should help to solve the problem.

CHAPTER 4 Supporting Companies in the Electricity Market 29

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 Other areas where the OSM may be able to help companies include
understanding the impact of specific BSC Modifications.

You can find more information about the OSM service at www.
elexon.co.uk/about/elexon-key-contacts/operational-
support-managers-osms/.

ARRANGING TRAINING SERVICES

The Elexon seminar ‘Introduction to the energy market’ is very popu-
lar among new entrants to the electricity market. It takes place five
times a year. But that’s just the beginning of the expert training that’s
available through the organisation. A whole menu of training oppor-
tunities, videos and webinars are aimed at helping Parties better
understand the BSC and their obligations.

An OSM can offer ideas about the kinds of training that might be
appropriate; however, Parties themselves can determine what best
suits their needs and talk to their OSM to request training. Best of all,
Elexon’s training resources are free for BSC Parties.

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 IN THIS CHAPTER
»» Supporting the rule change process

»» Digitalising BSC systems

»» Expanding Half-Hourly Settlement

»» Widening access to the Balancing

Mechanism for aggregators

»» Balancing markets across the continent

Chapter  5
Evolving the BSC for the
Future Energy Market

E
lexon experts are helping to guide the electricity market to a
variety of exciting places. This chapter talks about how
Elexon is working to enable the benefits of new technology
such as smart metering and electric vehicles to be realised.

The chapter also covers digitalising the BSC and explores the work
being done to integrate balancing energy markets across Europe.

Supporting the BSC’s Rule Change

Process
Britain’s energy system is changing rapidly. More than 30 per
cent of our electricity now comes from renewables. New technol-
ogies such as battery storage, blockchain (using digital ledgers to
record online transactions) and software applications mean there
are new ways to produce, trade and use energy.

CHAPTER 5 Evolving the BSC for the Future Energy Market 31

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 The BSC needs to adapt to serve this new system, and enable new
businesses that want to enter the market and offer new products
and services to consumers.

As outlined in Chapter 3, certain processes are built into the BSC

so that the rules can be changed to support these new develop-
ments. One excellent example of how this works involves allowing
multiple suppliers to serve a consumer using a single household
meter.

Currently it is very difficult for consumers to be served by more

than one supplier at a time through their meter, under the BSC
rules. This arrangement has been mostly fine up until now, as
people tend to buy the majority of their electricity from one
supplier.

In the future, consumers may want to buy and sell electricity from
multiple suppliers.

They will need their meter to still accurately register what they’re
using at home, and what they’re exporting to the networks, for
example, through household electricity generation equipment.
Elexon set out how the BSC could be amended to allow this in its
policy document ‘Enabling customers to buy power from multiple
providers’, which you can find at www.elexon.co.uk.

As a result, a Modification Proposal (P379) to change the BSC

rules was raised by a new entrant company for assessment by
the industry. (The term Modification is explained in Chapter  3).
The change would mean that the amount of electricity that the
consumer uses (or sells) could be separately accounted for and
itemised through the same meter, so that the consumer gets the
right bill for any electricity they buy from one or more suppliers.
They would also be paid properly for any electricity they sell back
to suppliers, community energy schemes or other Parties that
they may want to trade electricity with.

If this change goes ahead, it may benefit new developments and

business models. For example, manufacturers of electric vehicles
(EVs), or the companies that lease them, could offer the cars to
consumers on a simple per-mile basis, including the electricity
needed to charge them at home. Changing the BSC rules would
allow the meter to account for the electricity the customer uses
for charging the vehicle at home to be separated from the rest of

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 their consumption. In this way, the electricity for charging the
EV, is apportioned to the manufacturer or leasing company rather
than the consumer.

Settling household consumption in these future scenarios will

become more complex. However, it’s important for the BSC to
enable new developments, which are the shape of things to come
in the smarter, more flexible energy system.

Smart meters will play a critical role in helping future scenarios

become a reality. They record a consumer’s consumption every
30 minutes, and the amount of electricity they send back to the
networks. Smart meters can be read remotely without the need
for the meter to be physically read by somebody. This will end the
practice of bills being based on estimates, which will improve the
accuracy and timeliness of customers’ bills, and the Settlement
process in general.

Digitalising the BSC

Great Britain’s electricity market was created thirty years ago. The
IT systems and processes that make it work were established then
and have been growing and changing incrementally ever since.

Currently, these systems are being overhauled so they can serve

the industry of the future, when technology such as smart meters
will provide much more detailed information about energy use.

Elexon is responding to this by developing a new digital platform –

a software solution that will support the increasingly complex
changes in Britain’s energy system.

The platform will be flexible and scalable to adapt to new devel-

opments. As well as smart meters, these developments include
increases in the number and type of participants in the electricity
market. The sort of energy products that companies offer is also
expanding.

The current systems that support the BSC need to be changed. For
example, if changes are made to BSC rules, they often have to be
implemented separately across a number of different IT systems,
instead of being done once on one system. The processes to reg-
ister new market participants and encourage ongoing compliance
with the BSC can involve users having to complete forms by hand.

CHAPTER 5 Evolving the BSC for the Future Energy Market 33

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 Elexon’s new platform will automate the BSC significantly. It is
also scalable, so it can handle a significant increase in the volume
of meter readings resulting from Market-wide Half Hourly Set-
tlement (explained in more detail later in this chapter).

The platform is being delivered in stages and, once established, it

will allow Elexon to offer more efficient and effective BSC services
to customers.

Three key features form the initial part of Elexon’s new platform
as shown in Figure 5-1.

FIGURE 5-1: Elexon’s digital platform.

Elexon manages a wide variety of data on the electricity market.

Data such as this will play a huge part in helping to transform the
energy markets. Elexon wants to make this data more widely avail-
able, so it has raised BSC Modification P398 which proposes that all
data that it holds is assumed to be openly available, unless the BSC
Panel decides that there is a specific reason why it should not be.

Expanding Half-Hourly Settlement

to Domestic Customers and Small
Businesses
The whole electricity system is based on Half-Hourly Settlement,
and electricity supplied for use by the largest customers (typically
industrial companies) has been priced and measured in half-hour
periods for many years.

But the Half-Hourly Settlement concept doesn’t apply to all

households and businesses, and around 30 million household and

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 small business customers are not part of these arrangements. This
decision, made in the late 1990s, was mainly due to the then-
prohibitive cost of installing 30 million Half-Hourly capable meters.

Fast forward 20 years and, with advances in technology, ‘smart’

electricity and gas meters are now widely available and are being
installed. Smart meters can send Half-Hourly readings directly to
the consumer’s supplier without the need to physically read the
meter. Consumers can also see their energy usage in real time
through an in-home display linked to the meter.

Smart meters have lots of benefits for consumers and the

industry. For that reason, Elexon proposed a number of years ago
that the electricity industry should adopt Market-wide Half Hourly
Settlement (MHHS for short).

In 2017, the energy regulator Ofgem announced a review to prog-

ress this. Elexon has led Ofgem’s working group to design the
Target Operating Model and transition approach for moving the
whole electricity market to MHHS, including households and
small businesses.

One immediate benefit of MHHS to consumers is that it allows

wider use of ‘time-of-use’ tariffs, which reward customers for
reducing their energy use during peak demand (and price) times.

The fact that smart meters record consumption for every half-
hour is a financial incentive for consumers to join in the process
of smoothing out the peaks and troughs of energy demand, which
the old meters could not enable.

Through a ‘time of use’ tariff, consumers will find it easier to

provide demand-side response (DSR) where they reduce or increase
consumption when asked to do so by a network operator, a sup-
plier or an independent aggregator.

For example, they could save money by running their washing

machine at times of the day when there’s surplus electricity from
renewables on the system. They could also be rewarded for reduc-
ing demand, or selling electricity directly to the networks from
on-site generation or from an electric vehicle when it is needed.

The smoothing out of demand peaks has wider benefits, as it

helps to make the electricity system more efficient and cost-
effective overall.

CHAPTER 5 Evolving the BSC for the Future Energy Market 35

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 Greater use of smart metering also helps to build the business
case for electricity storage, and it encourages development of
electric vehicle charging technology. Smart meters could also help
peer-to-peer trading, when consumers buy and sell electricity to
and from each other.

Ofgem has given its preliminary approval to the Target Operat-

ing Model and transition approach that Elexon designed with the
industry working group. Further Ofgem working groups, to which
Elexon is also providing technical leadership, are now developing
this in more detail, ready for implementation.

Ofgem is expected to make the final decision on whether to man-

date MHHS in late 2020. The mandate would require all suppliers
to retrieve and process their household consumers’ Half-Hourly
electricity consumption for use in Settlement, unless the con-
sumer opts out.

Wider Access to the Balancing Mechanism

for Demand-Side Response Aggregators
In the future there will be more opportunities for consumers to
provide DSR and take advantage of supplier ‘time-of-use’ tariffs.

The combination of moving to MHHS and smart meter technology

can help consumers to provide more DSR. Independent aggrega-
tors can help them with this.

An independent aggregator is basically a company which negoti-

ates with energy suppliers or network companies on behalf of
­consumers, ensuring that, for example, a consumer is paid for
reducing consumption when the gap between supply and demand
is tight. Aggregators can perform this role for a wide range of
consumers and businesses, and it’s likely that they will play a
bigger role in the electricity system in the future.

Elexon has worked to open up the GB Balancing Mechanism (BM)

so that independent aggregators can access it. This is known as
Wider Access and it is important for the development of the smarter
electricity system. (As explained in Chapter 1, the BM is a market-
place used by National Grid ESO to balance electricity supply and
demand close to real-time).

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 Previously, independent aggregators could only offer services in
the BM if they were affiliated with a licensed energy supplier.
However, since December 2019, the BM has been opened to inde-
pendent aggregators (that don’t have this affiliation). Indepen-
dent aggregators are known as Virtual Lead Parties, or VLPs, within
the BSC.

Balancing Markets Across the Continent

Elexon and National Grid ESO have partnered to develop the
industry arrangements that will enable GB participation (includ-
ing generators, aggregators and VLPs) in Project TERRE (Trans
European Replacement Reserves Exchange).

TERRE is a pan-European market for trading reserve electricity.

Through TERRE, operators of the high voltage networks (trans-
mission system operators) in the participating countries will be
able buy reserve electricity in this new market. For example, a
British generator that has reserve electricity to sell could trade it
with the owner of the high-voltage grid in France.

VLPs represent a type of BSC Party that only participates in Set-

tlement by offering balancing energy. That is to say, they aren’t
generating or supplying electricity themselves; instead they act
as an aggregator by virtually ‘gathering up’ electricity that isn’t
being used by consumers (for example, businesses) and offering
it for sale to National Grid ESO.

Introducing the VLPs required Modifications to the Grid Code (the

technical code managed by National Grid for connection to and
development of the National Electricity Transmission System)
and to the BSC.

These changes have been implemented by National Grid ESO and

Elexon respectively. This is another example of how Elexon uses
its expertise in adapting the BSC to help drive innovation and
improvements.

Delivering the Project TERRE and VLP arrangements is a major

step forward for meeting the European Electricity Balancing
Guideline mandate, which is about increasing harmonisation of
European electricity markets.

CHAPTER 5 Evolving the BSC for the Future Energy Market 37

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 The Wider Access arrangements allow demand-side participa-
tion on a level playing field with traditional generation, suppliers
and aggregators. The arrangements pave the way for a valuable
potential source of additional revenues for DSR providers.

To qualify for Wider Access, an independent aggregator has to

become a VLP by enrolling in the BSC.  They would also need to
control at least 1 megawatt (MW) of capacity, which could be
power generation equipment or battery storage for example. You
could also be an aggregator with agreements in place with DSR
providers that can either reduce or increase demand by at least
1MW.

Involvement in Project TERRE depends on a few factors. Again,

you would need to have at least 1MW of flexibility capacity, capa-
ble of either increasing or reducing demand. You would also need
to be able to respond to a signal from the Transmission System
Operator to increase or reduce demand within 30 minutes.

As an example, sites that are taking part in Demand Turn Up (DTU)

where market participants can provide DSR to National Grid ESO
are able to participate in TERRE. (You can read more information
about DTU at: www.nationalgrideso.com/balancing-services/
reserve-services/demand-turn)

The BSC arrangements allow providers to offer electricity into

both the BM and TERRE at the same time, if they want to.

Balancing energy volumes exchanged through Project TERRE

will be activated via an auction performed by a trans-European
platform called LIBRA.  The LIBRA platform matches the needs
posted by transmission system operators across the EU with the
bids that the providers post.

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 IN THIS CHAPTER
»» Why the energy codes need to be
rewritten

»» Spelling out the issues with the codes

»» Realising the benefits of consolidation

and simplification

Chapter  6
Charting the Future of
the Energy Codes

T
he energy system in Britain is changing radically, with more
renewables, more innovation and new technology playing a
big part in it. Energy codes such as the BSC play an impor-
tant role in the system and this chapter is about the case for com-
pletely overhauling these codes.

Why Rewrite the Rules?

The energy codes are the commercial arrangements and legal
contracts that energy companies must sign up to in order to do
business in the gas and electricity markets.

This book focuses on the BSC, which Elexon uses to manage the
wholesale electricity market. It is one of 11 major codes across the
gas and electricity sectors. They’re managed by 6 code admin-
istrators (including Elexon). There are also five delivery bodies
(which provide the IT services and support that delivers each code
one of which is Elexon). Figure 6-1 shows all 11 codes together
with the bodies that manage them. Besides the BSC, the other
codes deal with different parts of the gas and electricity sectors
including the retail markets, and the energy networks.

CHAPTER 6 Charting the Future of the Energy Codes 39

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 FIGURE 6-1: Who manages which code.

Many organisations, including the Government, Ofgem and

Elexon, think that 11 codes is too many. Elexon believes that the
codes need to be consolidated and then simplified to improve the
user experience for market participants.

The energy system in Britain is changing as it moves away from

the traditional centralised model where a smaller number of large,
fossil-fuelled power stations produced most of the electricity
and the job of the networks was to funnel that electricity in one
direction – to consumers.

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 The system has rapidly become more decentralised as these large,
ageing power stations close and increasing numbers of smaller,
localised renewable sources take their place. In the future, more
consumers will play an active role in the energy market. New
technology such as smart meters and electric vehicles will offer
them more ways to interact with the electricity system, for exam-
ple, by selling some electricity they generate at home to suppliers,
and adjusting how much energy they use to take advantage of
‘time of use’ tariffs (explained in Chapter 5).

The energy codes were developed incrementally after the energy

markets were privatised in the 1990s, and they have served the
industry and consumers well. But they weren’t written with this
decentralised model in mind, and they don’t really lend them-
selves to innovation or cutting-edge business models.

Britain’s energy systems and markets are becoming smarter, as

new and existing businesses develop different products and ser-
vices for consumers. The rule change process for the codes needs
to be speeded up so that it supports fresh approaches and innova-
tive ideas by companies that want to deliver something new for
consumers.

Considering Simplification and

Consolidation
The Government and Ofgem have set out options for reform-
ing the code arrangements. Among the outcomes they want to
achieve are that:

»» The codes deliver on the strategic direction set for the

energy system by the Government and the regulator
»» The codes are more agile and responsive to change in
the sector

The reform options include one or more code managers working

with a separate strategic body which oversees the development of
the energy sector. Alternatively, an integrated rule-making body
could combine the code managers’ role with that of the strategic
body.

CHAPTER 6 Charting the Future of the Energy Codes 41

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 Elexon strongly supports the consolidation and simplification of
the codes. It will take years to complete and the Government and
Ofgem will develop their proposals further before finalising them.
Elexon is committed to working constructively with them on the
reforms.

There are a wide range of benefits to the industry and energy

companies from consolidating and simplifying the codes. They
include:

»» Supporting moves to a smarter system

»» Consistency and common practices across all the codes
»» Making it easier for companies to engage in the codes
»» More agile and speedy rules changes
»» Removing redundant or unnecessary rules and processes
»» Cost savings for the industry

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 IN THIS CHAPTER
»» Implementing smart metering and
greener power

»» Benefiting from competition

»» Creating a more flexible system

»» Getting power from here to there

»» Understanding the terminology

Chapter  7
Ten Key Takeaways
about the Energy Sector

I
f you’ve reached this part of the book, well done! Before you
close it, read on for a collection of simple key takeaways regard-
ing the way the system works and where it’s headed in the
future.

Getting Smarter
Just as mobile phones have become smarter, so have electricity
meters. Electricity meters have traditionally been the box under
the stairs that nobody really looked at. But they are going to come
out of the shadows.

Momentum is building towards the day when all homes and busi-
nesses will have smart meters. When that happens, it will be
much easier for consumers to see and control their energy usage
and how much energy they are producing with a few taps on a
smartphone.

CHAPTER 7 Ten Key Takeaways about the Energy Sector 43

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 Getting New Business
As smart technology continues to develop in the energy sector,
new businesses are entering the market. In Chapter  5 you saw
how aggregators can help customers sell back electricity they
aren’t using. In the future, new business models will emerge that
nobody has even thought of yet, offering consumers new ways to
get the best value out of the energy market.

Getting More Choice for Consumers

Elexon and the industry are working on potential BSC rule changes,
one example being that customers could have multiple suppliers
through the same meter (see Chapter  5). This could give them
more freedom to shop around for the best deals to suit all their
electricity needs in future. Making rule changes like this shows
how energy codes can adapt to change and enable new types of
businesses and products to enter the market.

Getting Electricity from Your Neighbour

Electricity customers contract with one supplier at a time for all
their needs. But what if you could buy some electricity from a
conventional supplier, and the rest from your neighbour, or from
a local solar generator down the street? These are the exciting
developments that the electricity industry is preparing for. Elexon
is already preparing for such scenarios.

Getting Faster Switching and Better Tariffs

Ofgem is working with the industry to speed up the time it takes
for consumers to switch their energy supplier. Combined with the
roll-out of smart meters, this will make it easier for consumers
to shop around and find the best tariff. Market-wide Half Hourly
Settlement for electricity will play a big role in making this hap-
pen (see Chapter 5).

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 Getting Greener
The electricity industry, the Government and the regulator are
working hard to promote a sustainable energy future, with more
power supplied from renewables. And in 2019, the Government
signed legislation to commit the UK to a legally binding target of
net zero emissions by 2050.

Around 30 per cent of Britain’s electricity comes from renewable

sources compared with around 5 per cent a little over 10 years ago.
And in May 2019 a new record was set when Britain went for 18
days without using any coal-fired power stations.

Getting More Efficient

New technology, smaller scale electricity generation equipment
and greater energy efficiency can help households and businesses
to reduce their electricity bills. In the future, consumers will have
opportunities to play a more active role in the electricity market
by selling back electricity that they aren’t using.

Getting More Competitive

The full roll-out of competition in Britain’s energy supply market
started in the late 1990s. Initially, there were relatively few sup-
pliers to choose from and for many years the largest energy sup-
pliers had a market share of greater than 90 per cent in energy
retail. Nowadays, more than a quarter of all electricity customers
are with independent suppliers (that is, companies other than the
largest suppliers). This is good for competition, as it gives con-
sumers more choice. As we explain in this book, Elexon provides
plenty of support to companies to help them enter the market and
stay in compliance with BSC rules. The BSC also enables compe-
tition by making sure that costs for Settlement are apportioned
accurately between generators and suppliers.

CHAPTER 7 Ten Key Takeaways about the Energy Sector 45

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 Getting Simpler to Understand
Energy codes, including the BSC, have a role to play in ensuring
that the system runs smoothly. There are 11 major codes govern-
ing the energy system altogether, overseen by six code managers.
The Government and Ofgem want to reform the code arrange-
ments, and Elexon supports moves to consolidate and simplify
the codes.

It is important to have simpler arrangements. The codes should

not be a barrier to innovation or to new businesses entering the
market.

Getting Better Technology

To support rapid changes in the electricity market, the essen-
tial services that deliver the BSC need to be overhauled. Elexon is
developing a new digital platform that will support the increas-
ingly complex changes in Britain’s energy system (explained in
more detail in Chapter 5).

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 Glossary
The energy sector is full of jargon, and by now you have probably read
through enough of it to last a lifetime! Most of the acronyms in this book
are explained as you read through it, but here’s a list of some particularly
useful ones.

Aggregators: Aggregators negotiate with suppliers or network opera-

tors on behalf of consumers. For example, they ensure that consumers
are paid for reducing consumption when the gap between supply and
demand is tight. Aggregators can either be affiliated with a licensed
supplier, or they can be independent (that is, not affiliated with a
supplier).

The Balancing Mechanism: Electricity cannot be stored economically

on a large scale yet, so it must be produced at the time of demand.
When National Grid ESO predicts that there will be a discrepancy
between the amount of electricity produced and what is being used,
they may accept a ‘bid’ or ‘offer’ in the Balancing Mechanism (BM) to
either increase or decrease generation (or consumption). The BM is
used to balance supply and demand in each half-hour trading period
of every day.

Blockchain: A type of digital ledger technology which records transac-

tion data in ‘blocks’ rather than in rows and columns in a database.
The blocks are closed by a type of cryptographic signature called a hash:
the next block begins with that same hash; a kind of wax seal. That’s
how it’s verified that the encrypted information hasn’t been manipu-
lated. Each person in a peer group holds a copy of the complete ledger.

In the energy sector, blockchain could have many applications. For

example, residents in a block of flats could trade electricity they
generated between themselves, with the transactions recorded by
blockchain.

Glossary 47

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 The BSC Panel: The BSC Panel is made up of independent industry
experts and representatives from National Grid, Ofgem, Distribution
Network Operators and Citizens Advice. Its role includes assessing
proposals to change BSC rules. If a BSC Change Proposal meets defined Self-
Governance criteria (which cover a range of considerations including
impacts on market competition), the BSC Panel may pass a determina-
tion on the proposal directly. Otherwise the BSC Panel makes a
recommendation to Ofgem which then acts as the ultimate deciding
authority.

BSC Parties: Any company that has acceded to the Balancing and
Settlement Code (by signing the BSC Framework Agreement).

Code Subsidiary Documents: These provide additional detail on the

rules and obligations in the BSC. This includes the supporting proce-
dures, specifications, methodologies and requirements. They give
advice, for example, on how to raise Modifications.

Data Collectors and Data Aggregators: Data Collectors are responsible

for the retrieval, validation and processing of metering data from Half
Hourly, Non Half Hourly and Equivalent Meters for all Metering Systems
registered in Elexon’s Supplier Volume Allocation systems (SVA). The SVA
is the method for working out how much each electricity supplier’s
customers use in a Settlement Period. Data Aggregators are appointed by
suppliers to aggregate the metering data received from Data Collectors
and provide this aggregated data to Elexon.

Demand-side response: This is where homes and businesses agree to

reduce or increase consumption depending on the needs of network
operators or electricity suppliers. They do this in exchange for pay-
ments. Smart meters will make it easier for consumers to take up these
opportunities in the future.

Electricity distribution networks: Regional electricity networks (known

as distribution networks) are owned by local electricity distribution
system operators (LDSOs).

They connect to the transmission networks and step down the voltage
so that electricity can be transported to homes, smaller businesses and
Independent Distribution Network Operators (IDNOs). IDNO networks
are directly connected to LDSO networks.

Electricity transmission networks: Transmission networks are the

high-voltage grids (up to 400 kilovolts) that act like the motorways of
Britain’s electricity system. There are three major transmission networks
in Britain, owned by National Grid, SSE and Scottish Power.

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 National Grid Electricity System Operator (ESO): National Grid ESO
is a legally separate company from National Grid group. The ESO uses
transmission networks to manage flows of high voltage electricity
through the system until it gets to electricity distribution networks.

The Target Operating Model (TOM) for Market-wide Half Hourly

Settlement (MHHS): A set of services required to deliver data on how
much electricity is being used by consumers and prosumers (people
who produce as well as use electricity) across the market, for each half
hour of the day. This data would be provided to a central body (such
as Elexon) for use in Settlement calculations and for other innovative
purposes (such as a community energy scheme or peer to peer trading).
The Elexon-led Design Working Group developed the design of the TOM
on behalf of Ofgem. The Design Working Group was made up of experts
from Elexon, the industry and other representatives including from
Ofgem.

Virtual Lead Parties (VLPs): VLPs represent a type of BSC Party

that only participates in Settlement by offering balancing energy. They
don’t generate or supply electricity themselves; instead they act as
an aggregator by virtually ‘gathering up’ changes in consumption by
consumers (for example, businesses) and offering it for sale to National
Grid ESO.

Wider Access (to the Balancing Mechanism): Previously, independent

aggregators could only offer services in the BM if they were affiliated
with a licensed energy supplier. However, from December 2019, the
BM has been open to independent aggregators.

Glossary 49

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