REMA Update - NESO Call for Input on Reformed National Pricing balancing, settlement and dispatch reform in GB

increased network congestion and misalignment between wholesale national price and locational balancing needs expected to require high levels of NESO balancing actions and costs

increasing levels of embedded generation are not visible and accessible to NESO for balancing in real-time

the overlapping timeframe between Gate Closure and the market trading deadline results means that NESO do not have visibility over traded positions at Gate Closure, and can result in NESO taking counterproductive energy balancing actions.  More flexible assets such as BESS and interconnectors may also respond to signals which do not reflect balancing needs such as network constraints. 

higher levels of redispatch volumes and network congestion can increase the risk of strategic positioning against constraints, to benefit from the imbalance price. NESO's view is that Non-BM Units in particular have a greater ability to do this currently because they are not required to submit or follow Final Physical Notifications.  

This would increase NESO's visibility of and access to balancing resources, by requiring smaller embedded generation to participate in the Balancing Mechanism. An initial assessment suggests a phased reduction of the threshold from 2027 to an ultimate 1MW threshold (e.g. earlier implementation for new connections and stepped threshold reductions over time). NESO will review the Balancing Mechanism requirements to ensure these are fit for purpose for smaller market participants, but acknowledges that this reform would result in additional operational and compliance costs for smaller market participants and may require a review of Capacity Market and CfD arrangements. TSO-DSO co-ordination will also need to be accelerated, to ensure that NESO's balancing actions do not inadvertently trigger constraints on distribution networks. 

NESO propose to realign the market trading deadline from the start of the Settlement Period (as is the case currently) to the Balancing Mechanism Gate Closure (which is currently one hour before the start of the Settlement Period), to give greater certainty on balancing actions required post-Gate Closure. This will effectively reverse the rule changes made in 2017. This reform is proposed to be implemented in 2027 - NESO acknowledge this may reduce near real-time market liquidity.

Market participants will be required to match their market traded position with their Final Physical Notifications submitted to NESO, to prevent participants intentionally taking an imbalanced position at Gate Closure to benefit from exposure to the imbalance price. NESO are also considering increasing visibility of the aggregated trading position ahead of Gate Closure, through additional information sharing obligations. These reforms would provide NESO with a better forecast of the actual upcoming market position, to support more effective balancing decisions. This may particularly impact aggregated BMUs such as those managed by a Virtual Lead Party or Supplier BMUs where it may be more complex to accurately forecast. NESO's initial assessment suggests implementation of this reform starting in 2027.

BM participants would be required to provide unit-level bids and offers in the day-ahead and intraday markets instead of on a portfolio-level basis. This would reduce the incentivisation to schedule units in a way that contributes to a network constraint and triggers redispatch action by NESO. NESO acknowledge this may have significant transition costs especially for market participants with diverse portfolios or that trade predominantly over the counter, and that this may have a higher impact on intermittent generation as volumes could no longer be allocated across a portfolio. NESO are considering two main options for this reform; physical unit bidding (under which the physical forward market is retained and portfolios are disaggregated at the day-ahead stage) and financial unit bidding (under which forward trading is converted to financial trading coupled with a new gross pool day-ahead market to gain a physical position). NESO says it will assess the timetable for implementation following the Call for Input.

NESO propose reducing the settlement period length to 5 or 15 minutes, so that the imbalance price more accurately reflects the real-time value of energy and to provide better operational signals to fast-acting renewables and flexible resources. In the first phase of this reform, the change would only apply to the wholesale market although shorter profiling would be introduced to the retail market (i.e. domestic and small business consumers). This would require significant IT system and metering changes (including a review of CfD and Capacity Market arrangements), and mean that market participants would need to adapt their trading strategies to reflect potentially higher price volatility. NESO says it will assess the timetable for implementation following the Call for Input.