Tyndall Briefing Note No.
2
The value of Intermittent
Renewable Sources in the
first week of NETA
Graeme Bathurst
(graeme.bathurst@umist.ac.uk)
Goran Strbac
(goran.strbac@umist.ac.uk)
Synopsis
The New Electricity Trading Arrangements came
into effect on the 27th of March 2001. This new
system referred to as NETA replaces the existing
England and Wales Pool as the commercial
mechanism by which wholesale electricity is bought
and sold. While there was some concern prior to
the “Go-Live” date about the adverse impact of
NETA on the value of Intermittent Renewable
Sources, the harsh reality of the first week of
operation has taken all by surprise.
One of the design characteristics of NETA is to
punish generators that do not honour their advance
contract commitments. If a generator has a
shortfall in contracted generation, then it must pay
for that shortfall at the System Buy Price. Over the
last seven days, these prices have been very
volatile and considerably higher than expected. If
the generator produces more energy than it has
contracted, then it is paid for this excess at the
System Sell Price. These prices have been very low
and often negative.
As Intermittent Renewable Sources are intrinsically
difficult to forecast, the effect of these penalty costs
in the first week of NETA has made renewable
energy worthless. This paper shows that over the
last seven days the most profitable way of
operating wind farms was to switch them off.
Background to the Pool and NETA – a
simplified description
There are some fundamental differences between
the previous Pool based trading arrangements and
NETA. Under the Pool, participating generators
submitted prices for their energy to the system
operator. Based upon these and the forecast of
expected electricity use, the system operator then
formed a daily schedule of the generators that were
required, and when they needed to operate. A
common electricity price for each half-hour of the
Tyndall Briefing Note No. 2
3 April 2001
day was also formed from this schedule, and this
was the price that the electricity suppliers had to
pay for the electricity that they used in that period.
It was also the price that was paid to all generators
for the electricity that they generated, regardless of
the price that they submitted.
While all large generators had to submit prices for
generation into the Pool, there was no obligation to
deliver as the bidding was not firm. There were no
penalty costs associated with non-delivery to the
Pool, except for those in external contracts. While
the Pool was not designed with Intermittent
Renewable Sources in mind, it did work for them as
they received the common electricity price for all
their generation when trading through the Pool.
“The role of the NETA Programme is not to dictate
how energy will be bought and sold on these
exchanges or in bilateral contracts. Instead it is to
provide mechanisms for near real-time clearing and
settlement of the imbalances between contractual
and physical positions of those buying, selling,
producing and consuming electrical energy.” [1]
All contracts must be submitted 3.5 hours ahead of
the particular half-hour dispatch period. Flexible
generators can then submit prices into the
Balancing Mechanism, which allows the system
operator to take action to ensure balanced and
secure operation of the electrical system. These
prices form the imbalance prices that must be paid
by generators or suppliers for any differences
between their actual position, and what they had
contracted to do.
The purpose of the imbalance prices is to provide a
commercial incentive to all participants to honour
their contracted positions. If a generator has a
shortfall in contracted generation, then it must pay
for that shortfall at the System Buy Price. If a
generator produces more energy than it has
contracted, then it is paid for this excess at the
System Sell Price. These are referred to as the
NETA imbalance prices and there is no constraint on
their magnitude or sign.
These costs are a considerable problem for
Intermittent Renewable Sources as even with state
of the art forecasting techniques, they are still in
imbalance by 30-40% [2]. A one week sample of
the output of a 10MW wind farm in the UK is shown
in Figure 1. By comparison forecasting electrical
consumption is very advanced with typical errors in
the range of only 2-5%.
3 April 2001
 Half-hourly energy output from a 10MW wind farm for one week

5000

4500

4000

3500
kWh/half-hour period

3000

2500

2000

1500

1000

500

0
0 48 96 144 192 240 288
Half-hour periods

Figure 1 The variation in output from a 10MW UK wind farm during a week in March
Unfortunately for Intermittent Renewable Sources benefit, however this is dependent upon the mix
such as wind generators who cannot accurately within the group.
predict their generation, the costs incurred by these
Analysis of the first week of NETA for
imbalance prices reduce the overall value of their
Intermittent Renewable Sources
generation. Initial predictions put these costs for
wind generation at between 0.1-0.3 p/kWh on an The first week of live NETA has shown extreme
optimistic contract price of approximately 2.0 volatility in both the System Sell Price and the
p/kWh. System Buy Price (Figure 2). An important
observation to note is that the System Sell Price
The potential impacts of these imbalance costs, and has gone negative many times within the first
also the additional cost of trading, was recognised week. A negative price means that a generator
at an early stage and so provision was made for spilling onto the system must pay the system for
small generators in the form of consolidation that un-contracted energy instead of being paid.
options. Consolidation is basically a form of sharing The second point to note is that the System Buy
the risk of imbalance between all members of the Price has had a large number of extremely high
group. It relies on one member’s negative error price occurrences.
being partially compensated by a positive error of
another’s. In practice this could lead to a small

NETA Imbalance Prices

System Sell Price System Buy Price Go Live

180.00

160.00

140.00

120.00

100.00
p/kWh

80.00

60.00

40.00

20.00

0.00
0 48 96 144 192 240 288 336 384 432 480
-20.00
Half-hour periods

Figure 2 Imbalance prices for the first week of NETA (and three days pre-GoLive)

Tyndall Briefing Note No. 2 3 April 2001

 Minimum Average Maximum
System Sell Price -14.64 p/kWh 0.07 p/kWh 3.80 p/kWh
System Buy Price 0.83 p/kWh 20.04 p/kWh 3414.76 p/kWh

Table 1 Summary of imbalance prices from the first week of NETA

Table 1 gives a summary of the actual imbalance to owners of Intermittent Renewable Sources in the
prices that occurred during the first week of NETA form of severely punitive imbalance prices. Due to
[3]. the stochastic nature of their primary energy
sources, the energy output of these generators is
To assess the value of an Intermittent Renewable
difficult to forecast and hence they are continually
Source under these market conditions, the energy
exposed to the imbalance prices of NETA. The
data from a 10MW wind farm in the UK from the
magnitude and volatility of these imbalance prices
same time of year is used. The energy is forecast
has exceeded the initial expectation by more than
using a standard forecasting method, assuming
tenfold with a devastating effect on the value of
that the energy can actually be traded during each
Intermittent Renewable Sources. Given the prices
day. It is also assumed that an optimistic contract
observed in the first week of NETA, it will be
price of 2.0 p/kWh can be obtained for all of the
interesting to see how this develops in the future,
forecast energy. A wind farm with the output
and what the long term impact on Renewables will
shown in Figure 1 over the first week of NETA
be.
produced 378MWh of energy and by doing so made
a loss of -£1,532 (Income through short/long term References
energy contract at 2p/kWh would amount at £7,560
[1] “An Overview of the New Electrical Trading
while the total NETA imbalance penalties in the
Arrangements”, May 2000, Ofgem,
same period were £9,092). That gives this wind
www.ofgem.gov.uk
farm a net negative unit value of –0.41 p/kWh.
Hence, the most profitable way of operating this [2] “Maximising the Commercial Value of Wind
wind farm over the last week would have been to Energy Through Forecasting” ETSU
switch it off. W/11/00555/REP, 2000.
Summary [3] www.bmreports.com
The first week of operation of the New Electricity
Trading Arrangements has delivered a nasty shock

© Copyright 2001, Tyndall Centre.

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Tyndall Briefing Note No. 2 3 April 2001