Ancillary service pricing

Following the release of the Enduring Auction Capability (EAC) prices across the Dynamic Frequency Response products have dropped. DRH has decreased by around £8/MW/h to -£6/MWh or less - negative clearing prices are now regularly seen in both High Dynamic Regulation & Moderation!

Why are people paying to do frequency response?

Prices for Dynamic Regulation High were often zero before the EAC. Batteries (that were registered in the Balancing Mechanism, meaning they could recover costs of service delivery) used the service to charge up for free from responding to high grid frequency, before discharging in wholesale markets at a profit.

Following the EAC changes to the auction clearing algorithm, prices now better reflect this value in high-frequency response services. Now, batteries actually choose to pay to do the service - seeing the value they'll get from discharging the otherwise free energy into wholesale markets, so their overall position is profitable. So, DRH prices are predominantly negative (and DMH too, sometimes).

The new Dynamic Frequency Response clearing algorithm has increased auction efficiency and lowered overall system cost. For batteries, it means lower revenues. December 2023 had the lowest revenues on record for batteries: just £2.1k/MW for systems <1.5h in duration, according to the Modo Benchmark.

For the Modo Forecast, we clearly need to change how we predict frequency response prices due to the EAC.

The prices for the different frequency response services are now far more correlated with each other.

They are also more correlated with wholesale prices. We look at the relationship between day-ahead wholesale price and auction clearing prices since EAC launch to predict prices for each service going forward, using our predicted wholesale prices.

We have updated the relationship between wholesale spreads and dynamic frequency response prices in v3.1's release to capture all the latest data.

These prices are available in our Power Price Forecast product.

 Modelling the price of Balancing Reserve

Negative and positive BR prices are set differently.

Positive Balancing Reserve: In historic data there are two price formations: one for low wholesale prices, and one for high. We fit historical data to model prices when the wholesale price is above £100/MWh, setting a maximum price at £10/MWh.

Negative Balancing Reserve: set to £1.34 which is the historical average price, excluding periods where the volume procured is zero.