Electricity markets explained

Our Market Services team supports the wider electricity industry, leading on the procurement and financial settlement of the balancing services we use in the Electricity National Control Centre (ENCC).

This team is responsible for NESO’s code secretariat function, administering the Connection and Use of System Code (CUSC), Grid Code, System Operator Transmission Owner Code (STC) and Security and Quality of Standard Supply (SQSS). They also run our Charging Futures Forum.

Additionally, our Market Services team undertakes tariff setting activity and recovers network charges – including TNUoS, BSUoS, AAHEDC and Connections Charges – on behalf of industry.

NESO’s Market Development team is responsible for checking if current electricity markets in Great Britain, within NESO, and across boarders, are suitable for a zero-carbon system. The team is divided into four areas and works with stakeholders to understand how the energy world is changing. This ultimately helps us develop markets and rules that will work well in the future.

Electricity Market Development

The Electricity Market Development focuses on where NESO's balancing services markets should be heading and answers important questions about the future of balancing services and making changes to the market to improve efficiency and reduce carbon emissions. 

The team produces our annual Markets Roadmap, which clearly shows the market changes that are planned. As the Roadmap explains, this area uses Market Design Objectives and Principles to guide the existing and future changes to NESO’s balancing services markets. This ensures we design markets in a thorough and transparent way.

Additionally, this workstream is exploring the best ways to secure stability services for the electricity grid in the long term. This work is part of our Stability Market Design innovation project.

Markets Strategy

The Market strategy workstream looks at GB’s longer term energy markets.

In particular, this group runs the NESO’s Net Zero Market Reform programme. This project was established in early 2021 to examine the changes to current GB electricity market design required to achieve net zero.

Most recently, this team published their Net Zero Market Reform Phase 3 assessment and conclusions. This report explores the reasons why reform is required for GB’s electricity market design, outlining nodal pricing as a solution to reduce consumer costs on the path to net zero.

Cross-border and EU

The Cross-Border and EU workstream develops and manages the relationship with the NESO's European counterparts following the withdrawal of the UK from the EU.

It is also responsible for analysing the medium- to long-term evolution of cross-border activities as the energy system transitions to net zero both in the UK and in Europe.

The Flexibility Market Strategy team plans the development and growth of markets and aims to enable flexibility across the electricity system. 

We've had feedback from industry participants that the clear commitments and logic in our actions are key to scale up investment and involvement in projects. 

To grow flexibility in the mid-term from low carbon consumer and distributed resources, a Flexibility Markets Strategy is being co-created with our industry colleagues. This strategy clarifies the NESO’s vision, desired 2035 strategic objective, along with targeted outcomes for 2028. It also sets out a roadmap of actions from now to 2028 to achieve these outcomes. 

Publications

NESO’s first 2028 flexibility markets strategy will be published in spring 2024.

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Our Market Change Delivery team develops a range of products and services that allow the NESO to operate a safe, secure net zero electricity system at the lowest cost to consumers. To meet these goals, they reform markets that facilitate participation from a wide range of market participants.

This team is responsible for balancing services reform. They lead response and reserve reform, including the development of new, day ahead procurement markets. They’re also developing new markets for stability and voltage services to help address emerging operability challenges.

The Market Change Delivery team delivers Pathfinder procurement events to find innovative new ways to operate the electricity system of today and tomorrow, and keep costs down for consumers.

They design and implement new systems and ways of working to make it easier to work with the NESO and participate in our markets, such as the Single Markets Platform and a new auction capability.

This team leads and delivers all of this change in partnership with industry through consultation and co-creation. The Market Change Delivery team facilitates the Power Responsive Programme to stimulate increased participation in different forms of flexible technology, such as Demand Side Response (DSR) and storage.

The NESO’s Code Change Delivery team works across GB’s technical and commercial codes, charging arrangements and cross-border frameworks. Their work enables more efficient markets and optimal consumer benefit on GB’s journey to a decarbonised electricity system.

This team works closely with the NESO’s customers and stakeholders through the open governance process for industry codes, as well as various industry work groups and governance functions.

Our Market Requirements team plays a critical role in supporting market development, design and delivery activities, working closely with the NESO’s Networks and National Control teams to support NESO ambitions to enable zero carbon system operation and competition for the benefit of consumers. The team also leads the technical design for our frequency services, enabling the delivery of our response and reserve reform commitments as part of our business plan.

They procure the NESO’s balancing services and lead on our Frequency Risk and Control Policy. Together, this work enables the identification and generation of £100s millions of consumer value each year.

The team also delivers mitigations to manage emerging system risks. This ensures that the NESO’s Electricity National Control Centre (ENCC) has the best tools to balance the supply and demand of electricity second by second in the most efficient, cost-effective way.

This involves creating models and conducting complex risk analysis with a core focus on generation supply, demands and margin; frequency risks and controls; and assessment of electricity balancing services. This results in insights to inform and support engagement with stakeholders at all levels across government, regulator and industry.

Our EMR Delivery Body team is responsible for the NESO’s Electricity Market Reform (EMR) programme of work. EMR aims to deliver low-carbon energy supplies while maintaining security of supply and minimising consumer costs. EMR includes two key mechanisms – the Capacity Market (CM) and Contracts for Difference (CfD) – that each provide incentives for the investment required for energy infrastructure.

The CM is one of the NESO’s key policies. It aims to makes sure that the future security of GB’s electricity supply comes at the lowest cost to consumers. It does this by providing regular retainer payments to reliable forms of capacity in return for such capacity being available when the system is tight.

Meanwhile, CfD is one of the key mechanisms implemented by UK government as part of EMR. It provides long-term price stabilisation to low-carbon plant, allowing investment to come forward at a lower cost of capital – and therefore a lower cost to consumers. CfD has a critical role to play in supporting our market development, design and delivery activities.

This team works closely with external customers and stakeholders through open governance process for industry codes as well as various industry work groups and governance functions.

The EMR Modelling team offers modelling expertise to government on security of supply, which involves determining the amount of electricity needed to meet demand. This includes generation, storage and interconnection with other countries.They focus on one to five year horizons, with complex models to reflect GB’s transition to a net zero electricity system.

The team also advises the government on how much electricity to procure in the Capacity Market. The Capacity Market ensures the legislated Reliability Standard of loss of load expectation (LOLE) to not exceed three hours per year. Exceeding this would indicate a higher risk of blackouts or supply interruptions.

Additionally, this team models technology de-rating factors, which measure how different technologies contribute to security of supply and are used to calculate Capacity Market payments to market participants. The EMR Modelling team provides annual recommendations and supporting modelling in our annual Electricity Capacity Report. They then recommend updates to auction parameters (as required) as part of the Demand Curve Adjustment process following prequalification for the Capacity Market.

The EMR Modelling team also provides modelling expertise for the NESO’s Winter Outlook report. The team models the margins between electricity supply and demand over the winter period and forecasts whether the system will be within the Reliability Standard.