France: towards a volatile imbalance price

What is a balancing price? For Balancing Responsible Parties (BRPs) the term is well known. For those not directly involved in these markets, understanding what they are and their impacts can be important. 

Balancing prices are the cost of keeping energy transmission systems in balance - something which is required to ensure security of supply. The Transmission System Operator (RTE in France) is responsible for balancing energy consumption and production. 

Where production is not equal to consumption, BRPs buy and sell the volumes required by the TSO at the balancing price.  

Who does the balancing price impact? 

Everyone in the power production value chain is affected as exposure to the imbalance market arises due to imbalances in physical portfolios. Once the system's balancing cost for the delivery period is calculated, any volume deviations are then resolved at that cost. 

The parties directly affected by balancing prices include renewable power producers, energy utilities and speculative traders. 

Because weather conditions dictate their output, renewable energy sources are unable to consistently match forecasted levels - unless they are co-located with battery storage or are able to take advantage of turn down schemes.  

Power producers able to manage their output, such as nuclear or gas, are less exposed to imbalance prices. They can tailor their generation levels to reduce their exposure to these costs. 

Balancing prices also directly affect speculative traders. This is because they arbitrate intraday markets against the balancing price. They can make money by selling power when there is a shortage, having previously purchased it at a lower price. 

Balancing prices also indirectly affect asset owners who subcontract their asset management and are liable for imbalance fees. 

French Imbalance Prices 

Historically the French balancing price is close to the Day-Ahead price due to the imbalance price formula and vast volume of hydro flexibility. 

However, the deep penetration of solar power across France (and more widely Europe) is changing the dynamics of the fuel mix. 

Asset owners often use hydropower to manage volatile solar production from the day ahead. However, if hydro flexibility is used to manage volatile solar production from the Day Ahead. Then what is left for short-term balancing?  

Typically in France, Oil and DSR – Demand Side Response is then called upon. In contrast to hydro, the price of these 2 assets is dramatically more expensive and not linked to the day ahead.  

At time of writing, the oil price is around 400€ and DSR starts at 1,000€ for a day ahead peak at 130€. 

From 2018 to October 2023, the average imbalance price in France went from the day ahead (50€) to day ahead + 11% (102€ + 11€). 

The average marginal price went from Day Ahead + 48% (50€+24€) to Day Ahead + 161% (102€ + 164€) which is a tremendous evolution! 

The reality behind these numbers is even worse. Imbalance volumes in France are primarily driven by solar and wind generation, alongside consumption levels. 

So, if you have this kind of generation in your portfolio, it is more likely than not that your portfolio is partly responsible for the imbalance in the country.  

Therefore, it’s more likely your portfolio will always lose money than achieve a perfect 50% gain (or lose) probability. 

As a result, it is important to assess the quality of the forecasts you are using. 

Of course accuracy is key, but you need to go one step further and understand how it could be wrong. This will enable you to anticipate whether the system is likely to be short or long and act accordingly. 

To manage a portfolio, do not reduce the volume risk but increase the risk of gain!