How imbalance settlement really works across Europe

How imbalance settlement works across Europe 

Every European TSO calculates imbalance prices under the same overarching framework: the Imbalance Settlement Harmonisation Methodology (ISHM). But “harmonised” doesn't mean identical. The methodology sets common principles, then leaves room for national choices that can produce very different outcomes for balancing responsible parties (BRPs) operating across borders. 

This piece walks through why the methodology matters, the five design choices that shape imbalance prices most, and how nine European markets (Netherlands, Germany, Sweden, Norway, Finland, Denmark, France, Hungary and Poland) have each applied it. 

Why imbalance settlement matters? 

ISHM does three things at once: 

• It sets the ground rules. The methodology establishes common principles for imbalance price calculation across all European TSOs, creating a shared starting point rather than nine (or more) unrelated systems. 

• It shapes national regulation. How each country regulates its balancing market is influenced, directly or indirectly, by the choices made under this framework. 

• It explains cross-border gaps. For a BRP active in several bidding zones, ISHM is often the reason outcomes look so different from one market to the next, even when underlying system conditions are similar. 

One design question is still open and could be further scope of harmonization or at least be clarified: which volume shall be considered in the imbalance price calculation: activated balancing energy or satisfied balancing energy demand? That single choice shapes the incentive given to BRPs, and it's a useful lens for reading everything that follows. 

Five choices that shape the imbalance price 

The methodology leaves room for flexibility, and five decisions do most of the work in explaining why markets diverge. 

Single vs dual pricing

Dual pricing appears when activation happens in both directions within the same period, acting as a safeguard against overly aggressive passive balancing. The Netherlands and Spain both use dual pricing. 

Scarcity component

When the net regulation volume (NRV) reaches extreme values, the price is inflated to reflect system scarcity. Whereas Germany applies a quadratic function for this, Austria uses a cubic one; several other markets use this component as well. 

Incentivising component

In Germany and Austria, the imbalance price can only be more expensive than intraday, capped at up to 1.25x in DE and in 1.1x an intraday index, reflecting market prices close to delivery. The goal is to push BRPs toward closing their positions in intraday rather than relying on the balancing mechanism. 

Financial neutrality

Used in France (via the k-factor used a way to ensure RTE´s long term financial neutrality). This keeps the TSO cost-neutral: revenues collected from long BRPs offset payments made to short BRPs. Financial neutrality components are also applied in Poland and Romania via the invoicing. 

VWAP vs marginal pricing

A volume-weighted average price (VWAP) is more moderate and less exposed to single expensive activations. Marginal pricing, by contrast, reflects only the cost of the last unit activated, making it more sensitive to extreme events. 

With those five levers in mind, here's how each market has configured its system. 

Netherlands: aFRR-driven, dual pricing, marginal pricing 

The Dutch imbalance price is set by the last, most expensive activated unit, with only local activations setting the price. This is a reactive philosophy: mFRR activation is rare, but priced high when it happens. 

Dual pricing (Regulation 2) kicks in when activations occur in both directions, and the flat aFRR merit order tends to keep price jumps less frequent than in more marginal-driven systems. 

Montel's Dutch NRV analysis shows increasing occurrences of dual pricing as two-directional activation becomes more common, alongside a market that remains mainly aFRR driven with only local activations setting the price. 

Germany: aFRR-driven, single pricing (VWAP)

Germany prices on a weighted volume average across a wide and comparatively flat aFRR merit order. Two features stand out. First, the market is well coupled via MARI and PICASSO, which has helped keep volatility lower than in less-integrated systems. Second, the market-coupling component – relying on the IDAEP price index considering the last 500 MW traded - is becoming increasingly relevant to price formation. In practice, the scarcity component remains rare.

Nordics (Sweden, Norway, Finland): mFRR-driven, single pricing

Sweden and Norway price purely on mFRR activations. Finland and Denmark also factor in aFRR under certain conditions. Across the region, single imbalance pricing is set using a max()/min() approach for activations in uncongested areas.

The bigger story here is what's coming: as the Nordics join MARI and PICASSO, pricing dynamics are expected to shift meaningfully.

Denmark: mFRR-driven, two synchronous areas

Denmark is a special case: its two bidding zones sit in different synchronous areas. mFRR usually sets the price when upregulating, though aFRR has played a growing role since March 2025.

The mechanics are distinctive. mFRR is scheduled roughly 15 minutes ahead based on forecasts, and a 25 MW deadband increases the number of settlement periods with no dominant direction. When that happens, the value of avoided activation (VoAA) – being the day-ahead price in the DK case - steps in to set the imbalance price instead.

France: proactive, mFRR-led

France stands apart philosophically. Rather than reacting to imbalances as they occur, RTE anticipates balancing needs, using mFRR specific and RR reserves first and treating aFRR as a last resort.

That said, aFRR via PICASSO remains the main driver of volatility when it is activated, as shown in the sharp aFRR-to-price-spike relationship in Montel's French NIV analysis. MARI usage has been limited so far, but an mFRR reform is expected in 2026, and the imbalance price methodology itself is shifting from an average-based to a marginal approach.

French aFRR balancing price curves illustrate just how flat the stack is until the very top, where prices can jump from single digits to €5,000/MW.

Hungary: aFRR-driven, on the verge of change

Hungary currently prices on a single aFRR-driven basis, with activated reserve coming mainly from aFRR and IGCC. Upward bid caps are only active when the market is concentrated.

The more significant development is structural: PICASSO and MARI go live in Hungary in October, after which the balancing energy price will be built from the PICASSO cross-border marginal price (CBMP), with VoAA as a fallback.

Poland: central dispatch, marginal pricing

Poland runs a central dispatch model with single imbalance pricing, where the capacity price in balancing products is set by the last, most expensive activated unit. Four reserve types are in play: FCR, aFRR, mFRR and RR.

As in France, aFRR via PICASSO is the main source of volatility. But a large share of Polish balancing activity is still driven by non-market redispatch rather than market-based activation, a distinction worth keeping in mind when comparing Polish price data to more fully marketised systems.

The common thread

Across all nine markets, the same underlying question keeps resurfacing: how much of the imbalance price is shaped by market-based activation versus system-level adjustments like scarcity components, market-coupling components, or non-market redispatch? ISHM gives every TSO the same rulebook, but the choices each has made, on pricing method, on scarcity handling, on financial neutrality, on where aFRR and mFRR sit in the merit order, add up to genuinely different market behaviour.

For BRPs operating across borders, understanding these differences isn't optional. It's the difference between correctly anticipating exposure in one market and being caught out by a mechanism that simply doesn't exist next door.

Every chart referenced in this piece is live in Montel EnAppSys, covering imbalance prices, NRV analysis and merit-order curves for TSOs across Europe.