Market Index Definition Statement Review 2021

The Market Index Definition Statement (MIDS) defines the use of Market Index Data to calculate the Market Index Price (MIP), a price reflective of wholesale electricity for a Settlement Period in the short term market.

An annual review of this document is required by the BSC, to ensure that the MIP is providing a reasonable reflection of the price of wholesale electricity in the short term market.

1. Executive Summary

1.1 Elexon reviews the Market Index Definition Statement (MIDS)1 annually on behalf of the BSC Panel in accordance with BSC Section T1.5.4. In this review, the analysis covers the period 1 August 2019 to 31 July 2020. The review is undertaken to ensure that parameters used in the MIDS calculations (i.e. the Individual Liquidity Threshold (ILT), timeband weightings and product weightings) remain fit for purpose and through the parameters, checking the MIDS principles (BSC Section T1.5.3) are being met.

1.2 The Market Index Price (MIP) is calculated for every Settlement Period as defined in the MIDS. It is reported to industry for information and used in the calculation of System Prices in defined scenarios, more information on when it is used in the calculation is given in Section 2 of Appendix 1.

1.3 To comply with the European Balancing Guideline, from 15 January 2021, the MIP cannot be used as a component of the System Price calculation, and will be replaced by the Value of Avoided Activation of Balancing Energy (VOAA). BSC Modification P410 ‘Changing imbalance price calculations to comply with the Imbalance Settlement Harmonisation regulations’ has been raised to address this.

1.4 As part of the BSC Modification P410 workgroup, the future of the MIDS will be determined, including whether the requirement for an annual review of the MIDS (in accordance with BSC Section T1.5.4) remains valid.

1.5 Following the 2018 MIDS review, BSC Modification P377 amended the description of the timebands in the MIDS and removed timeband 6 as a weighted product in Market Index Data (MID). BSC Modification P377 was implemented on 18 April 2019. In this review, analysis covers the period 1 August 2019 to 31 July 2020, which represents the first full MIDS review period following the P377 changes.

1.6 The 2020 MIDS review indicates that the current ILT, timeband weightings and product weightings remain suitable. Therefore our preliminary recommendations are not to change the parameters.

1.7 We use Market Index Base Data (MIBD) to review the performance of the parameters in accordance with the principles defined in the MIDS. The data details individual trades on the two power exchanges2 which act as Market Index Data Providers (MIDPs).

1.8 Our detailed analysis is provided in Appendix 1 to this paper. In summary, our key findings are:

• Volume: The daily average MIV (the traded volume across weighted timebands and products3 ) was 1,109MWh in the 2019/20 review period. This is 96MWh higher than the daily average MIV of 1,013MWh between 18 April and 31 July 2019 in the last review period following the implementation of P377. See Appendix 1, Section 3 for more information.
• Individual Liquidity Threshold (ILT): The current 25MWh threshold remains suitable for both MIDPs. There were 21 Settlement Periods (0.12%) in the current review for EPEX SPOT where the MIP and MIV were defaulted to zero. For 14 of these 22 Settlement Periods, no data was received from the MIDP. For Nord Pool, 17,438 Settlement Periods (99.26%) had the MIP and MIV defaulted to zero in the 2019/20 review period. For 17,392 of these Settlement Periods, there were no qualifying trades as part of the Market Index Base Data. See Appendix 1, Section 4 for more information.
• Weighting values: The weightings are applied to determine which products and timebands are included, and to what extent, in the MIP calculation. Currently, the MIDS defines the use of either ‘1’ or ‘0’ weights, where ‘1’ results in the data being fully included and ‘0’ fully excluded.
  • Timebands: The current ‘1’ weighting of timebands 1 to 5 includes all trades within eight hours of the Submission Deadline. The analysis indicates that the current timebands are suitable.
  • Products: The weighted products are those of half hour, 1 hour, 2 hour and 4 hour duration. The analysis indicates that the current product weighting remain suitable in accordance with the MIDS principles.

1.9 The 2019 MIDS Review assessed whether the changes as part of BSC Modification P377 have delivered the expected benefits of ensuring that there was increased liquidity in the MID, and that a reflective MIP is calculated based on the short term market. This review, the first full MIDS Review period following the changes continues to show that trades used to calculate the MIP are closer to real time, and that the changes to timebands have meant that the daily average MIV has increased since before P377.

1.10 The detail of our review is set out in Appendix 1 – Market Index Base Data Analysis

2. Views from the Imbalance Settlement Group (ISG)

2.1 The ISG noted the analysis presented in the MIDS Review and agreed with the recommendations made by Elexon.

2.2 The ISG discussed that as part of the BSC Modification P410 workgroup, the future of the MIDS will be determined. The ISG have added a question to consultation, with the potential discontinuation of the MIDS, to seek information from BSC Parties on the use of the MIP outside of it being a component of the System Price calculation.

Market Index Base Data Analysis

1. Background Information

1.1 Each year, Elexon reviews the Market Index Definition Statement (MIDS) on behalf of the BSC Panel in accordance with BSC Section T1.5.4. In this review, the analysis covers the period 1 August 2019 to 31 July 2020. The review consists of checking that parameters used in the Market Index Price (MIP) calculation defined in the MIDS (i.e. the Individual Liquidity Threshold (ILT), timeband weightings and product weightings) remain fit for purpose and through the parameters, checking the MIDS principles are being met (BSC Section T1.5.3). The purpose of the MIP is to reflect the price of wholesale electricity in Great Britain in the short term market, for delivery in respect of that Settlement Period.

1.2 Parties trade wholesale energy on power exchanges where they can buy and sell power exchange products. The products vary by duration and start time. Approved Modification Proposal P78 introduced the MIP to reflect the price of wholesale electricity in the short term market for Great Britain. 1.3 A power exchange can provide data through its role as a Market Index Data Provider (MIDP). As a MIDP they calculate Market Index Data (MID), which consists of half hourly prices and volumes. The calculation process is defined in the MIDS. In particular, the Market Index Definition Statement defines:

• The overall price (Market Index Price or MIP) and volume (Market Index Volume or MIV) calculation process;
• A volume threshold (Individual Liquidity Threshold or ILT), below which the default rules are applied;
• A list of power exchange products that are included in the calculation;
• A list of timebands which group trades according to how long before the Submission Deadline they are made;
• Weightings which reflect the importance of the products and timebands; and
• Principles by which the weightings, products and thresholds are determined.

1.4 The Individual Liquidity Threshold (ILT) is a volume threshold that is set to apply default rules (see 1.5) when there is insufficient trading on the power exchange to provide a suitable price. The aim is to avoid the price being set by a single trade (i.e. not setting the ILT too low), and to minimise the number of Settlement Periods where the default rule is applied (i.e. not setting the ILT too high).

1.5 The Market Index Volume (MIV) is calculated as the sum of the traded volume across the selected products and timebands, as defined in the MIDS. When the MIV traded in a half-hour is greater than the ILT, the MIP is the volume weighted average price of the trades. Where the MIV does not meet the ILT, the MIP and MIV default to zero.

1.6 The current MIDS (effective from 18 April 2019, following the implementation of BSC Modification P377) sets the products to be included in each half-hourly price and volume calculation as the Half-Hour, 1 Hour, 2 Hour and 4 Hour products traded within eight hours of the Submission Deadline. Prior to BSC Modification P377, the products were required to be traded within 12 hours of Gate Closure. 1.7 Weightings are applied to reflect the importance of each product and timeband and are set to ‘1’ or ‘0’, which either completely include or exclude particular trades. The current weightings applied to the different products and timebands used in the calculations are shown in Table 1.1.

[example table]

Source: Elexon

Use of the Market Index Price (MIP)

2.1 Since the introduction of BSC Modification P305 ‘Electricity Balancing Significant Code Review Developments’, implemented on 5 November 2015, the MIP is used to set the System Price in two scenarios: a) When the Net Imbalance Volume (NIV) is zero, then the System Price will default to the MIP; or b) If all of the actions in the price stack are unpriced then the Replacement Price, and consequently the System Price, will be set by the MIP.

2.2 Prior to the implementation of BSC Modification P305, the ‘reverse’ System Price was calculated for every Settlement Period and used for Energy Imbalance Settlement. The aim of the ‘reverse’ price was to reflect the price of wholesale electricity in the short term market for Great Britain, with the MIP used to set the ‘reverse’ price.

2.3 The System Price has not defaulted to the MIP due to a zero NIV since the implementation of BSC Modification P305. Since 2001, the NIV has equalled zero three times: 5 September 2007, Settlement Period 8; 22 September 2009, Settlement Period 10; and 10 May 2015, Settlement Period 7.

2.4 Graph 2.1 below shows the number of Settlement Periods with a Replacement Price over the past eight review periods. The Replacement Price is primarily determined based on the weighted average cost of the most expensive 1MWh of unflagged balancing actions, the Replacement Price Average Reference (RPAR). Where there are no unflagged balancing actions, the Replacement Price is set at the MIP.

2.5 The MIP set the Replacement Price in 554 Settlement Periods between 1 August 2019 and 31 July 2020. This represents 3.2% of all Settlement Periods, and 44.5% of Settlement Periods with a Replacement Price.

Graph 2.1 Annual incidences where the Replacement Price has been used in the System Price calculation. Annual periods are from 1 August to 31 July

[example graph]

2.7 Graph 2.2 shows the average of the MIP and the RPAR for the Settlement Periods where they have been used as the Replacement Price to set the System Price. Both the average MIP and RPAR Replacement Prices have decreased by £22.79/MWh (49%) and £24.56/MWh (58%) respectively. This is the largest decrease in the average MIP and RPAR Replacement Prices for the past eight reviews.

Graph 2.2 Average of the MIP and RPAR Replacement Prices. Annual periods are from 1 August to 31 July.

[example graph]

Future use of the MIP

2.8 The European Balancing Guideline (EBGL) requires all Transmission System Operators (TSOs) to develop a proposal for the harmonisation of imbalance settlement, including pricing. The proposal contains requirements for the calculation and use of a ‘Value of Avoided Activation of Balancing Energy’ (VOAA). This is the terminology that refers to a default price in situations where we currently default to the MIP.

2.9 The proposal includes a definition making it clear that this value can only be calculated from prices for balancing products, and therefore the MIP cannot be used. This is consistent with the overarching EBGL requirements. The proposal was approved on 15 July 2020, and the MIP must be replaced with a VOAA by 15 January 2021.

2.10 BSC Modification P410 ‘Changing imbalance price calculations to comply with the Imbalance Settlement Harmonisation regulations’ will provide a calculation methodology for the VOAA in order to comply with the EBGL. After the initial Work Group, Elexon is investigating viable methodologies for calculating the VOAA to develop a default price to be used in situations when, currently, the MIP is used.

3. Analysis of the Market Index Volume (MIV)

3.1 Market Index Volume (MIV) is the total traded volume across the ‘1’ weighted products and within ‘1’ weighted timebands. The weightings are displayed in Table 1.1.

3.2 The daily average MIV was 1,109MWh in the 2019/20 review period. This is 96MWh higher than the daily average MIV of 1,013MWh between 18 April and 31 July 2019 in the last review period following the implementation of P377. Historical daily average MIV data can be found in Table 3.1.

Table 3.1 Daily Average MIV in MIDS Reviews since 2012