Cash-Out Arrangements
The gas and electricity transmission systems need to be kept in balance by matching supply and demand within prescribed technical limits which are different for each system. The System Operator (SO) for the relevant system (National Grid National Transmission System (NGNTS) for gas and National Grid Electricity Transmission (NGET) for electricity) has overall responsibility as ‘residual balancer’ for the relevant system.
As part of the electricity balancing role NGET may buy or sell electricity from or to generators and suppliers (or large customers who are quickly able to reduce their demand to bring the system into balance). NGET also contracts with generators and large suppliers to hold a “reserve” to keep the system in balance. For gas, NGNTS buys or sells gas to offset differences in inputs and outputs to keep the system in balance. Any actions taken by the SO for energy balancing purposes incurs a cost.
‘Cash out’ arrangements are operated in both the gas and electricity markets. These arrangements are designed to target the cost of energy balancing incurred by the SO to the parties who created those costs (i.e. those parties who do not balance their inputs and outputs within the relevant balancing period). As such, parties who are not in balance incur charges that reflect the costs incurred by the SO in addressing the imbalance. These charges are known as cash out prices.
Cash out prices are designed to provide market participants with strong commercial incentives to balance their contractual and physical positions and therefore avoid exposure to cash out prices. That is, by contracting for supply ahead of time or by maintaining the reliability of their generating plant.
Electricity cash out project
Ofgem is working with the industry to review aspects of the cash out arrangements in electricity.