The gas markets need to be kept in balance by matching supply and demand within prescribed technical limits. The Gas System Operator, National Grid Gas PLC, has overall responsibility as residual balancer for the system.
In operating the Gas National Transmission System (NTS), National Grid uses various tools to keep the system in balance, including buying or selling gas in the wholesale market. Any actions taken by National Grid for energy balancing purposes are likely to incur a cost.
Cash-out arrangements are operated in both the gas and electricity markets. These arrangements are designed to address the cost of energy balancing incurred by National Grid to the parties who created those costs (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 National Grid 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. This may include contracting for supply ahead of time, or by maintaining the reliability of their production plant, for example.
Both of these measures taken in response to the incentives created by cash-out prices, in turn, help secure supply. The cash-out arrangements that would apply in an emergency are being considered as part of the Gas Security of Supply Significant Code Review.