Paper: arXiv 2610.28075

Authors: Joseph Cary, Thomas Morstyn

Abstract

The electricity system in Great Britain (GB) allows participants to deliberately produce or consume a different volume to their traded position and has incentivised this practice with a single imbalance price since 2015. In particular, non-physical traders (NPTs) often take an open position to imbalance without any intention to produce or consume power. However, new government proposals could restrict this practice due to concerns over supply-demand balancing feasibility and costs. This article presents the first empirical analysis of speculative imbalance positioning (SIP) by NPTs in the GB electricity system through its effects on imbalance volumes, balancing costs, the imbalance price, and associated settlement costs over the period 2021-2024. Our research uses party-level imbalance data in each settlement period to run counterfactual simulations of the electricity balancing mechanism without the aggregate NPT imbalance. Our results indicate that SIP by NPTs reduced the total net balancing volume required by 3.1-3.9 TWh (16-20%), reduced system imbalance standard deviation by 48-65 MWh (13-17%), reduced balancing costs by £347-396m (5.9-6.7%), and reduced supplier imbalance costs by £193-325m (65-75%) over the analysis period. These results suggest that consumer bills would have been higher without SIP by NPTs, since the extra costs would likely have been passed on to consumers through levies, although the potential for effects in the wholesale (primarily late-stage intraday) markets complicates this picture.

Complexity vs Empirical Score

  • Math Complexity: 4.0/10
  • Empirical Rigor: 8.0/10
  • Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper presents a strong empirical analysis using real-world data and counterfactual simulations. While the methodology is sound, the mathematical complexity is not exceptionally high, focusing more on data analysis than advanced theoretical derivations.

Research Flowchart

  flowchart TD
    A[Research Goal: Analyze impacts of Speculative Imbalance Positioning (SIP) by Non-Physical Traders (NPTs) in GB electricity system] --> B{Key Methodology: Empirical analysis using counterfactual simulations};
    B --> C[Data/Inputs: Party-level imbalance data for each settlement period (2021-2024)];
    C --> D[Computational Process: Simulate electricity balancing mechanism WITHOUT aggregate NPT imbalance];
    D --> E{Key Findings/Outcomes};
    E --> F[Reduced Net Balancing Volume by 3.1-3.9 TWh (16-20%)];
    E --> G[Reduced System Imbalance Std Dev by 48-65 MWh (13-17%)];
    E --> H[Reduced Balancing Costs by £347-396m (5.9-6.7%)];
    E --> I[Reduced Supplier Imbalance Costs by £193-325m (65-75%)];
    E --> J[Conclusion: SIP by NPTs likely reduced consumer bills, though wholesale market effects are complex];