The role of imbalance settlement mechanisms in electricity markets: a comparative analysis between UK and Brazil Ana Luiza Souza Mendes 1,2 ; Nivalde de Castro 1,3 ; Roberto Brandão 1,4 ; Lorrane Câmara 1,5 ; Mauricio Moszkowicz 1,6 1 UFRJ, Av. Pasteur 250, Rio de Janeiro, Brazil, 2 ana.luiza@gesel.ie.ufrj.br 3 nivalde.castro@gmail.com 4 robertobrandao@gmail.com 5 lorrrane.camara@pped.ie.ufrj.br 6 moszko01@gmail.com Abstract—The present work aims to analyze UK’s and Brazil’s wholesale electricity trading models. UK’s model, also known as New Electricity Trading Arrangements (NETA), can be considered a reference for the present day electricity markets. Recently UK has implemented a market reform that, while maintaining UK’s market structure, introduced several strong regulatory economic signals in order to foster new investments, both in thermal and in low carbon emission electricity generation. Brazil’s wholesale market model is also noteworthy as it managed to promote large scale investments in low carbon generation in a liberalized market environment. However, Brazil’s regulatory framework design proved fragile during a recent long draught period when short term financial obligations related to imbalance settlements soared and led to financial stress and, eventually to a market halt. Index Terms-- Energy Market; Energy regulation; commercialization; Short Term Market; Balancing Power Market I. INTRODUCTION This paper is part of a GESEL (Electric Electricity Research Group of the Institute of Economy of the Federal University of Rio de Janeiro) research project to promote regulatory innovations in the Brazilian Electrical sector, based on the experience of several International regulatory frameworks. The focus of this paper is to propose regulatory improvements to Brazil’s trading arrangements inspired partly on UK’s current imbalance settlement rules, since these rules provide an economic incentive for agents to avoid imbalances, something that could be useful to improve Brazil’s market design. Firstly the paper presents the basic concepts of UK’s current market arrangements. Then the Brazilian electricity trading regulatory framework is presented, highlighting some important aspects related to current crisis (2013-2016), triggered by a long drought period. Finally the article proposes some regulatory innovations, to be detailed and enhanced in future studies, in order to mitigate the financial risks experienced during the crisis period. II. ENGLAND: FORWARD MARKET AND IMBALANCE SETTLEMENT After privatization of the electricity industry in England and Wales, in the 1990s, the System Operator (SO) centrally dispatched generation and transmission. Currently in the UK’s the electric system is no longer centrally dispatched, as a result from a subsequent reform carried out in 2001 known as the New Electricity Trading Arrangements (NETA). In the NETA framework, that serves as a proxy for the European Electricity Markets, both generators and suppliers are induced to contract 100% of their energy production/supply in each market time interval. In this design, market prices guide the behavior of agents and imbalance prices act as a punishment element in case of imbalances, i.e. when agents are not able to contract all their electricity output/need at the electricity market [13]. NETA comprises three commercialization tools: (i) Forwards and Futures Markets; (ii) Balancing Mechanism, and (iii) Imbalance Settlement. [11]. Agents (generators, suppliers and traders) transact energy contracts so that electricity supply and demand have to match at every market period [14]. Electricity contracts are negotiated bilaterally at the Forward Market, where energy is traded before delivery. The negotiations can be held “Over the Counter”, on terms agreed between the parties, or at the Power Exchange [8; 14]. The SO handles differences between contracted consumption and production. In the Balancing Mechanism, the SO balances electricity supply and demand in real time [8]. The Balancing Services Market was developed so that the SO could promote these real time adjustments. In the Balancing Services Market, agents submit to the SO electricity sale offers (Offer to sell), to increase production or reduce consumption, or energy purchase bids (Bids to buy), to reduce production or to increase consumption. These proposals are equivalent to the prices at which agents are