Competition Economics of Balancing Markets

1. Introduction

A balancing market is a part of the electricity market used to maintain a continuous balance between electricity supply and demand. Electricity generation and consumption must remain closely balanced because large imbalances can affect system frequency and reliability. Generators, storage operators, demand-response providers and other participants may provide balancing services to the system operator.

Competition economics in balancing markets examines whether these services are supplied efficiently, whether participants can exercise market power, and whether market rules provide fair opportunities for competition.

2. Meaning of Balancing Markets

Electricity demand and generation cannot always be predicted accurately. Unexpected plant failures, changes in renewable generation, weather conditions and demand fluctuations can create imbalances.

A system operator therefore needs balancing resources that can increase or decrease electricity production or consumption quickly.

Balancing markets may involve:

frequency regulation;

reserve capacity;

automatic generation response;

demand response;

battery storage;

imbalance settlement; and

emergency balancing services.

The economic objective is to obtain these services at reasonable cost while maintaining reliability.

3. Why Competition Is Difficult

Balancing markets can be highly concentrated because only some generators or technologies may be capable of responding quickly. Transmission constraints can also reduce the number of suppliers available in a particular geographic area.

Consequently, a company with relatively modest overall generation capacity may possess significant local market power during periods of system stress.

Competition authorities and regulators therefore need to examine both overall market concentration and short-term availability of balancing resources.

4. Market Power and Strategic Bidding

Participants in balancing markets normally submit bids indicating the price at which they are willing to provide balancing services. A supplier with substantial market power may have an incentive to submit strategically high bids when competitors cannot easily replace its capacity.

This creates an important distinction between:

legitimate high prices caused by scarcity, and
prices or conduct resulting from unlawful exploitation of market power.

Economic analysis may examine bidding patterns, marginal costs, available capacity, market concentration and the availability of alternative suppliers.

5. Importance of Storage and Demand Response

Battery storage can increase competition because batteries can respond rapidly to system requirements. Demand-response providers can also reduce consumption when balancing services are required.

However, if access to balancing markets is restricted to traditional generators, newer technologies may be excluded. Competition economics therefore supports technology-neutral participation rules where technically appropriate.

A competitive balancing market should allow different resources to compete according to their actual technical capabilities.

6. Competition Act and Balancing Markets

In South Africa, the Competition Act 89 of 1998 provides the general competition-law framework. It prohibits certain restrictive horizontal and vertical practices and regulates abuse of dominance.

Section 8 is particularly relevant where a dominant participant uses market power to exclude competitors or engages in other prohibited conduct. The Constitutional Court has emphasised that competition law seeks to promote competitive markets and protect consumers.

In Competition Commission of South Africa v Senwes Ltd, the Constitutional Court examined exclusionary conduct involving a dominant firm and an important storage facility. The Court explained that section 8(c) requires consideration of whether conduct impedes entry or expansion and whether its anti-competitive effect outweighs technological, efficiency or other pro-competitive gains.

Although Senwes concerned grain storage rather than electricity balancing, its economic reasoning is relevant by analogy where control over an important electricity resource can affect competitors.

7. Essential Facilities and Network Constraints

Balancing markets depend heavily on transmission and distribution infrastructure. If a balancing provider cannot obtain appropriate network access, its ability to compete may be reduced.

This creates potential competition concerns where a dominant infrastructure operator:

discriminates between competitors;

restricts access without sufficient justification;

provides preferential treatment to an affiliated business; or

controls information needed for market participation.

Competition economics therefore has to be considered together with electricity-sector regulation.

8. Renewable Energy and Balancing

The growth of wind and solar generation increases the importance of balancing markets because their output can vary according to weather conditions. Flexible generation, batteries, demand response and improved forecasting can help manage these variations.

However, renewable generators should not automatically be treated as causing competition problems. The economic question is whether balancing rules allocate costs and opportunities in a transparent, technically justified and non-discriminatory manner.

9. Efficiency Versus Competition

Balancing markets must achieve two objectives: economic efficiency and system reliability. The cheapest bid is not necessarily sufficient if it cannot provide the required response speed or reliability.

Therefore, market rules may legitimately consider technical characteristics such as response time, availability, ramping capability and location.

Competition analysis must distinguish legitimate technical requirements from unnecessary barriers that protect incumbent participants.

10. Conclusion

Competition economics of balancing markets focuses on market power, bidding behaviour, scarcity, network constraints, entry barriers and efficient procurement of balancing services. Because electricity must remain continuously balanced, these markets have special economic characteristics and may experience temporary or local market power.

South African competition law, particularly section 8 of the Competition Act, can address abusive conduct where the legal requirements are established. Senwes provides a useful comparative precedent concerning dominance, exclusionary conduct and dependence on important infrastructure. Effective balancing markets therefore require transparent bidding rules, fair access, technology-neutral participation, appropriate market-power monitoring and coordination between competition authorities and electricity regulators.