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HMRC internal manual

VAT Fuel and Power

Treatment of supplies of electricity and piped gas: British Electricity Trading and Transmission Arrangements (BETTA)

Following a review by the Regulator and the Department of Trade and Industry in 1998, it was recommended that the existing electricity trading arrangements should be removed and replaced with a market based approach, similar to trading commodities on an exchange. The New Electricity Trading Arrangements (NETA) was introduced in 2001. In 2005, NETA was extended to the whole of Great Britain (England, Wales and Scotland), and became known as the British Electricity Trading and Transmission Arrangements (BETTA). Northern Ireland, since 2007 has been part of a Single Electricity Market which operates across both the Republic of Ireland and the Province.

Under BETTA, bulk electricity is traded “forward” through bilateral contracts, and on one or more power exchanges, such as APX Power UK. Most trading in BETTA takes place in the forward contracts market.

Electricity cannot be stored and has to be kept in balance on a second by second basis by the National Grid Company (NGC). NGC operates a balancing mechanism to ensure system security. Only small volumes of electricity traded are subject to the arrangements in the balancing mechanism.

Generators are out of balance if they cannot provide all the electricity they have been contracted to provide, or they have generated too much; suppliers are out of balance if they have consumed more electricity than they have contracted for, or they have consumed too little. This will mean that NGC will face additional costs because it may have to buy or sell electricity at short notice to keep the system in balance. The charges (prices) participants face for being out of balance are based on these additional costs.

How BETTA works

The following table details BETTA trading activities.

### Forward and futures market Bilateral (two way) trades of electricity are conducted between sellers (generators) and buyers (electricity suppliers and customers). Buyers will purchase electricity according to their forecast demand.

These trades are done outside the power exchanges and balancing mechanism. The majority of trading will be conducted within this market with “fine tuning” of contracts taking place within the power exchanges.

The Grid Trading Master Agreement is the standard contract on which BETTA trades are based.  
  ### Power exchange

  | The power exchange gives electricity suppliers and customers the opportunity to fine tune their position as more accurate information will be available about their demand requirements. In the power exchange, electricity may be bought to fill the gap between electricity bought in the forwards and futures market, and the updated forecast. |

| ### Gate closure

  | The power exchange closes 1 hour before real time operation (the actual point in time when electricity is generated and consumed). This is known as gate closure. At this point, all participants must submit their final physical notification of their forecast of expected demand or supply to the system operator.

The system operator will call for bids and offers to be submitted at this stage. A bid will be to either reduce generation or increase demand. An offer will be to reduce demand or increase generation.    
  ### Balancing mechanism The balancing mechanism operates from gate closure until real time operation. It is essentially a means for the system operator to ensure that the systems balance during each half an hour of real time operation. The system operator does this by using the bids and offers submitted at gate closure.
Should a participant be out of balance at gate closure, they will be subject to the imbalance cash-out price. The penalties for imbalance are high and, as such, this mechanism is seen within the industry as a last resort.    
  ### Half hour of real time operation This operates to ensure supply meets demand.
  ### Settlements If the system operator has to take action on behalf of a participant during the balancing mechanism and through the half hour of real time operation, the participant is subject to the imbalance cash-out price. This is where the system operator calculates the participant’s settlement.

VAT treatment

Most electricity trades and derivatives are standard-rated, including those within the balancing mechanism. This includes futures and forward contracts for electricity and electricity options.

The exceptions are:

  • the information imbalance charge, which is in effect a penalty and thus outside the scope of VAT;
  • supplies on terminal markets, which are zero-rated; and
  • financial derivatives, such as contracts for differences, which are exempt from VAT.

There is more information about financial derivatives and trades in Notice 701/9: Derivatives & terminal markets.