Understanding Balancing Market Product Structure
— 5 Products, Composite Bidding & Online Connection Overview

The Balancing Market Trades "Power Insurance"

The power grid must constantly balance supply and demand; otherwise, frequency deviates, leading to large-scale blackouts in the worst case. The Balancing Market is a market for trading the balancing capacity that fills this "gap."

The buyers are general transmission and distribution operators (Tohoku Electric Power Network, TEPCO Power Grid, etc.), and the sellers are generation companies and battery operators. Sellers receive compensation for "standing by ready to operate at a specified output during specified time periods."

Trading of all products began in April 2024. The Balancing Market has five products: Primary Reserve, Secondary Reserve 1, Secondary Reserve 2, Tertiary Reserve 1, and Tertiary Reserve 2. Differences between products are determined by two axes: "how quickly can it respond" and "how long can it sustain." Additionally, there is a "Composite" bidding method that bundles four products from Primary through Tertiary 1, allowing simultaneous entry into multiple products with a single bid. Primary Reserve has two participation methods: Online (dedicated line connection) and Offline (simple command system).

Design Philosophy of 5 Products — Divided by Speed and Purpose

* Duration is the current FY2026 specification. At system creation, Secondary 1 & 2 were "30+ min" and Tertiary 1 & 2 were "3 hours," but all products were unified to "30 min" with the transition to day-ahead trading and 30-min slots (Tertiary 2 was changed in advance from FY2025). Primary Reserve Offline monitoring specifications apply from FY2025.

What Are GF, LFC, EDC & GC?

The abbreviations in the table represent control functions for maintaining grid frequency and terms indicating market time divisions. Battery operators need to understand these to grasp the positioning of each product.

GF (Governor Free) is a function where generators detect frequency fluctuations and automatically adjust output. Machines respond instantaneously without human judgment. Grid frequency should always be maintained at 50 Hz (eastern Japan) or 60 Hz (western Japan), but even momentary supply-demand mismatches cause frequency to fluctuate. GF is the first line of defense that automatically absorbs these "second-level gaps," and Primary Reserve corresponds to this function.

LFC (Load Frequency Control) is a function where the central dispatching center monitors frequency deviation and instructs generators to increase or decrease output. It handles "multi-minute fluctuations" that GF cannot fully absorb. If GF is an automatic individual response, LFC is a system where a command center adjusts while monitoring the whole picture. Secondary Reserve 1 corresponds to this function.

EDC (Economic Dispatch Control) is a function that optimizes the output allocation of multiple generators to minimize cost. While GF and LFC prioritize "maintaining frequency," EDC allocates output with economic efficiency in mind — "using the cheapest power sources while maintaining stable supply." It handles supply-demand adjustment over longer time horizons (tens of minutes to hours) and is divided into Secondary Reserve 2 (fast response: EDC-H) and Tertiary Reserve 1 (slow response: EDC-L).

GC (Gate Close) means the "deadline" in electricity trading. Unlike GF, LFC, and EDC which are generation control functions, GC is a market time division with a different nature. It is set one hour before actual supply and demand, and after this time, generation and demand plans can no longer be changed by generators or retail electricity providers. The "gap between forecasts and actuals" remaining after GC is filled by transmission operators using balancing capacity. Tertiary Reserve 2 is the product for addressing RE generation forecast errors that arise after GC.

Because batteries can physically "change output in milliseconds," they have an overwhelming advantage in fast-response products like Primary (GF) and Secondary 1 (LFC). Response within 10 seconds is technically difficult for thermal plants and gas turbines, giving batteries a structural competitive advantage.

Online vs Offline — Participation Conditions Change by Connection Type

Primary Reserve has two participation methods: "Online" and "Offline." This is an important classification directly linked to battery equipment configuration and costs, with significant differences in market performance. Note that all products from Secondary Reserve onward require Online connection.

Online (Dedicated Line Connection)

A method of connecting with the transmission operator via a dedicated communication line and responding to real-time commands. Frequency fluctuations are detected and output is adjusted automatically. Installation of the dedicated line costs tens of millions of yen, but enables bidding in all time periods and all slots.

Offline (Simple Command System)

A method that requires no dedicated line and responds via a simple command system. The barrier to entry is lower since dedicated line costs are not incurred. However, for batteries with installed capacity of 10 MW or more (extra-high voltage connection), Online connection is mandatory for Primary Reserve participation, and Offline entry is limited to batteries under 10 MW (per EPRX trading rules). Note that for generators, Offline applies to single-unit capacity under 1 MW, with a different threshold than batteries. The procurement cap for the Offline frame is set at 4% of the Primary Reserve requirement, and from FY2026, the solicitation volume has also been reduced (changed to 1-sigma equivalent, discussed below).

Composite Products — Bundled Bidding from Primary to Tertiary 1

From April 2024, Primary, Secondary 1 & 2, and Tertiary 1 were traded as "weekly products" in bulk (transitioning to day-ahead trading from March 13, 2026). The Composite product is a bundled bidding method (composite clearing logic) combining these four products, not an independent product category.

Bidding on the Composite product allows simultaneous entry into multiple balancing products with a single bid. For example, when a battery bids on the Composite product, it may be awarded in any product from Primary through Tertiary 1. Awards are stacked "from lowest price," filling the fastest product (Primary) first.

Meanwhile, Tertiary Reserve 2 is traded in an independent market as a "day-ahead product" and is not included in the Composite product scope.

With the Primary Online fulfillment rate at 40.8% and Primary Offline at just 3.4%, the supply shortage for Primary Reserve is outstandingly severe. For batteries, this means the market environment continues to offer high probability of winning awards upon entry.

Battery Contract Prices — 3-6x Higher Than Thermal

Batteries are awarded at higher unit prices than Thermal precisely because of their faster response speed.

(Unit: yen/delta-kW per 30 min, monthly range for FY2025 first half)

Battery awarded unit prices are 3-6 times those of Thermal. VPP (Demand Response, etc.) frequently bids near the price cap and commands the highest unit prices, but awarded volumes are limited. Batteries are becoming the primary resource in the Balancing Market in terms of both "volume" and "price."

FY2026 Policy Changes — Day-Ahead Trading and Price Cap Reduction

Starting with transactions from March 13, 2026, two major changes were implemented in the Balancing Market.

1. Day-Ahead Trading and 30-Min Slot Transition

Primary through Tertiary 1, which were previously bid as "weekly products" in bulk for one week, transitioned to "day-ahead trading" where bids are placed at 2 PM the day before for the next day. The trading unit was also subdivided from 3-hour blocks to 30-minute slots. Accordingly, the duration for all products was unified to 30 minutes (Tertiary 2 had already been changed to 30 minutes in advance from FY2025).

This means operators must now make daily decisions for each of the next day's 48 slots: "sell on JEPX (wholesale electricity market) or stand by for the Balancing Market." Since only unsold portions from JEPX spot market bids can be bid into the Balancing Market, the strategic allocation between the two markets has become more important.

2. Price Cap Reduction

Sigma represents the statistical standard deviation. Transmission operators determine the volume of balancing capacity to secure based on the statistical variability of demand forecast errors. 3-sigma covers 99.7% of forecast errors (= preparing for nearly the worst case), while 1-sigma covers 68% (= handling normal fluctuations). The change from 3-sigma to 1-sigma in solicitation volumes for Primary Reserve and Secondary Reserve 1 means a significant reduction in the total balancing capacity procured through the market. Note that Secondary 2 and Tertiary 1 were already procured at 1-sigma.

While the price cap was relaxed from the initial proposal of 7.21 yen to 15 yen, it still represents approximately a 23% reduction from the previous 19.51 yen. Furthermore, if no improvement is seen in market competitive conditions, the policy is to reduce in phases to 10 yen then 7.21 yen.

48 Time Slots and Bid Rate — Operating Strategy Determining Battery Revenue

JEPX trades in 48 slots of 30 minutes per day. The Balancing Market also transitioned to 30-minute slots from FY2026. For batteries, "how many of the 48 slots can be put into the market" directly affects revenue.

Batteries cannot bid into the market while charging. In normal operations, they charge during low-price periods (late night, daytime solar surplus hours) and discharge during high-price periods. Therefore, it is impossible to bid on all 48 slots, with revenue opportunities reduced by the number of slots used for charging.

The technical solution to this constraint lies in advanced operational algorithms provided by aggregators. Operations are becoming possible that optimize charging timing and allocate the maximum number of slots to both the Balancing Market and JEPX. The choice of aggregator is a factor that creates significant differences in annual revenue even for the same battery equipment.

Key Points for Battery Operators