May 19, 2020

Is the flexibility market moving toward real time?

The UK National Grid procures its balancing products (in advance) through Ancillary Services (e.g. Short Term Operating Reserve (STOR)) and in real time through the Balancing Mechanism. Ancillary Services markets usually pay for the availability of the assets in addition to the utilisation, providing asset owners a level of certainty for some revenue during a contract. However the Balancing Mechanism only pays for utilisation and prices are determined by a variety of factors, such as the generation provided by renewables (how much the wind is blowing or the sun is shining), the availability of traditional generation (e.g. operational reductions or maintenance), transmission from other countries, peaks and troughs in demand and the quantity of supply (number of assets) in the Balancing Mechanism.

Forecasting balancing needs (frequency, power, inertia, etc.) is becoming more complex with higher penetration of renewable generation, increased electricity demand from commercial, industrial and domestic users due to decarbonisation initiatives (which usually result in electrification) and the increases in dynamic demand from new technologies such as electric vehicles. Even crisis such as Covid-19 has changed the consumption patterns and has created more complexity. Therefore, having a large portfolio, and a variety of assets in the Balancing Mechanism can offer National Grid the option of determining balancing needs in real time and not rely on the complex forecasts needed in for Ancillary Services markets. This would also mean that National Grid could save money by only paying for utilisation in the Balancing Mechanism, rather than offering the additional availability payment in the Ancillary services markets.

National Grid have opened the Balancing Mechanism to aggregators and other flexibility providers recently with the hope of enlarging their flexibility portfolio, and also adding assets such as batteries that can respond faster in real time. This was good news for the industry at first, but soon it became obvious that managing smaller dynamic assets in a system that has been based on human operation and larger assets for many years, is more challenging than anticipated.

For the first year of so after the decision to open the market to additional providers, the smaller assets were not dispatched because of the lack of an automated system, National Grid hoped to address this with the launch of a new system in 2019/2020 and there has been some improvement in their dispatch pattern of the smaller assets. The other issue being experienced currently is that batteries are usually reserved for when very fast responses are required. This limits the revenue for such valuable (and expensive) assets that in some cases are commissioned purely to be dedicated to balancing services. This has led to some providers becoming more concerned about participating in the Balancing Mechanism.

In summary, it is well understood that real time markets can bring a lot of value to both National Grids and flexibility providers, but there is still a long way to go before National Grid and flexibility providers can rely on these markets. The changes support the NOVICE business model as it opens up access to new markets and revenues for smaller asset owners. However, the lack of certainty about the amount of revenue generation would not suit the MoU contract developed under NOVICE. As the market matures these revenues may become better understood. In the meantime alternative business models that allow uncertainty in the revenue generation are being explored by Kiwi Power, Noel Lawler and e7 within the NOVICE project.

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