FLEXIBLE RESPONSE:
A MARKET OR AN
ANCILLARY SERVICE?
ENERGY
IAN SMYTH
Managing Director
[email protected]
DAVID HALLDEARN
Senior Advisor
[email protected]
INSIDE THIS ISSUE
REGULATORY CHOICES AND
CHALLENGES FOR THE UK
SUMMARY
In this paper we argue that actions are needed, principally by the regulator, if
current demand side services are to be developed into a more dynamic market for
flexible demand side response (DSR). We highlight related regulatory issues that will
PAGE 1
Summary
PAGE 1
Introduction
PAGE 2
Demand for Flexible Response
is Growing
services by National Grid and action is required if a proper market is to evolve.
PAGE 2
A New Platform is Being Built
to Enable Flexible Response
INTRODUCTION
PAGE 2
Enabling Flexible Response:
Regulatory Challenges
Globally, the increasing penetration of non-programmable renewable generation (notably
PAGE 3
The International Dimension
if network operators are to continue to ensure high levels of system security. Thermal
PAGE 4
About the Authors
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About Navigant
Navigant Consulting, Inc. (NYSE: NCI) is a
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that helps clients take control of their future.
Navigant’s professionals apply deep industry
require attention. Whilst there is much interest in the development of demand side
services, the current arrangements rely heavily on the contracting of these as ancillary
wind and solar) is resulting in a growing demand for flexible response which is essential
generating plants are a casualty of the growth in renewable generation and as these
assets are retired or mothballed the flexible response services they have historically
provided will be reduced.
In parallel, power transmission and distribution network operators are being encouraged
by regulators to improve the efficiency with which they operate their networks through
the application of new smarter technologies which enable greater active control of
their networks. Thus network businesses will increasingly be able to avoid the cost of
new investment in new infrastructure by managing constraints using flexible sources of
knowledge, substantive technical expertise,
generation and demand. As a result, system balancing will be required at a distribution
and an enterprising approach to help clients
rather than just a transmission level and system balancing is increasingly becoming an
build, manage and/or protect their business
activity both required and achievable at a local level.
interests. With a focus on markets and clients
facing transformational change and significant
regulatory or legal pressures, the Firm primarily
serves clients in the healthcare, energy and
These trends are resulting in both a greater requirement for flexible response and an
ability to deliver it from non-traditional sources at a time when the main sources of
financial services industries. Across a range
flexibility are in decline. Across different jurisdictions, policy makers and regulators have
of advisory, consulting, outsourcing, and
sought different mechanisms and incentives to support and encourage these trends with
technology/analytics services, Navigant’s
different levels of success (for example capacity auctions/markets). Ultimately though,
practitioners bring sharp insight that pinpoints
opportunities and delivers powerful results.
More information about Navigant can be
found at navigant.com.
policy and regulation have been slow to respond to disruption of these changes in both
technologies and markets.
2
These global trends are very much reflected in the UK. For
example, despite the potential impact of the new capacity reward
mechanism introduced as part of the electricity market reforms,
A NEW PLATFORM IS BEING BUILT TO
ENABLE FLEXIBLE RESPONSE
new sources of flexible response will still be required to maintain
Three primary factors are driving the increased likelihood of
system security. Further, the introduction of smart meters provides
a flexible demand side response market. Firstly, the ability to
an important component but only a partial solution for enabling
place a value on not consuming power enables flexibility to be
the demand side to offer greater volumes of flexible response.
monetarized; secondly, the price control framework incentivises
distribution network operators to embrace flexibility; and finally
However, whilst there is much interest in the development of
the unprecedented levels of technology disruption we are seeing
demand side solutions, current arrangements rely heavily on
enable flexibility.
the contracting of the demand side of the market as ancillary
services by National Grid. Actions are needed, principally by
The roll-out of smart meters in Great Britain will enable half
the regulator, if the current one-sided market for demand side
hourly metering. This technology will provide consumers with
services is to be developed into a more dynamic market in
much greater information on their consumption patterns and
flexible response.
will also empower them with greater control over when they
consume energy. Perhaps most importantly, smart meters
DEMAND FOR FLEXIBLE RESPONSE
IS GROWING
will also reveal the true cost of consuming or choosing not to
Increased penetration of renewable generation and a combination
consume, provides them with an opportunity to sell the flexibility
of different policies and regulations have created a perfect storm
inherent in their choice in the form of flexible response.
consume in any given half hour period. Revealing to consumers
the financial advantage of choosing when to, and when not to
for thermal generation, effectively pushing it off the grid.
The latest price control on distribution network operators
Wind and solar (PV) generation plants are unprogrammable –
(RIIO-ED1) for the period 1 April 2015 to 31 March 2023 includes
their output is dependent on the availability of wind and sun
incentive arrangements to encourage innovation and efficiency
and so they cannot be controlled sufficiently to provide reliable
gains by the distribution companies, including through the
flexible response. If the output of these types of plant dips
application of smarter technologies in their networks. In order
because of unsuitable weather conditions, then other sources
to achieve efficiency gains the companies can be expected to
of generation must fill the gap or demand must be reduced to
adopt a more active role in the operation of their networks.
match available supplies.
Active management of network constraints (which is already
a normal feature of transmission grid operation) will become
Renewable generation capacity has increased, and can be
an increasingly commonplace activity for distribution network
expected to continue to do so, while much thermal generation
operators; Distribution Network Operators (DNO) are becoming
has become uneconomical. Consequently the requirement for
Distribution System Operators (DSO).
flexible response is also likely to increase.
The development and maturation of new technologies (e.g.
INSTALLED CAPACITY OF RENEWABLE SOURCES
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
micro-grids, virtual power plants) and particularly electricity
storage technologies, including the storage inherent from the
increasing penetration of electric vehicles, are a further enabler of
flexible response.
ENABLING FLEXIBLE RESPONSE:
REGULATORY CHALLENGES
However, despite all of these factors, an efficient and transparent
market for demand response or more broadly for flexibility is not
2010
Wind
2011
Marine
2012
Solar PV
2013
Hydro
2014
Bioenergy and wastes
Source: Renewable Sources of Energy: Chapter 6.4, Digest of United Kingdom Energy
Statistics (DUKES)
a given. In order to enable the development of a true market in
demand side response (DSR) a number of issues must be settled:
3
•• Consumer protection. The flexible response of smaller
replaced with a multi-party market-based arrangement in
consumers must be aggregated together to form blocks of
which, for example, renewable generators could participate
response which can be used effectively by system operators.
in order to hedge their imbalance risk. In order to achieve
In some cases these services may be locational, and in
this adjustments to the Balancing and Settlement Code will
some cases not and it is possible that different prices may
be required.
apply for locational flexible response than for non-locational
flexible response since the demand and supply balance will
•• Transparency. We also consider that revealing a market-based
price for flexible response will make it easier to identify the
be different in each case. Service companies are already
most efficient solution, notably where a network-based (i.e.
entering the market to manage smaller consumers’ demand
investment) solution on flexibility is the most efficient.
side flexibility and to pool the flexible response of a number
of consumers. These aggregators and ESCOs will be dealing
directly with energy consumers and must participate as
physical players in the market arrangements (which are
discussed more below). These features are much like those of
suppliers, although it is unclear whether the current regulatory
framework captures these new players. In our view there is
a good case for consumers having protection similar to that
OFGEM provides in relation to electricity suppliers.
•• Regulatory Leadership. Flexibility products from consumers
•• Clarity of Roles. Transmission System Operators (TSOs)
and DNOs will be major customers for flexible response
in order to maintain system security and to operate their
networks efficiently. One outcome of greater active network
management by both TSOs and DNOs is that each may
independently take actions which, whilst individually may
be correct, when taken together may produce an inefficient
outcome. For example, a constraint management action by
a DNO may well affect the balancing actions of the TSO.
Further, in some areas it is necessary to have a hierarchy of
must be fungible as well as being of real use as a system
responsibilities – one operator must be responsible for the
management commodity. Consequently the industry should
balancing of the entire system, for example (black start may
develop a standard set of flexible response products. It is
be another example). We believe regulatory clarity in the roles
unlikely that industry players will be able to collaborate
and responsibilities of the TSO and DNOs is needed.
effectively to define such a set of products (not least because
of the risk posed by competition legislation) so we think that
the regulator will have an important role in encouraging such a
discussion through establishing a forum for discussion which is
dedicated to Flexibility (rather than as a part of another forum
e.g. Workstream 6 within the current Smart Grid Forum).
•• Market led efficiency. A fundamental choice exists on
what sort of market in flexible response would be the most
efficient in the changing energy environment. We consider
that whatever arrangements are in place should provide
•• Incentives. The actions of DNOs and the TSO will be affected
by the financial incentive arrangements put in place through
their respective price controls. Interactions between the
system operation activities of DNOs and the TSO will, in
turn, affect the financial outcomes on each system operator.
Consequently we believe it will be important to consider the
implications on the incentive regime when considering the
roles and responsibilities of the TSOs and DNOs.
THE INTERNATIONAL DIMENSION
efficient pricing of flexible response, not least since it will be
a significant cost element in consumer prices. We also think
The need to address the issue of flexible response is not unique
that there should be efficient price discovery to signal the
to Great Britain. Developments are already underway in other
need for new investment in the provision of flexible response.
markets, and in some cases these developments are likely
•• Access. We also think that flexible response should be
available to market players other than network operators as
a means of balancing a portfolio, and through the offering
of hedging instruments to enable market players (including
renewable generators) to hedge their imbalance risks.
•• Market Modification. We do not consider that the current
ultimately to impact directly on GB’s own market arrangements.
The growing requirement of flexible response to maintain
system security is an issue that is being increasingly recognised
internationally. Within the European Union the European
Commission has identified demand side response as an issue to
be addressed as part of its ‘Energy Union’ communication. The
one-sided market (in which the system operator is the
Council of European Energy Regulators (CEER) is examining the
counterparty to flexibility contracts, including through the
developing role of DSOs as active operators of their networks
balancing mechanism) delivers the benefits outlined above,
and the implications of that for the regulatory framework.
nor is it capable of doing so. We consider that it should be
Some other markets have already developed initiatives to
encourage greater participation from those able to offer
flexible response. The PJM market in the US has encompassed
the demand side and electricity storage into the mainstream
electricity market. Currently nearly 22% of synchronous reserves
are provided by demand response, and demand response
achieves annual revenues of $500 million, compared to just $1.4
million in 20021.
The PJM market has also facilitated the introduction of electricity
storage as a source of flexible response. A one-megawatt set of
lithium-ion batteries (owned by AES) has provided regulation
services in the PJM market for several years. AES now has a twoMW battery facility. A much larger, 64-MW, battery facility went
into operation in 2011 in conjunction with a 98-MW wind farm.
The battery facility is capable of changing its output in less than
one second and helps PJM to regulate frequency as an alternative
to adjusting the output of fossil-fuel generators2.
Flexibility and DSR is not a unique requirement or feature
of the GB market and there are opportunities to replicate
successes and avoid distortions and failures which other
markets have experienced.
ABOUT THE AUTHORS
Ian Smyth is a Managing Director in Navigant Consulting and
CONCLUSIONS
leads the Energy practice in EMEA. David Halldearn is a Senior
There is growing demand for flexibility on the system and
They can be contacted at [email protected] and
demand side response is an obvious solution which can deliver
Advisor in Navigant Consulting’s Global Energy practice.
[email protected].
this flexibility. A solid platform to support DSR is being built and
a range of new enabling technologies are reaching commercial
viability. A market-led approach for DSR services is consistent
with current policy and other markets and will ensure flexibility is
delivered transparently, reliably and quickly.
However, intervention is required by the regulator to avoid
distortions and to overcome barriers to the evolution of these
flexible services in achieving security of supply. Without these
interventions, capacity will be squeezed further, DNOs will be
prevented from investing further in the necessary enabling
platforms and technologies which can enable will instead disrupt
the energy system.
1.
Source: PJM
2. Source: PJM
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