How flexibility markets can drive the energy transition

Two papers published this week set out recommendations for market-based approaches to managing flexible resources.
Published: Fri 06 Sep 2019

The need for more flexible electricity markets to match demand with supply is becoming more urgent as distributed renewable generation resources increase, and several platforms are emerging to help system operators balance the grid as an alternative to building more infrastructure.

Association for digital and decentralised energy solutions smartEn recommends some important regulatory changes that should be introduced in order to foster the development of these valuable flexibility tools in a paper published this week: Design Principles for (Local) Markets for Electricity System Services.

"The recently adopted European Clean Energy Legislative Package lays out new rules for network operators to procure flexibility resources for electricity system operation from the market. Our new position paper defines core design principles for such markets to drive the sustainable energy transition and empower consumers in a secure and cost-effective electricity system," says Frauke Thies, smartEn’s executive director.

The Clean Energy Package says that Distribution System Operators (DSOs) should procure flexibility services where these are cheaper than grid expansion. As the digitalisation of the energy sector progresses and smart meters, energy storage, electric vehicles, electric heating and cooling appliances become more prevalent, there is a growing opportunity to operate the grid more efficiently and manage the timing of this demand rather than building new capacity. However, this will require a big shift in the way the electricity markets function, and whether economic incentives will be enough to change consumer behaviour on one side and utility culture on the other – remains to be seen.

 

Incentives

Some measures have already been set out in the revised European Electricity Directive but have yet to be written into many member states’ laws, perhaps most importantly allowing for cost-recovery based on total expenditure rather than just on capital investments, which has only been implemented in the UK so far. This would incentivise system operators to invest in digital solutions and software rather than physical infrastructure alone to resolve grid congestion problems. Some sort of financial incentive should be introduced to address the market disconnect, in that system operators may underestimate the value of delayed investments and the reduced risk of stranded assets because as they are regulated these costs are passed through to consumers. Investment decisions above a certain threshold for each voltage level should be qualified with an assessment of the cost of the non-wire alternative, smartEn suggests.

System operators should be able to procure flexibility services from the market, rather than owning and operating the resources providing these services, according to smartEn, and all flexibility markets should be directly open and accessible to decentralised resources and consistent with the electricity wholesale markets and the transmission level. This is to avoid a high concentration of market power with the system operator.

Emerging platforms, operated by independent third parties and sometimes by a consortium of system operators, should use open standards to promote competition and should be open to all decentralised solutions to allow for innovation and not to pick winners by locking in criteria tailored to existing technologies. There are several examples of platforms already in operation, such as NODES, ENERA, Piclo Flex, Enera - EPEX Spot Local Flexibility Platforms, ETPA/GOPACS and OMIE IREMEL which are helping to demonstrate the feasibility of a market-based approach.

Finally, the procurement of flexibility services should be transparent and non-discriminatory, with system operators making information on expected congestion management needs and activities publicly available to the market and only relying on bilateral deals when necessary.

Market observers and flexibility providers endorsed the key recommendations from the paper.

“The paper is published at the right time learning from initiatives that are taking place and analyzing key topics such as DSO´s incentive structure for using flexibility, product design and transparency. In the end flexibility platforms aim to support the integration of renewables and active consumers via markets, which is the backbone of the Clean Energy Package and our future energy systems, says Alicia Carrasco CEO of consultants olivoENERGY.

“As a leading flexibility market platform in the UK, we agree that market platforms should be open, transparent and non-discriminatory. Additionally, we recognise that the TOTEX incentive scheme used by DSOs in the UK can serve as a great blueprint for other countries across Europe. We see a huge opportunity for more efficient flexibility markets that can reflect the increasingly locational demands on the system, helping drive investment and innovation to the edges of the grid,” says James Johnston, CEO and co-founder of Piclo.

Examples of flexibility platforms:

Norway’s NODES is jointly owned by marketplace Nord Pool and energy company Agder Energi.

The Netherlands’ GOPACS is a collaboration between the Dutch TSO TenneT and the DSOs.

Germany’s ENERA: EPEX Spot local flexibility markets is a part of the development program Smart Energy Showcases – Digital Agenda for the Energy Transition (SINTEG) by the German Federal Ministry of Economic Affairs and Energy. The energy group EWE and the European Power Exchange EPEX SPOT launched it together with system operators Avacon Netz, EWE NETZ and TenneT.

Spain’s IREMEL was launched by Spanish Iberian electricity spot Market Operator OMIE in collaboration with IDAE, Institute for the Diversification and Saving of Energy (Ministry for the Ecological Transition).

The UK’s Piclo Flex is operated by Piclo, an independent software company, with six DSOs members at present: UK Power Networks (UKPN), Scottish and Southern Electricity Networks, Electricity North West Limited, Northern Powergrid, SP Networks and Western Power Distribution.

Redispatch in Germany

Congestion management cost Germany almost €5 billion over the past four years, according to a paper Market-based redispatch is a necessary complement to the current German redispatch regime authored by NODES, E-Bridge and Poyry.

Renewables were curtailed by 3.3TWh in the first quarter of 2019 due to grid constraints and estimates for network expansion costs are increasing. These costs could be mitigated with a market-based redispatch system, but the German government seems to be opposed to such a move and it is still heavily regulated under recent legislation, according to the paper. The number of flexible resources available for redispatch has increased, but demand-side flexibilities and small-scale generators have been excluded, and there is an assumption that demand is inelastic.

“Everybody is talking about smart grids but it only becomes flexible when you have smart markets,” says CEO of NODES Enno Böttcher. “Additionally, we would defer grid investments and have a chance to achieve the national climate targets with effective coordination.”

“Considering that congestion will continue to exist in the German transmission and distribution networks for many years or even decades, the efficiency of a chosen congestion management scheme over time becomes increasingly important for the success of the “Energiewende”,” the paper concludes.

 

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