The regulator’s conundrum is how to provide sufficient certainty for investors while also making the necessary changes to market rules and regulatory arrangements in response to a rapidly changing sector, said Andrew Burgess, Ofgem’s deputy director of energy system transition at National Grid ESO’s Power Responsive summer reception in London. “What’s important is not to stifle innovation,” he said. “The current rules were designed for a passive and not a dynamic energy system. But we are open to new services coming in.”
Ofgem’s consultation on the treatment of electricity storage opened this week is a welcome step forward, said Merlin Hyman, chief executive of think-tank Regen. The regulator added a definition of storage and a requirement for licence holders to provide information to their suppliers to support the correct calculation of levies and charges which is open to comment until 25th July.
There is a potential discord between the role of the regulator and the UK’s commitment to zero carbon by 2050, as Ofgem’s remit is primarily to provide value for the energy consumer and not necessarily favour low carbon sources of generation. The recent targeted charging review (TCR) was criticised by Ovo Energy’s director of strategy Toby Ferenczi as “a step backwards,” although said he is looking forward to seeing how the regulator's Access and forward looking charging work would deliver better signals.
The review seeks to allocate fixed residual transmission and distribution charges fairly once the current triad incentive mechanism is removed, which could effectively mean customers face fixed charges with their demand at peak times addressed through other parts of Ofgem’s reform programme. The balancing services charges task force report was published in May 2019 and supplementary analysis looking at a scenario with no capacity market is open for public comment until 12th July. The changes could be introduced as early as April 2021. These are all part of a wider package of reform, Burgess said.
Flexible generation and demand side response resources have become a victim of their own success, says Colm Murphy, head of electricity market change delivery at the UK’s system operator National Grid ESO (NGESO). Due to oversupply a recent contingent one-year capacity market auction saw prices as low as £0.77/kW - much lower than the most recent price in the four-year auction of £8.40/kW and the high of £22.50/kW.
“We are going through the birth of something new, something different. But we are living with the legacy of a system built 20 years ago. Now it’s a meshed world that’s interlinked, it’s digital,” Murphy said.
Various projects are underway to assign value to flexibility, but the pace of reform has been gradual and some new market structures have been delayed. The capacity market is being challenged by the European Court of Justice, and the European replacement reserve balancing exchange TERRE has been postponed until at least next June due to implementation delays in France and other countries. But NGESO is pressing ahead with reforms, Murphy said.
As part of a drive to lower barrier to entry for providers with variable demand and generation NGESO is moving contracts closer to real time. The first phase 1 weekly frequency response auction to procure a low frequency static service was held two weeks ago, from a previous monthly tender cycle.
The balancing market has been opened to more participants and wider access will be granted by the end of the year, and potential revenues can be stacked with other markets. The Network Operator Assessor pathfinder projects are looking at system needs such as high voltage, stability of frequency and constraint management, so these could lead to further opportunities to provide ancillary services, as could other NGESO innovation projects such as Power Potential and Black Start from distributed energy resources.
The wholesale market could provide good earnings, but it’s not necessarily the case that existing market participants have the necessary trading capability nor the appetite for price risk, said Tom Harper, senior manager at consultants Baringa Partners. Flex operators are “feeling the pinch” from these market conditions, along with other market developments, he said. “It’s a challenging time.”
Managers at large industrial consumers may take a negative view on flexibility programmes after seeing problems with the capacity market, said Steven Edwards, head of flexible energy at manufacturing firm SIMEC. The legal challenge, low prices and some rejected bids for relatively minor reasons are giving an impression that participation is seen as relatively risky. “You can earn a lot, but we don’t bank on it and we certainly don’t invest on the outcome,” he said.
Distribution network operators are procuring flexibility products in different ways. WPD has a second round of flexible power procurement starting next month, SSEN uses the Piclo platform and hopes to announce its first contracted constraint managed zone services next month, and UKPN will issue another flexibility tender trial later this year.
The Energy Networks Association has a consultation on flexibility later this month and will launch a flexibility page to act as central repository of information, following guidance published last month.
The jury is still out on whether these products will deliver the ‘firming flexibility’ that will be required to manage the increase in renewable generation called for in the zero carbon pledge, said Baringa’s Harper.
A stark warning came from Chris Rapley, professor of climate science at University College London. “Time is running out. You’re now on the wrong side of history.”