Demand side flexibility (DSF) has been winning market share in National Grid ESO’s ancillary service markets, according to the Power Responsive annual report.
Product evolution has seen some settle to ‘natural price points’, the system operator said, but it indicated there would be more changes to products. The application of the EU’s Third Energy Package mean some familiar products will change, because the package requires ESOs to procure reserve one day ahead for a contract length of no more than one day. As a result STOR and Fast Reserve tenders have been suspended while NGESO determines, along with Ofgem, whether it can comply with the new requirement.
NGESO already has new products in development, including a competitive market for ‘restoration’ services that would use alternative routes for ‘black start’, rather than calling on a few large fossil plant. It is also expecting to launch procurement of ‘dynamic containment’ services this year. Meanwhile, as a result of the Coronavirus lockdown the system operator has been considering ‘foot room’ products required to manage low demand. The lockdown has brought that need forward. An EU consultation could also see more requirement to call on renewables to provide DSF.
The Energyst’s DSF report, Shifting Value, found that the majority of DSF providers – who are most often large companies that spend more than £1 million on electricity annually – remain broadly satisfied that DSF is worth their while. However, revenue and confidence have been eroded by changes to products, new regulations and the suspension of the Capacity Market in 2019.
Several products have both an availability and a utilisation fee. Last year, according to the report, although the Short Term Operating Reserve (Stor) market has been shrinking, DSF has retained its share of contracts and availability prices centred on a ‘natural price point’ of £2/MW/h for 2019. But DSR contracts offered lower utilisation fees so they have been called on to respond “substantially more” than traditional providers.
In fast reserve, NGESO accepted 75% of DSF tenders in late 2019, compared with 30% the year before. It attributed that it had increased the capacity sought and halved the entry level from 50MW to 25MW. It said that relatively high prices bid for availability payments and low prices for utilisation meant “providers are seeking more certainty” over the revenues.
In firm frequency response the picture was complex because volumes moved in from the old mandatory market, while some volumes moved out to a new auction market, which NGESO is trialling in 2019 and 2020, while other. But there were more and larger providers from the DSF sector over the last three years while fewer and smaller traditional providers won contracts. The ambition is to move to day-ahead auctions, NGESO says will provide investors with clearer pricing singles than the current pay-as-bid tendering process. But there is no firm timetable for this at present.
In the Capacity Market DSF continues to win contracts in the T-4 auction but have seen volumes contracted in the T-1 auctions fall as process have collapsed. In future, DSF should be able to bid for multi-year contracts in the CM auction.
Reaching into distribution
NGESO notes that DNOs are now starting to procure demand side flexibility directly to manage issues on the low voltage networks, and it noted local energy market platforms being developed to trade or sell flexibility across distribution and transmission. But it warned that “the minded-to position to allow DNOs to provide network management services could be viewed negatively, as this is likely to compete with demand side customer opportunities”. The relationship between flexibility markets is still uncertain; for example National Grid ESO said its solutions for managing the system during low demand may include “accessing resources” at the distribution network level to raise demand.
Read the full report
Read The Energyst’s DSF report ‘Shifting Value’