Revealing the value of flexibility in electricity markets - September 2013


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The attached slides outline our ideas on how the value of flexibility could be traded in the European electricity markets, within the context of the Target Model. Contact Stephen Woodhouse at Pöyry for further details of an ongoing study

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Revealing the value of flexibility in electricity markets - September 2013

  2. 2. COPYRIGHT@PÖYRYCOPYRIGHT©PÖYRY 2 Agenda 1. Why is there an increasing need for flexibility? 2. Why do current incentives for flexible capability fall short? 3. What is the best way forward? REVEALING FLEXIBILITY VALUE PROPOSAL 24 May 2013
  3. 3. COPYRIGHT@PÖYRY 3 European renewable targets mean that prices and dispatch patterns will be dictated by wind and solar Projected changes in wholesale prices from 2010 to 2030 Greater flexibility will be needed to operate the electricity system Four main options: 1. Flexible generation 2. Increased interconnection 3. Demand Side Response (DSR) 4. Electricity storage 20102030 Projected generation on a sunny day across N Europe in 2030
  4. 4. COPYRIGHT©PÖYRY 4 ‘Flexibility’ is one of the keys to unlock market-based decarbonisation Achieving intensity below 100gCO2/kWh through market means is dependent on supporting developments, including availability of “flexibility” in various forms Relationship between carbon emission intensity and carbon price from market • This is derived from our multi-client study on “Future Market Design” which has just been completed • Figures relate to 17 countries in North and Western Europe • Other key findings are shown in the Annex to this presentation LIBERALISATION AND DECARBONISATION JULY 2013
  5. 5. COPYRIGHT@PÖYRY Instead of flexibility, Europe is rewarding capacity (but not across borders) 5 GB Developing capacity auctions SEM CCGT tender (2002/3); Ongoing price-based capacity mechanism France Call for tender; Capacity obligations being developed Portugal Price based capacity mechanism for new units Spain Current price based capacity mechanism being re-developed Italy Proposals to replace current mechanism (with low payments) with reliability contracts Greece Quantity based capacity mechanism Germany Discussions about introduction of national capacity mechanisms; Grid stability reserves in south since 2011 Poland Proposals for new market with capacity mechanism Sweden & Finland Strategic reserve supplements energy only market Belgium Tenders for new CCGT
  6. 6. COPYRIGHT©PÖYRY 6 What is the requirement for flexibility? Decarbonisation increases need for flexibility What is the impact of capacity mechanisms? Risk paying for the wrong technology How can flexibility be traded across borders? Implementation of EU ‘Target Model’ Who needs to buy flexible capability? Greater balance responsibility, especially RES Further important questions for the implementation of new arrangements to reward flexible capability European electricity markets must change (2014) to improve cross-border trading Existing ‘wide’ capacity mechanism Existing ‘narrow’ capacity mechanism Proposed capacity mechanism Projected difference between day-ahead and out-turn (GB)Projected 2030 wholesale electricity prices in Northern Europe How much cross-zonal capacity is available for sale in each timeframe? What are the mechanisms and rules for selling cross-zonal capacity? How much harmonisation of balancing and imbalance arrangements?
  7. 7. COPYRIGHT©PÖYRY 7 Greater flexibility will be needed to operate the electricity system The common consensus is that higher levels of wind and solar generation driven by RES targets will prove challenging to electricity system operation RES curtailment Regulators and TSOs are faced with intermittency challenges Greater curtailment of wind and solar generation is a likely option Curtailment increases the cost associated with renewable energy; support arrangements may change Greater challenge to meet carbon emissions and RES targets Hidden flexibility Requirement is understood, but value is not transparent Payments made indirectly through CPM regimes or TSO ad hoc procurement and balancing Imbalance prices are not reflective of reserve holding and flexibility costs Potentially leads to inefficient outcomes Revealed flexibility RAs and TSOs make it a key goal to directly expose flexibility value Creation of ‘flexibility markets’. Energy options, intra-day trading, cross- border balancing Intra-day trading across interconnectors is important for selling flexibility across price zones Cross border balancing services requires common definitions of capability (but not common products) 1 2 3 How will system operation and market frameworks adapt? LIBERALISATION AND DECARBONISATION JULY 2013
  8. 8. COPYRIGHT@PÖYRYCOPYRIGHT©PÖYRY 8 Agenda 1. Why is there an increasing need for flexibility? 2. Why do current incentives for flexible capability fall short? 3. What is the best way forward?
  9. 9. COPYRIGHT@PÖYRYCOPYRIGHT©PÖYRY 9 Why might current incentives for flexible capability not be sufficient? Can the existing frameworks provide appropriate incentives for new investment if flexible capability becomes more scarce? Income for flexible capability is typically obtained from: • Energy revenue from conventional operation, supplemented by Short-term spikes in spot prices Balancing market Specific contracts with the grid operator Capacity mechanisms in some markets • Premium for providing output at short notice/over short timescales is often low Today, there is no shortage of plants with flexibility capabilities (but this will change) • There is limited ability for the true value of flexible capability to be revealed: Grid operator payments are often fixed (not market based) for specific services (monopsony buyer) Spot and balancing prices are smoothed (Regulatory pressure and TSO actions) Limited ability to realise cross-border value of flexible capability However:
  10. 10. COPYRIGHT@PÖYRY 10 There is a risk of inappropriate future levels of flexible capability Market rules must be able to cope with uncertainty about the future value drivers for flexibility • Capacity mix and growth of technologies with uncertain or variable output • Improvements in forecasting (demand, wind/solar output) • Policy environments – e.g. encouraging rigid behaviour in demand and generation Drivers for future flexibility need • Amount of existing older thermal plants that remain open • Level of cross-border coordination and efficient use of interconnectors • Development of innovative technologies • Improvements in flexibility parameters of thermal plant • Technology and cost developments of demand side response Drivers for future supply of capability Appropriate remuneration is the key factor • Under- or overpayments are likely to deliver inappropriate levels of flexibility • Basing payments on ‘wrong’ attributes (which are not scarce) brings regulatory risk (as the payments may change in future)
  11. 11. COPYRIGHT@PÖYRYCOPYRIGHT©PÖYRY 11 Agenda 1. Why is there an increasing need for flexibility? 2. Why do current incentives for flexible capability fall short? 3. What is the best way forward?
  12. 12. COPYRIGHT©PÖYRY • Significant – 28% • Moderate – 50% • Minor – 22% How much demand side flexibility will ‘smart’ solutions provide by 2030? • Electricity – 25% • Capacity – 9% • Flexibility – 56% • Other – 9% Which product / market do you think will be the key source of value in future? • Smart Energy – 14% • Capacity payments – 7% • Reserve/flexibility markets – 66% • Bigger ancillary service payments by TSOs – 14% What market design changes are needed to unlock future value? Voting on the day revealed that ‘flexibility’ is believed to be the missing market 12 Pöyry, with Eurelectric, held an energy policy discussion forum to consider the decarbonisation challenge
  13. 13. COPYRIGHT©PÖYRY 10 SEPTEMBER 2013 REVEALING FLEXIBILITY VALUE - WORKSHOP 2 13 In our study, we have agreed on the objective to be met by any proposed solutions to better reveal the value of flexibility “To find most economically efficient way of facilitating European goals for decarbonisation and security of supply, through signals and behavioural incentives for all market participants based on ‘market’ values for all services, with ‘simultaneous’ optimisation across timeframes and locations” Any solutions should be robust to both continuous trading and periodic auctions
  14. 14. COPYRIGHT©PÖYRY 10 SEPTEMBER 2013 REVEALING FLEXIBILITY VALUE - WORKSHOP 2 14 Optimisation across timeframes – is it better to commit the resource now or hold it to meet later contingencies? Resources in Country A Forward DAM IDM Balancing Resources in Country B Forward DAM IDM Balancing Cross-zonal capacity Resources can be generation, storage, cross-zonal transmission or demand-side Overall welfare optimisation through market-based mechanisms
  15. 15. COPYRIGHT©PÖYRY (Physical) energy options as tradable product for flexible capability 15 We have identified a number of elements to efficiently incentivise delivery of flexible capability The objective is to find the most efficient way of facilitating European goals for decarbonisation through incentives for all market participants based on ‘market’ values, with ‘simultaneous’ optimisation across locations and timeframes Sharper incentives to balance supply and demand Nationalarrangements Electricity market participants do not place ‘true’ value on having access to flexible capability Need tools to allow buyers and sellers of flexibility to better manage price and volume risks in low-carbon future Reserve procurement by TSO (single buyer) not facilitate innovative approaches to provisions Greater ‘flexibility’ in procurement of reserve capability No market-based mechanisms to allocate cross-zonal capacity between use of for energy and use for flexibility Cross-border mechanisms for market-based access of flexibility to cross-zonal capacity
  16. 16. Copyright © 2013 Pöyry Management Consulting (UK) Ltd All rights reserved Is full trading of flexibility a more appropriate option to reveal the value of flexibility? 16 Unlikely to provide sufficient weight to plants providing system flexibility (e.g. hydro plants) Balancing responsibility and marginal prices Energy options Intraday allocation of capacity (Explicit & Implicit) Cross-border balancing 1 2 3 4 More appropriate to reward flexibility directly Four steps are needed to allow trading of flexibility TRADING FLEXIBILITY CAPACITY PAYMENTS
  17. 17. COPYRIGHT@PÖYRYCOPYRIGHT©PÖYRY 17 Pöyry has developed a strawman option as a starting point for discussions The ideas behind the strawman option have been discussed with a range of organisations and market participants across Europe Some IC capacity could be allocated for intraday trading to allow flexible capacity to trade cross-border… …and the balancing services in place should support this arrangement Appropriate market arrangements to reward flexibility Compare value of IC capacity for different uses DAM: Energy IDM: Options BAL: Balancing Dynamically allocated IC capacity over various timeframes • Transitional measures need to be allowed until market arrangements would be in place • Flexibility trading could support the trading of energy options which would commit service providers to making services available at a later stage, allowing parties to hedge exposure to volatile intraday prices With appropriate definitions of balancing services, a better result than “common merit orders” is possible: • We would develop a generic structure to define the capabilities of service providers (i.e. define how quickly the service can commence and how long the service can last) in terms of a continuum rather than attempting to define specific ´balancing "products“ • The concepts can cover everything from the delivery of system inertia and primary frequency response through to more leisurely dispatchable balancing services
  18. 18. COPYRIGHT@PÖYRY Intraday capacity could be traded as an explicit product (interim), later moving to trading of energy options as a basis for ‘co- optimisation’ 18 €/MWh MW SNL DNL SNO DNO €12 20MW € 50 € 40
  19. 19. Copyright © 2013 Pöyry Management Consulting (UK) Ltd All rights reserved With appropriate definitions of balancing services, a better result than “common merit orders” is possible 19 €/MW time 5sec 15sec 30sec 15min 30min 4 1 5 3 6 2 4a Problems with standardised products • There is no value for extra flexibility (4a) • Some services have value although they do not fit the standard product definitions (3) • There may be cheaper solutions for TSOs (3 + 5 + 6)
  20. 20. Contact: Name: Stephen Woodhouse Mail: Phone: +44 7970 572444