revealing the value of flexibility
TRANSCRIPT
POWER PLANT FLEXIBILITY AS THE FUTURE KEY SOURCE OF VALUESeptember 2013Stephen Woodhouse
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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
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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 generation2. Increased
interconnection3. Demand Side
Response (DSR)4. Electricity storage
2010
2030
Projected generation on a sunny day across N Europe in 2030
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‘Flexibility’ is one of the keys to unlock market-based decarbonisationAchieving 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 DECARBONISATIONJULY 2013
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Instead of flexibility, Europe is rewarding capacity (but not across borders)
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GBDeveloping capacity
auctions
SEMCCGT tender
(2002/3); Ongoingprice-based capacity
mechanism
FranceCall for tender;
Capacity obligations being developed
PortugalPrice based capacity mechanism for new
units
SpainCurrent price based capacity mechanism being re-developed
ItalyProposals to replace
current mechanism (with low payments) with reliability contracts
GreeceQuantity based capacity
mechanism
GermanyDiscussions about
introduction of national capacity mechanisms;
Grid stability reserves in south since 2011
PolandProposals for new market with capacity mechanism
Sweden & FinlandStrategic reserve
supplements energy only market
BelgiumTenders for new CCGT
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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 capabilityEuropean 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?
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Greater flexibility will be needed to operate the electricity system
The common consensus is that higher levels of wind and solar generation driven byRES 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 3How will system operation and market frameworks adapt?
LIBERALISATION AND DECARBONISATIONJULY 2013
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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?
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Why might current incentives for flexible capability not be sufficient?Can the existing frameworks provide appropriate incentives for new investment ifflexible capability becomes more scarce?
Income for flexible capability is typically obtained from:
• Energy revenue from conventional operation, supplemented byShort-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:
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There is a risk of inappropriate future levels of flexible capabilityMarket rules must be able to cope with uncertainty about the future value driversfor 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)
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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?
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• 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
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Pöyry, with Eurelectric, held an energy policy discussion forum to consider the decarbonisation challenge
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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
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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-zonalcapacity
Resources can be generation, storage, cross-zonal transmission or demand-side
Overall welfare optimisation through market-based mechanisms
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(Physical) energy options as tradable product for flexible
capability
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We have identified a number of elements to efficiently incentivise delivery of flexible capabilityThe 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 Nat
iona
l arra
ngem
ents 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
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Is full trading of flexibility a more appropriate option to reveal the value of flexibility?
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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 directlyFour steps are needed to allow trading of flexibility
TRADING FLEXIBILITY
CAPACITY PAYMENTS
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Pöyry has developed a strawman option as a starting point for discussionsThe 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: EnergyIDM: OptionsBAL: 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
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Intraday capacity could be traded as an explicit product (interim), later moving to trading of energy options as a basis for ‘co-optimisation’
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€/MWh
MW
SNL
DNL
SNO
DNO
€12
20MW
€ 50
€ 40
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With appropriate definitions of balancing services, a better result than “common merit orders” is possible
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€/MW
time5sec 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)
Contact:Name: Stephen WoodhouseMail: [email protected]: +44 7970 572444