Understanding Flexibility Markets

Understanding Flexibility Markets

The nature of the energy markets is changing: as distributed generation of electricity through the installation of solar and wind increases, the need to balance these intermittent flows has become a greater priority.

One way to achieve this balance is to simply restrict the amount of new solar and wind power onto the Grid, however this is in direct opposition to our need to decarbonise power generation as part of the global commitment to climate change and CO2 reductions. An alternative approach is for new generation and consumption to be more “flexible” - where electrical energy and usage is permitted and adjusted in line with the levels of demand. 

In the UK the main driver for flexibility is through the market where price is used as the mechanism to achieve the required actions. National Grid has been one of the leaders of this market with their “Power Responsive” model which has in turn created several further markets, each with specific requirements around a mixture of power, response time and duration. The Distribution Network Operators (DNO) are now following suit with new market mechanisms being tested currently for rollout over the next few months, a move that will see them become Distribution System Operators (DSO).

The evolution of the flexibility markets is also driving the emergence of “aggregators” and “virtual power plants”.  Aggregators - as the name implies - aggregate smaller generators or demand to enable them to interact in the flexibility markets where there is a minimum size – typically 1MW, although this minimum size is reducing. Virtual Power Plants (VPP) is another name for the services certain organisations (mainly energy suppliers) provide to allow assets to interact in the flexibility markets. Essentially VPP’s are an amorphous group of assets (generation + demand) that can be controlled remotely to act like a large centralised power plant to provide the Grid with the exact power flows it requires.

The emergence of flexibility markets, aggregators and VPP’s is directly and positively influencing the state of the energy storage, and predominantly the battery market, because much of the need from National Grid and the DSO’s, is for fast response, short duration assets – which batteries provide.

Two years ago in the UK almost 250 MW of battery capacity was actioned this is now being installed and has driven demand for energy storage systems and consequently prices have fallen. This momentum seems to be continuing as large industrial users of electricity and generators are driven towards the benefits of the flexibility markets by the emerging participants.

How are payments made?

While the details vary on the aggregator or VPP that you engage with, typically payments can range from £25,000 to £150,000 per Mw depending on what you have to offer. This is a combination of size, response time, duration and hours per day.

Significant returns are clearly achievable, but there are also some potential hurdles to overcome. For example, some VPPs and aggregators may insist on a specific supplier, others may have specific terms and legalities surrounding lease agreements - often around the definition of who can access the asset at what times and for how long and rules about who undertakes O+M etc.

However, it is clear that a new revenue opportunity is emerging for anyone connected to The Grid with a “flexible asset” i.e. equipment or plant that can be switch on or off when contracted. I’m sure you can think of one electrical appliance within your business that meets this definition; one that can be in this state for at least 30 minutes per day?

One thing is for sure, flexibility markets are not going away in the short term and the UK’s market will influence the structure of those that will develop in other countries; there is more to come and much to learn. While we all need more time to establish how effective these market developments will be, at Argand we have already integrated complex flexibility analysis into our GridMAP modelling application to enable investors and developers to accurately model the financial implications.

We are all set for an interesting journey…

If you have any questions about this blog or have questions that you would like to discuss further, then please contact the team on +44-1803-864706 or email bepositive@argandsolutions.com.

Fraser Durham is Commercial Director at Argand Solutions Ltd.

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