In the electricity market flexibility has become an everyday word thrown around at conferences, in meetings, and in the boardroom – but why do we need it? What is it? And where does it come from? asks Pöyry senior consultant Rob Lee.
The electricity system in Great Britain and across Europe has been undergoing unprecedented changes, the impact of which is set to escalate if we are serious about creating a sustainable economy. The widespread deployment of intermittent technologies, such as wind and solar, has led to a fundamentally new challenge in operating the system. Being able to react to changes in supply or demand is essential for a system where supply and demand must be continuously matched in real-time to avoid blackouts. If we add in a subset of other issues such as transmission and distribution bottlenecks, the scale of the problem for an intermittent low-carbon future begins to emerge.
Market players that offer flexibility to the system are able to quickly respond to the underlying physical need. Recently we’ve seen the success of several gigawatts of new flexible capacity in the (currently suspended) capacity market. New engines, open cycle gas turbines, storage technologies, demand-side response, and interconnectors have all been successful which raises the question, “in such a crowded space how much is too much?”
Flexibility is driven by different needs and in different timescales. Close-to-real-time demand forecast error has always been with us – arising from the fact that consumers use electricity at will and predicting demand accurately has its limits. On the other hand wind farm output is fairly predictable at the 24-hour-ahead stage but of course can vary significantly over days and weeks. So some flexibility needs are predictable and can be scheduled in and met by large thermal generators e.g. CCGTs. For closer-to-real-time issues, if relatively small adjustments are what’s needed, investors need to be creative to make the business case stackup.
Revenue stacking is not a new concept. It can broadly be defined as providing a combination of services across a range of markets in different time frames to realise value. But the recent divergence from large, transmission connected generation to smaller players connected at lower voltage levels has opened up the opportunity to provide overlapping services. Generating power at peak times in specific locations may help network companies to avoid certain costs whilst also providing power to wholesale or balancing markets. In certain locations this can be an immensely valuable service to network companies, however, the recent rise and fall of this business model hinged on exploiting inefficiencies in network charging regimes, rather than providing valuable service to the system.
With further reform on the horizon, it’ll be crucial for investors and developers to recognise where asset value departs from outdated pricing regimes and which locations will have enduring value. In such a crowded market, not everyone can be a winner.