How businesses can achieve success in energy flexibility markets

Enel X

Davide Miriello, senior energy market analyst at Enel X UK & Ireland, explains how consumers can take advantage of flexibility markets and realise the value of their energy assets.

The transition to renewables-based energy generation is driving significant change in energy markets around the world. As renewables replace traditional power generation, balancing supply to meet demand is less straightforward. Different physical properties, weather-dependency, volatility and uncertainty increase the need for flexibility in both demand and generation to achieve that balance.

The UK’s energy flexibility markets are among the world’s most advanced. They maintain a reliable energy system in the face of an imbalance between supply and demand or help recovery after a power system event. As one of the first regions to evolve its energy mix with a higher penetration of renewable energy, the UK is a leading innovator in flexibility markets.

Flexibility markets balance the grid by releasing power back to the grid when demand is high (or supply is low) and consuming it when supply is high (or demand is low). As the flexibility markets open up and evolve, they create new opportunities for businesses to realise value from their energy assets.

Opportunities and challenges of energy flexibility markets

As energy users, businesses can reduce costs or receive payment for being flexible with their energy consumption, or by making their energy assets (e.g. on-site generation or back-up power) available into different markets.

Alongside the rewards there are also challenges. Energy flexibility markets are constantly evolving and complex to navigate. Broadly there are four markets: Capacity Market; Ancillary Services; Energy Markets and Customer benefits – with different programmes or value streams in each market.

Understanding different markets and their programmes and forecasting obtainable value takes knowledge and resources few businesses have in-house. Reliable systems are also essential to access and participate in the market and optimise an asset’s position in the available markets and programmes.

Success in energy flexibility markets involves understanding the requirements, market trends and dynamics, evaluating risks, defining strategies, bidding, responding and settling. There are barriers to entry in most, up-front costs are a typical requirement. This calls for an in-depth understanding of the markets and an assessment of the financial risks. Being unable to meet certain requirements, for example, or failing to deliver during events can incur financial penalties.

Access points for entering energy flexibility markets

Businesses can participate in flexibility markets with different asset types including curtailment of different loads, utilisation of on-site generation through solar and wind, gas engines and also using Combined Heat and Power (CHP) or ‘co-generation’.

One of the most versatile assets in flexibility markets is battery energy storage systems (BESS). The ability to respond in both directions by charging (importing) and discharging (exporting) the asset and the fast response rate (typically less than one second) allows BESS to be the most effective asset in most flexibility markets.

Many businesses deploy BESS ‘behind-the-meter’ (BTM) to provide standby power for resilience and recovery after an energy event, to improve the quality of power, to store self-produced energy, and to enable other technologies if local grids are constrained.

Versatility drives battery market growth

The versatility of BESS is illustrated by the growth in the UK pipeline during 2021 when deploying utility-scale battery energy storage shot up 70 per cent on 2020 levels. The total installed capacity of utility-scale storage approached 1.7 GW across 127 sites in the UK in 2021, with the pipeline of future projects increasing to 27 GW.

The primary function of battery storage used behind the meter will always be to satisfy the operational needs of the site. If the stored energy is not required, or there is spare capacity, it can be used to participate in flexibility markets.

The use of both BTM and FTM battery projects in flexibility markets needs to be optimised to maximise earnings. Optimising FTM projects across multiple markets will improve potential return.

FTM battery optimisation

FTM battery optimisation maximises the value that can be obtained from ancillary services and energy markets. Battery assets are currently eligible to trade in ten key programmes in the UK: Dynamic Containment Low (DCL) and High (DCH), Dynamic Moderation Low (DML) and High (DMH), Dynamic Regulation Low (DRL) and High (DRH), Firm Frequency Response (FFR), Short Term Operating Reserve (STOR), Wholesale and Balancing Mechanism (BM). Being the only technology able to participate in all these programmes gives battery assets an advantage to unlock the full market potential, however it also implies having to develop more complex bidding strategies and to deal with higher uncertainty.

Over the past eleven months frequency programmes have represented more than 90 per cent of battery profits in the UK, followed by wholesale and lastly BM. A common day-to-day bidding strategy relies on frequency programmes revenues and moving to wholesale and BM only in days/hours of high price spreads e.g., during the volatility seen during the heatwave in July.

Ancillary services: dynamic containment, moderation and regulation

Frequency programmes in the UK have seen deep changes in the last couple of years:

  • Before October 2020, Enhanced Frequency Response (EFR) and FFR were the only frequency programmes available to batteries. EFR was a one-off tender and has been discontinued while FFR has been partly replaced by some of the new frequency programmes and will be phased out in the next couple of years.
  • In Oct 2020, Dynamic Containment Low was launched as a daily service with availability payment flat at 17 GBP/MW/h. This started allowing a first form of daily optimisation across ancillary services and energy market.
  • In Nov 2021, DCL was changed to be a pay-as-clear programme tendered by EFA block. Dynamic Containment High was introduced, and batteries started to be able to be available in both DCL and DCH in the same EFA block. These changes to the market increased the ability of batteries to participate in multiple programmes.
  • In April-May 2022, Dynamic Moderation Low and High and Dynamic Regulation Low and High programmes were introduced with the same commercial characteristics as Dynamic Containment. This increased the number of new dynamic frequency programmes from two to six.

Since DCL was firstly introduced, the new frequency programmes have represented an important portion of battery profits. Understanding trends and drivers of contracted volumes and clearing prices is key for optimisers to develop a bidding strategy.

DC, DM and DR volumes and prices

The average contracted volumes in the new frequency programmes increased almost fourfold from 427 MW in November 2021 to 1,520 MW in September 2022. Dynamic Containment still represents almost all of the contracted volumes; however Dynamic Regulation has started to get significant interest and Dynamic Moderation is expected to follow.

The increase in contracted volumes is a good sign for battery developers as it increases the chances of being contracted and is often a stimulus for prices to increase as well. However, despite the upward trend being quite evident, daily variations in contracted volumes can be very significant. To help developers build better forecasts, the National Grid started publishing forecasts of Dynamic Containment requirements for the following four days; these are updated on a daily basis.

The high volatility that we have seen in contracted volumes also applies to clearing prices. Clearing prices for DCL – the most volatile programme – have ranged from 0.01 GBP/MW/h to more than 100 GBP/MW/h. Since its start, Dynamic Regulation has also been clearing at very high prices, however since DRH started to reach saturation the clearing prices in this programme have dropped.

Overall, the high volatility, the limited historic data and the numerous options in DC, DM and DR make it hard to forecast prices and volumes in these programmes. Bidding strategies that consider the new frequency programmes in the optimisation need to be able to handle uncertainty. The value in this market is high at the moment and battery optimisers tend to prefer it to the energy market. As a limited market, as more assets enter there will be a downward pressure on prices and the ability to move to other markets becomes key.

Energy market: wholesale and balancing mechanism

Unlike the new set of frequency programmes, wholesale and balancing mechanism are technology-neutral programmes with a longer history of operation which offers a larger future opportunity based on the volume requirements. Both programmes offer several options to monetise volatility for a battery asset.

Wholesale trading in the UK can happen in two main exchanges: EPEX and Nord Pool. The day-ahead clearing prices of the two pools are correlated but may differ significantly in some settlement periods. In addition, despite day-ahead trading seeing the highest volumes, intraday trading is gaining attention. Similarly, the balancing mechanism gives participants the option to bid/offer capacity, and also to import/export at imbalance price and to stack bids/offers with frequency programmes.

Day-ahead trading offers the most secure way to access revenues in the energy market for two reasons: the day-ahead forecasts for the wholesale market are the most accurate and unlike balancing mechanism there is a guarantee of volumes being traded. A key strategy for a BESS to take advantage of market volatility is to secure volumes in the day-ahead market and try to get extra profits in the balancing mechanism. This offers a potential for batteries to import electricity for free, or being paid to do so and to export at extremely high prices. However, securing volumes in this market can be tricky as both acceptance rate and call durations are low for batteries. Similarly, trading at the imbalance price is risky as the forecasts for this market are inaccurate and the prices can change drastically from one settlement to another.

To sum up, at the moment wholesale is more attractive than BM for FTM batteries in securing profits on the energy market. However, National Grid has acknowledged that the low acceptance rate of small units (and therefore batteries) in the BM is something that they are planning to improve in the coming years. It is expected that in the future a higher potential could be unlocked for batteries in the balancing mechanism.

The new energy opportunity

The increasing and ever-changing choice of options and the range of assets needed to meet the demands of the coming decades will see owners and operators use new technology that integrates with their systems. The need for rapid decision-making will put the focus on intelligent technology with automated real-time control and measurement. Only this will enable asset owners to optimise margins and develop projects to realise the value of their assets.

Even now, advanced technology driven by machine learning and AI is enabling developers and operators to manage multiple assets across multiple markets to optimise returns and exploit new and emerging revenue streams.

Technology alone is not enough. A trusted energy partner with the scale and expertise to provide strategic advice, alongside innovative technology, is crucial to overcome the complexity, reduce risk and ultimately optimise asset value to be successful in flexibility markets.

Others have also viewed
grid connection

Grid connection delays hit the spotlight after BBC report

Last week, the BBC reported that billions of pounds’ worth of green energy projects are ...
demand flexibility

Demand flexibility provides electricity to ten million households

The Demand Flexibility Service, put in place by Natonal Grid ESO across the 2022/2023 winter, ...

Report reveals how to speed up UK green grid connection

Queue-jumping, sunset clauses and a data-driven can-do attitude are simple ways to connect renewables to ...

Smart energy grid to be installed at the University of Nottingham

As part of the continued drive towards net zero, researchers in the University of Nottingham’s Faculty ...