The last twelve months has seen a rapid fall in the cost of lithium ion batteries, at the same time as a rapid growth in the number of businesses offering demand side response services.
The acceleration of technical capability, not entirely co-incidentally aligns with a growing need for flexibility in order to operate the UK’s energy system. With approximately 25% of capacity now provided by renewable and distributed generation, the system operator, National Grid, faces real challenges in balancing the overall system. Flexibility provided by batteries and demand side response have the potential to balance frequency and load locally and dynamically.
With the changing economics of the energy market and the decline in coal, the imperatives for investment in capacity and flexibility remain strong in order to meet carbon targets and keep the lights on.
So what does the flexibility market landscape look like and why is it causing market disruption?
1. Supply and Demand
The starting point for flexibility are those parties generating and consuming power. The consumers , who are currently in the main, large industrial and commercial consumers, have the incentive and capability to reduce demand and hence their bill. Sophisticated building control systems managing energy consuming assets (eg fridges, heating, lighting) , backup generation and owned generation assets all provide potential flexibility.
Generators, or at least those who can turn on and off quickly, also provide potential- significantly enhanced by the potential to co-locate with storage assets.
2. Flexibility providers
Storage, the word which is now interchangeable with ‘batteries’, provides the capability to control the release of power to either the system operator or the traded market. Instantly providing the capability to access value through contract or arbitrage.
Demand side response aggregators, are a growing class of market operator. Their business models tend to focus on a particular route to market or a source of supply or demand. Their technical capability enables them to plug into the source asset and remotely control its despatch or demand, in isolation or aggregate with other assets.
The flexibility providers have been a central focus of innovation, with impressive technologies and capabilities developing quickly. Their challenge is being to access the full energy market value created by their technology solutions, as the routes to market are multiple and complex.
3. Routes to market
There are currently three primary routes to market for flexible volumes, either in isolation or combination.
Traditional access to the traded market and therefore arbitrage and optimisation can be created through a strategic relationship with a supplier. The supplier has the advantage of both having existing relationships with the consumers and also having capability to access the traded market. They therefore also have the ability to control the value passing back to the provider of flexibility and the consumer themselves.
National Grid, as system operator, have developed a broad range of contractual schemes, which offer revenue in return for flexibility. The schemes are multiple and varied depending on the need for speed, longevity and volume. All have different commercial terms, but as a generalisation offer a fee for availability and a fee when required. The only challenge for the provider, is that there is no guarantee that the asset will ever be called.
The third route to market, the Capacity Market, has struggled to gain traction for flexibility providers, albeit with much improved uptake of storage in the December 2016 auction. The challenge with this market is that it is only periodic (currently twice a year) and relies on a successful auction bid against other technologies, projects and business drivers. The last main auction proved not to be entirely economically rational, with strategic business drivers trumping price expectations.
4. Traded markets
Access to traded markets is limited to those parties who are licenced and have acceded to the Balancing and Settlement Code (BSC)- namely all suppliers and some large scale generators. This often causes contention as the value inherent in arbitrage and optimisation can only be fully accessed by those trading in the market. However, what is less readily accepted is the risk and complexity that comes with managing positions in the market, not least the risks associated with forecasting imbalance.
So what does this all add up to?
Whilst complex and imperfect, the transformational flexibility market is here to stay- the physics of the system demand it. This gives opportunity, which is already being grabbed, for new business models, new revenue streams and new ways of engaging with end consumers. The complexity of navigating through the market is not easy, but multi layered rewards are there for those who persevere.