How a little fresh commercial thinking – and an evolutionary adaption of regulatory implementation – could resolve some key issues in the growth of intermittent power generation.
As we move towards a new era in electricity supply, with greater reliance on intermittent generation resources, flexible demand management systems will assume ever greater importance. At first glance, recognising the value of these intangible assets – network management algorithms, new types of intra-industry contracts, investments in systems and software – seems to be a daunting task from both the regulatory and commercial viewpoints. And without a framework that allows this value to be recognised, there is no incentive for industry players to invest in them. But in this article I will argue that huge steps can be taken without a regulatory overhaul, provided that the industry is prepared to open itself to a little fresh thinking.
Our existing structure, with its disaggregated value chain and emphasis on security of supply, was designed to protect consumers in a world of constantly available generation and slow and predictable demand growth, with a ‘brute force’ approach to providing peak capacity. Now we need to move on from the equivalent of the motoring world’s vintage 5 litre V8 to an electronically managed 1.4 litre that delivers the goods just as effectively but far more efficiently. Without wanting to stretch the analogy too far, we need to find a way to incentivise industry players to invest in the brains that allow the smaller engine to do just as well as its thirsty forebear.
We know what we want this ‘brain’ to do – it needs to be able to integrate demand, supply, variable pricing and the use of storage capacity. But for this to work we would, it seems at first, need to break down the commercial and regulatory barriers between the various components of our generation, distribution and consumer interface systems. It’s a safe bet that the power generation crunch – which looms inevitably as existing plant is decommissioned – will arrive long before that is achieved. But there is another, smarter, approach, which simply needs us to accept two concepts.
The first is a new type of unregulated entity. The second is acceptance that algorithm driven demand management, and new forms of contractual relationships between industry participants, can reduce the need for investment in peak capacity in distribution and transmission systems – and therefore should be treated as having a real value somewhat analogous to the hardware they replace.
The new entity would be an evolution of an energy services company (‘ESCO’) or demand aggregator, built around a demand and supply (and therefore capacity forecasting) management algorithm. It would control a network of automated flexible demand services and storage facilities, which would allow it to arbitrage electricity prices, whilst ensuring sufficient capacity to provide balancing services to National Grid and capacity constraint services to distribution networks.
The optimal control algorithm would be delivered via cloud computing and implemented locally on storage and flexible demand services. These algorithms are being developed based on complex mathematical theory incorporating stochastic models, physical and regulatory constraints to enable their use in power system economics and risk minimisation tools. They will effectively discover the highest service value for storage and flexible demand on a real time, dynamic basis.
Through this entity the individual parts of the electricity value chain will be able to share services that manage intermittency while reducing the investment required in physical infrastructure assets, without affecting the regulatory separation between components of the value chain.
However, the commercial and regulatory structure of the industry as it stands presents obstacles to implementing this because it does not recognise the value of intangible assets or of broader, system wide benefits. Should distribution networks wish to invest in either storage or flexible demand they must be able to justify this investment based on cost comparisons to traditional network reinforcement. These comparisons do not take in to account the possible total system benefits that the investment may realise. For example, in UK Power Networks’ recent submission to the Ofgem Low Carbon Network Fund (LCNF) Tier 2 initial screening process, a storage unit costing £11m is proposed recognising that the alternative traditional network reinforcement is more cost effective at about £8m. It would be very challenging indeed to propose such an investment as part of business as usual, outside the LCNF project process.
Chicken and egg – without clear revenue streams, investment in flexible demand management or storage facilities will not be commercially attractive. And it won’t be made to the levels required to balance an intermittent grid mix in the proportions inherent in Government targets of 30% wind generation by 2020. If this investment is not made the price of balancing the system will turn out to be much higher than it could have been. While this is recognised in the Capacity Mechanism that forms part of the Energy Market Reform (EMR), operation of this mechanism is still unclear and the disaggregated regulatory framework will prevail. An entity that cost optimises should be able to produce very competitive bids in to the Capacity Mechanism but this will clearly only be possible if investment has been made in flexible demand systems and storage.
The benefits of creating the price optimising entity will be to reduce the cost of low carbon transition to consumers and business customers and to minimise the environmental impact of ever expanding distribution infrastructure. All that is needed is some clear sighted commercial and regulatory thinking and a recognition that the tenets of a historical approach dominated by the value, and returns from, physical assets will not serve us well as we move into the new era.
Sara Bell MD, Alectrona Grid Services Sara Bell is currently designing a trading platform that aggregates value across the whole electricity supply chain and shares the value appropriately between distribution, transmission, generation and supply in order to drastically reduce the cost of the move to a low carbon economy by enabling the financing of electricity storage and flexible demand. Prior to this role, Sara Bell was responsible for developing UK Power Networks’ commercial strategy for future distribution network management and operation. This included delivering significant savings in traditional electricity network investment and substantial regulatory outperformance through developing commercial alternatives to network reinforcement, such as Demand Side Management. Sara sits on the ENA/ERA Smart Demand workgroup, on the National Physical Laboratory Centre for Carbon Measurement Stakeholder Group, on the EValu8 Plugged-in-Places Steering Committee, on the Advisory Board for London First’s Property and Energy Network, on the Sustainability First GB Electricity Demand Project and is a former member of the Singapore Government Climate Change Committee R&D workgroup. Sara holds a Masters in Environmental Management and is a regular speaker at conferences and industry events.