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Getting market design right

Alongside grid expansion and the use of AI, clever market design can help accommodate new forms of power supply and demand. In our second feature on transmission adaptation, we take a closer look.

Ever since the Network Code was introduced by Ofgem DG, Clare Spottiswood, in the late 1990s, the regulator and government have been struggling to optimise the market system design – with considerable success. The UK deregulated model has been copied all over the world, including in the European Union and more recently Japan.

The system also spawned and nurtured innovative and world leading UK companies, such as Octopus and Good Energy, among others.

Smooth operator

Suitable market design is critical to ensure the smooth operation of the future energy grid. This must help match complex flows of supply from various intermittent renewable sources, with demand from new green sectors such as transport, data centres and heating.

Key objectives include the encouragement of demand management, which helps even out peak flows. It must also avoid renewable load shedding, to maximise green energy production and minimise emissions.

This contributes to optimising system performance and reduces strain on the transmission and distribution grids. As such, it helps maintain system balance.

Incremental half-hourly pricing is one crucial element in the UK system. It provides an incentive for consumers to avoid expensive peak load when the system is at its most stretched – and most carbon intensive. Other elements include the capacity market and CfDs, while factors such as zonal pricing could play a role. 

Steven Whyte, grid modernisation strategy leader at AECOM Europe and India, said clever system design was already alleviating pressure on the grid.

“We’re starting to see the creation of flexibility markets, where utility network operators have begun taking a proactive role in facilitating balancing of the network by procuring assets that can respond to market signals, while large industrial users are increasingly able to lower their energy consumption during times of grid congestion – all facilitated by AI,” he said.

“This solution takes advantage of flexibility already present in the network, reducing pressure on the grid, while awaiting future network upgrade and reinforcement.”

Evolving model

The UK gas and power markets are evolving. The latest Review of Electricity Market Arrangements (REMA) was announced in 2022, with initial directions revealed earlier this year. It is due to reach final recommendations in 2025.

Shortcomings in the current design have been acknowledged. Frederic Godemel, EVP power systems and services at Schneider Electric, said poor market design was contributing to unacceptably high levels of load shedding from renewables generators.

Locational optimism

One of the reforms REMA is suggesting is locational pricing. Under this, different areas would have different power prices – incentivising shifts in supply and demand.

The reform is intended to reduce congestion and curtailment by encouraging demand near supply. It will also deliver price reductions for customers in zones where there is more generation. It would match demand and supply more efficiently.

Locational pricing could ease demand on the grid, according to Michelle Sally, partner at TLT. This could have an “impact on the amount of grid expansion required to achieve net-zero. The merits of such a market design are currently the subject of much industry debate, including whether incremental reform to existing arrangements, such as reform of transmission charging, could achieve a similar result.”

Juliet Stradling, another partner at TLT said locational pricing would influence transmission infrastructure required to enable the energy transition. Such a move in pricing would have an impact on the use and location of flexible assets. As such, this alters the picture for transmission operators.

“There is also a concern/debate about the extent to which it is practically possible to build out infrastructure at pace given planning and global supply chain issues,” she said.

Not all are convinced of such a move. Offshore Energies UK (OEUK) has warned there is a risk such a move would increase generators’ cost of capital. The group has also warned it could jeopardise projects such as ScotWind, with supply located far from where power is consumed.

V2G

TLT’s Sally said additional ideas for improved market design included rules to encourage the integration of smart meters, AI-based grid management systems and IoT devices that optimise energy usage.

She said there could be specific additional market incentives for smart EV charging infrastructure. This would encourage charging off peak and the use of vehicle-to-grid (V2G) technology, which can supply energy back to the grid during high demand periods. Currently, this depends on daily price variation alone.

Denis Watling, managing director of ChargeGuru UK, said EVs could play a role through bi-directional smart V2G charging.

“V2G technology can provide grid operators with crucial flexibility in managing electricity demand and supply. EVs can store excess energy during times of low demand and release it back to the grid during peak periods, effectively smoothing out fluctuations and alleviating pressure on the infrastructure.”

National Grid’s Future Energy Scenarios suggested V2G charging could provide up to 38 GW of flexible power. This would come from 5.5 million EVs. This would cover all the additional peak power needs in the highest-demand scenario for 2050.

P2P

Sally said rules could also be established to facilitate peer-to-peer energy trading platforms. This would allow consumers to buy and sell excess energy. This would also encourage participation in demand response programmes, which use AI and reward consumers for reducing or shifting their energy consumption during peak periods.

“Access to increasingly dynamic pricing is the best way to incentivise consumers to shift their electricity usage to off peak periods, again, reducing the need for additional grid capacity.”

OEUK said CfDs also need reform. “Market reform should be tailored to open new routes to the flexible market for wind output and exports via interconnectors and hydrogen.” As a consequence, the group said, the cost of electricity supply will fall in the longer term.

Andy Willis, founder of Kona Energy, said market design should encourage National Grid to use energy storage. This, he said, “can be built far quicker than transmission infrastructure … This digitally defined asset is the fastest responding asset on the electrical system, meaning it can solve issues for National Grid in sub-second timeframes.”

Widening access

Enel X said it has successfully proposed a specific market design change to Ofgem. This will extend energy flexibility opportunities even further.

Known as P415, this is a modification to the Balancing and Settlement Codes (BSC). It “will widen access for commercial energy consumers beyond the Balancing Mechanism to the wholesale electricity market, via aggregators” also known as Virtual Lead Parties (VLPs) such as Enel X.

Enel said the service helps to relieve grid stresses and facilitate a greater renewables mix. It would also release revenue for owners of under-utilised energy assets.

Ofgem has accepted the proposal, the company said. P415 is due to go live in the UK on November 7, 2024. This will help “the end user obtain the value from their flexibility within the wholesale market”, said Enel X.

“P415 removes a barrier to energy users who want to offer flexibility, enabling behind-the-meter customers to trade their flexible electricity capacity in the wholesale market – without being a supplier and without relying on the National Grid to select their assets for a flexibility event.”

The company’s senior director for regulatory affairs Paul Troughton said “commercial and industrial energy users can provide valuable flexibility to the power system. However, in the balancing mechanism they are dependent on the Electricity System Operator’s dispatch decisions, where they can often be overlooked. By offering their flexibility in the wholesale market, customers can lock in value without such risks.”

“As the UK power system continues its transition, pricing is likely to become more volatile. Although volatility is often seen as a problem which drives up costs, for energy users who can be flexible, it brings opportunities,” he added.

Revision of queuing system

As well as clever market design, contributors suggested reorganising the grid build out process would also improve transmission constraints.

TLT’s Stradling noted the long delays to obtaining a connection to the grid.

Reforms such as the Queue Management Provisions and the ESO’s Five Point Plan are under way. But there is a “rush to secure connection offers ahead of more significant reform of the system”, she said, referring to policy change that could result from the upcoming general election. 

Stradling noted that, when combined with impending process reforms such as TMO4+ and general moves towards a more centrally planned system such as the Strategic Spatial Energy Plan, there would be winners and losers in terms of accessing the grid.

Kona’s Willis agreed there needed to be reform in the area. “Spatial planning framework is needed to encourage new transmission infrastructure. National Grid need to fully prioritise ‘first ready’ projects to connect to the system as fast as possible.”

Combining clever market design and AI can encourage demand management and storage. This will significantly reduce the additional strain from the energy transition and national green electrification.

If implemented effectively, the green power system of the future can be more efficient, technically enabled and cleverly designed – and probably cheaper than the conventional system of the past, at least for those with flexibility.

This is the second of a two-part series looking at new ways of unlocking the challenges of the grid. The first focused on AI.

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