New Balancing Reserve service to be fully open to smaller units

The Electricity System Operator (ESO) has reversed a decision that would have effectively ensured that a substantial portion of contracts for its proposed new Balancing Reserve service would be awarded to large gas plants.

The body said its new position will fully open the market a wider pool of providers, including smaller and aggregated units.

The ESO currently procures regulating reserve to keep supply and demand in balance through the Balancing Mechanism and wholesale market trading. This includes repositioning generators to create sufficient headroom or footroom to enable them to increase or decrease their output when called upon.

According to the ESO, the cost of procuring regulating reserve in this manner has risen significantly in recent years, partly as a result of the energy market turmoil caused by Russia’s invasion of Ukraine.

The body therefore plans to create a new service to procure regulating reserve in day-ahead auctions.

Under the ESO’s initial proposals, participants in the new Balancing Reserve service would have been required to have the capability of providing Mandatory Frequency Response (MFR), effectively limiting eligibility to large gas plants.

It justified this decision on the basis that contracted generators in the Balancing Reserve would necessarily have the headroom or footroom available to also provide MFR. As the result, the ESO said it would save money it may otherwise have spent separately repositioning generators to be able to provide MFR.

Following complaints that this would have locked many potential providers out of the market, the ESO instead decided to procure only a portion of its regulating reserve from units capable of providing MFR. This segment of the market was going to be referred to as Balancing Reserve for Response.

However, the ESO has now decided to drop this segment.

Explaining its latest proposals in an online event this week, Ewa Krzywkowska, future ancillary services design engineer at National Grid ESO, said their control room is relatively clear on the volumes of regulatory reserve they will need by the time the day-ahead auctions would take place based on factors such as the time of day, week and season and weather forecasts.

By contrast, Krzywkowska says it is difficult to predict its requirements for MFR, which is used to make up any shortfall that emerges following its procurement of frequency response through other markets. She noted that the factors determining MFR requirements include “sudden wind changes, demand pick-ups or unplanned system outages.”

“Since our requirement for reserve with response capability might be challenging to set, we think it is not the most transparent way to procure this additional response capability,” she added.

Krzywkowska said the change will mean the Balancing Reserve auction will “produce a single clearing price and the result will be easier to understand to industry.” She said the change will also open up the entire market to aggregated units.

She said the ESO is currently developing a short-term strategy for reforms to its frequency response services over the next three to five years, including possible intraday or real-time procurement of its new suite of services – Dynamic Containment, Dynamic Moderation and Dynamic Regulation. The strategy will also cover the future of Mandatory Frequency Response.

Speaking to Utility Week, Flexitricity co-founder and chief strategy officer Alastair Martin, said the initial proposals to “saddle” the new Balancing Reserve service with an MFR requirement would have meant the ESO was “fishing in a limited pool” and would have therefore end up paying higher prices.

He said the requirement would have prevented many types of assets from participating: “Small gas peakers don’t provide Mandatory Frequency Response and batteries generally provide frequency response through the commercial services.

“I am not aware of significant volumes of batteries being under mandatory provisions in their connection contracts and that leaves large thermal. And the ones that can be turned down to provide Mandatory Frequency Response are gas because the nukes don’t want to get turned down and the coal units – we’ve only got one left and it’s mostly off.”

Martin said the proposals for a segmented market were definitely an improvement but still not ideal: “Apart from anything else, when you take an auction and split it into two different flavours, you add complexity to that auction and that just makes it harder to run and harder to determine your buy curve. And it also opens you to endless needs to justify every buy decision that you make.”

He continued: “Now that is gone, it’s a nice clean market where price discovery across the entire range of participants is now possible and everyone should be pretty chipper about that. I’m very pleased.”

Martin said there obviously remains questions over the future of Mandatory Frequency Response, which has become the “god of the gaps” between other services but remains “the only form of frequency response that the ESO can buy at those very short timescales”.

The ESO’s suite of new frequency response services has been dominated by batteries, which can have difficulties in providing frequency response at short notice: “In order to buy frequency response from a battery, you’ve got to position your state of charge correctly prior to the time in question and then you’ve got to manage your state of charge during the period of delivery, especially when you’re talking about a form of frequency response that requires a reasonable number of energy transactions.

“And that is the case of the more active forms of frequency response like Dynamic Moderation and Dynamic Regulation.”

But Martin said the ESO must find a new way of procuring frequency response close to real time if it is to achieve its goal making the electricity system ready for zero-carbon operation by 2025: “There is probably some thinking that needs to be done over how you would buy battery frequency response on the day, including the positioning aspect.”

The ESO said the new Balancing Reserve service is expected to be introduced by the end of the first quarter of 2024. It intends to procure all of its reserve requirements through day-ahead Balancing Reserve auctions but only if it is economic to do so.

Analysis by the consultancy LCP Delta found that the new service would deliver a net benefit to consumers of £639 million over the first four years of operation, although these benefits would reduce over time, starting at £428 million in 2024 and dropping to £129 million in 2025, £82 million in 2026 and just £19 million in 2027.