The importance of being flexible

As Ofgem looks at how to create “the world’s first distributed energy super marketplace”, Piclo chief executive James Johnston tells Utility Week why he is against proposals for a central market platform, which he claims will slow progress and hold back innovation. He also discusses the ongoing evolution of the company, which hosts flexibility markets for a number of network operators.

Piclo has “always been a mission-driven company,” says its chief executive and co-founder James Johnston. That mission is to decarbonise the power grid and “we’ve always known that our role within that was creating a new kind of marketplace for decentralised, distributed energy.”

When the company was formed in 2015 under the name Open Utility, Johnston says: “Our first stab at trying to achieve that was more literally around creating peer-to-peer energy trading markets.”

But they quickly came up against “a whole series of regulatory and system headwinds” that blew the firm off course. He says the type of peer-to-peer market the company was trying to develop requires a redefining of the “whole concept of licensed supplier” which has yet to occur and to this day remains “a big if”.

“Our heart was in the right place but we realised that the world wasn’t ready for it,” he recalls.

With this route blocked, five years ago the company made a major pivot towards facilitating flexibility markets for distribution network operators (DNOs). Johnston says this represents “a different angle of attack to the same problem around decentralised energy.”

Piclo was originally the name of the company’s peer-to-peer trading platform, but alongside its transition, the firm adopted this as its own moniker. Taking the learnings from its previous work, the company developed a new trading platform to host DNO flexibility tenders as part of a government sponsored trial. This it named Piclo Flex.

A change in mindset

Johnston says the shift required “a slight change in mindset” because “instead of consumers trading energy, it was a grid company being the buyer of a service.”

When the company was developing its peer-to-peer trading platform, they “started with a bunch of technology – we’re big technology geeks,” but they were essentially “searching for a problem that it could solve.”

“We never quite found it because of the regulatory constraints et cetera so the second time around with Piclo Flex, we took a very different approach.

“Yes, we are a technology business, but we didn’t build anything in the first six months of our project. We just listened to our users – UK Power Networks was our first DNO partner – but also our flex providers, and we found out what the pain points were. And we took a very different user-centred approach, which we’ve really just carried through across the last five years.”

“Ever since we launched that initial trial, we’ve had great success,” he boasts. “It’s gone from strength to strength every year.”

The trial was eventually joined by all of six DNOs in Great Britain and four of them are now using the Piclo Flex platform on a commercial basis. Last month, Northern Powergrid signed a two-year deal with Piclo to use the platform to host its flexibility tenders.

The Piclo Flex platform is also being used by the Electricity System Operator (ESO) for its trial of a local constraint market to manage congestion across the B6 transmission boundary between England and Scotland. In June, the ESO announced that the first transactions had been successfully completed, with households in Scotland being paid to increase their energy consumption so that wind turbines north of the boundary could keep spinning.

The DNOs currently procure flexibility months, if not years, ahead of need and they only use the Piclo Flex platform for the procurement stage of the process. By contrast, the ESO is purchasing flexibility through its local constraint market on a day-ahead or within-day basis and conducting end-to-end transactions on the Piclo Flex platform, from procurement through to dispatch and then settlement.

“Our platform is used by the National Grid control room operators,” Johnston explains. “They have Piclo Flex on one of their screens and there’s a whole bunch of bids that come in from our growing set of flex providers and generators. We run market clearing every day and produces an order book for which the control room operators can basically press: ‘Yes, I accept that.’

“We do the dispatch instructions and then afterwards we run the settlement so working out how they’ve performed and whether they should be paid or not.”

Evolving markets

Johnston says their work on the local constraint market trial will be carried over to DNOs’ flexibility markets so they too can conduct end-to-end transactions on the platform in day-ahead, within-day and even real-time markets.

He says: “The functionality has grown quite a lot over the last five years and now coming back to the DNOs, they’re all going through this step change in capability requirements for ED2.

“This is the type of technology that they’re looking for as well, which is actually really important for distributed flexibility because if you look at a lot of demand-side response technologies they really want to access short-term markets. They can’t really commit to providing flexibility at some point next year under a long-term contract but they know what they can do in the next 48 hours.

“We are in discussions with several of our clients because of the ED2 requirements about how we can support them on the end-to-end journey,” he adds.

“If we look forward over the next 12 months, I think we’ll see a step change with many, if not all, of our customers adopting more of the end-to-end suite.”

The ESO is obviously used to conducting close to real-time trades through the Balancing Mechanism to manage the electricity system and keep supply and demand in equilibrium.

When asked how comfortable DNOs will be with starting to rely on short-term markets to manage their networks, Johnston says: “It’s never going to be one or the other. You need both. You need to have a baseload of capacity contracts – so kind of like the Capacity Market on a very localised level – and then you need the short-term markets, and in the future real-time markets, as well.”

“They view ED2 as a critical period for scaling up and building confidence in flex markets; building data – real hard data – and evidence on how much can they rely on this. And ED3 is then around this becoming critical for keeping the lights on.”

This scaling up can be seen in the figures recently released by the Energy Networks Association, which revealed that DNOs contracted 1,871MW of flexible capacity for delivery during 2022/23.

This represented only a slight increase on the 1,848MW contracted for delivering during 2021/22. However, the amount they sought to procure did increase significantly from 3,616MW to 4,641MW.

The ENA said DNOs have already contracted 2,400MW for delivery during 2023/24, having so far tendered for 4,582MW. The trade body said this figure is still expected to increase as flexibility is tendered closer to real time over the course of the year.

The small increase in contracted capacity between 2021/22 and 2022/23, despite the increase in procurement targets, hints at what Johnston identifies as “one of the critical challenges right now.”

“There’s still not enough flex in the system. There needs be a whole lot more investment going into flexibility so that for a DNO that has 100,000 feeders across the network and has issue they need address on a day-ahead basis, then there is actually some flexibility they can access.”

“There’s just not enough or the stuff that has been connected hasn’t been turned into a flexibility asset yet,” he adds.

“This is stuff that is not obviously going to happen. It’s not inevitable that the right decisions are made and the right progress is made. But we are cautiously optimistic and we are playing our part in banging the drum for what we think are the right things to do.”

Johnston was speaking to Utility Week shortly before Ofgem issued a new call for input on how best to encourage domestic consumers to provide flexibility. Echoing his comments, the regulator said the widespread participation of households in flexibility markets is “something which is by no means a given.”

Stacking and coordination

Ofgem also issued a call for input in March in which it set out plans to create the “world’s first distributed energy super marketplace”.

The regulator said this marketplace would need to be underpinned by a “common digital energy infrastructure” for which it proposed three archetypes: a market directory to enable buyers and sellers to understand the markets and assets available; an exchange to coordinate otherwise separate markets and provide a “single point of truth”; and central platform for flexibility, encompassing all activities across all markets, including co-optimised clearing.

Johnston says everyone in the industry is “singing from the same hymn sheet” when it comes to the need for “better co-ordinated markets” that can “unlock revenue stacking”. He is “strongly supportive” of Ofgem’s move to address these issues.

But he also has concerns over the proposals for a highly centralised architecture, in particular the single central platform envisioned in the third archetype: “What we don’t want to do is just throw out all of the hard work that’s been built up over the past few years and the progress and investment going into this, and essentially put all that into hiatus to start thinking about creating one platform to rule them all.”

Johnston says trying to build the “perfect” platform from scratch is “absolutely the wrong approach,” adding: “What we need is to build on current practises and incrementally evolve these.”

He worries that a single central platform would stymie innovation and lock in technologies and solutions that quickly become outdated.

Johnston believes a decentralised approach characterised by greater standardisation, common processes and shared market design principles could also achieve the outcomes the regulator desires. Piclo has therefore proposed a “market governance framework” that would require market platforms, network and system operators, and flexibility providers to sign up to “an agreed set of rules for participation.”

“We want to connect into and integrate with multiple flexibility markets, not just the DSO markets, but to enable that to happen there needs to be more standardization,” he explains. “There needs to be sort of a common language that these different markets use for everything from data standards to identity.”

He draws a comparison with the internet, which is likewise based around a set of “decentralised principles” that everyone has agreed to follow.

Johnston says this is “still a relatively early stage idea in terms of how this could be implemented” but he believes there is support in the industry for a decentralised approach.

Recent decades have seen the emergence of a number of tech monopolies whose initial successes become insurmountable leads that allow them dominate sections of the internet, for example, Google and search engines. As one of the pioneers the flexibility space, Utility Week asks whether Piclo’s first mover advantage could allow it to become the “one platform to rule them all”.

“Yes, we’re a commercial entity and our mandate is to grow and to take market share. That’s for sure,” responds Johnston.

“But we want to do it on an even playing field. If you create the conditions for competition, there are other markets out there, we have competitors and they can also grow and they can win mandates from clients.”

He continues: “I think the point is if there is a source centrally mandated solution then there is no competition. If you design architecture right, then you don’t in bake in, fix in or prescribe what the solutions are and the solutions can evolve and grow.”

In its call for input, Ofgem said a single central platform could allow the co-optimised clearing of all distributed energy markets across all voltage levels. Johnston says a decentralised model could also achieve this but do so “faster and more effectively.”

“There’s always a sort of tendency to think too far in in advance about the theoretical optimal system models when the hardest thing is getting the right journey and moving forward,” he observes.

He says Piclo is already looking at coordinating markets across transmission and distribution as part of the local constraint market trial: “There’s so much learning to be had by just doing it in practice… That will create a lot more value than having a theoretical discussion around how this should all work in a in a big, centralized way.”

Circling back

Towards the end of last year, Utility Week interviewed Jo-Jo Hubbard, chief executive of Electron, which is still seeking to develop peer-to-peer local energy markets.

Hubbard said the greatest gains from flexibility will come from the “bottom up” optimisation of the energy system and identified the trading of network capacity as one of the prime opportunities for peer-to-peer trading.

Although Piclo’s focus is currently on networks’ own markets, Johnston says they are eventually interested in circling back to peer-to-peer trading: “There’s a lot of scope for different types of peer-to-peer model.”

He says the model of network capacity trading is “a very exciting one” and will probably “emerge much sooner than any changes to licensed supply.”

“If peer-to-peer models are solving real customer issues or solving real grid issues like connection capacity trading, then they should emerge and they should flourish,” he adds.

Johnston says he also sees the potential for peer-to-peer trading of more granular Renewable Energy Guarantees of Origin (REGO) certificates that allow companies to ensure their power supply is genuinely green.

“When we were talking about peer-to-peer in the past it was really around the provenance of where your energy’s coming from,” he explains. “And what really came out is the way REGOs are done as an annualised, aggregate unit is not reflective of the reality where you need to track it on a half-hourly basis.”

Johnston says Granular Energy’s work to create a market for hourly REGOs is similarly exciting because “if that’s then put into policy, that creates a different value pool for time-based REGOs that in turn creates another value pool for flexibility and peer-to-peer arrangements.”

“I think it will come back in different ways but not in the way that we thought when set out the transformation of licensed suppliers,” he summarises. “I think that’s still a decade away and I think it’s going to come through in these more niche areas of connection agreements and REGO trading.”