Working party: Unlocking the Value of a Flexible Power System - 20 March, The Soho Hotel, London

A need for new sources of flexibility is arguably the most important challenge facing the energy industry today. As the surge in renewable generation and the fast-changing nature of consumer demand transform the UK’s power sector, the old ways of managing power will become increasingly unfit for purpose.

Utility Week and CGI have been working with industry on this vital issue for the past three years, and last month brought together a high-level working party to discuss the challenges. Under the banner “Unlocking the Value of a Flexible Power System”, the event, chaired by Utility Week editor Ellen Bennett, sounded out three key segments of the energy market– suppliers and traders, aggregators and networks – on three main issues:

• the current barriers to the transition to a flexible energy system;
• the effectiveness of recent policy and regulatory attempts to remove them;
• the maturity of enabling technologies, including factors that have helped them reach maturity, and what needs to happen next.

Introducing the event, CGI UK’s vice-president digital utilities, Rich Hampshire, recalled how as recently as three years ago “the ‘f’ word, ie flexibility”, was not widely used in the industry. Fast-forward to today and the landscape has changed considerably, with the landmark Smart Power paper published by the National Infrastructure Commission on the importance of flexibility, not to mention the Smart and Smart Systems and Flexibility Plan from Ofgem and the Department for Business, Energy and Industrial Strategy (BEIS).

With so much political weight behind the drive for flexibility, there can be little doubt of its importance. However, as the event heard, there are still numerous barriers to the market reaching maturity – particularly the lack of a market framework to realise value from flexibility.

Utility Week and CGI are now undertaking an exclusive piece of market research looking more deeply into the barriers to flexibility, informed by the working party’s discussions. The resulting report, to be published this summer, will be the third in a series from Utility Week and CGI examining the transition to a flexible energy system.

Stakeholder views: what suppliers and traders thought

Suzanne Heneghan

Top of the agenda on the suppliers’ and traders’ table was the lack of market structures to realise the value of flexibility. Despite some efforts by the government, such as BEIS and Ofgem’s Smart Systems and Flexibility plan, the lack of an optimised framework continues to create knock-on issues, such as inefficient products and conflicts in the market. It is also currently impossible for some transactions, such as peer-to-peer energy trading, to realise value.

Meanwhile, market participants are left attempting to realise value via existing market frameworks, which are designed for price and capacity – not flexibility.

Data was another key hurdle. While increasing amounts of data are being generated – for example, by the rollout of smart meters – regulations mean it cannot always be used, or even accessed by some market participants. This lack of information blocks numerous opportunities for the flexible use of energy.

As some developments, it was felt, had led to the wrong market incentives, changes – such as the review of network charges – were therefore inevitable. And while they may cause pain for some, it did not necessarily make them wrong, but a process the industry must go through to allow a market with the right signals to emerge.

A further challenge was getting consumers to understand the value of power and to take responsibility for their own actions on consumption – something difficult for companies to do against the current negative backdrop surrounding energy pricing.

Although millions of people may have embraced recycling and the need to cut down on plastic, up until now the energy industry had tended “to bottle it” over such usage messages, one participant claimed. The key to changing this would be engaging with the public, perhaps through a government energy awareness campaign.

While really keen for Ofgem to move faster on flexibility in general, suppliers and traders feared it had insufficient resources to respond to the pace of change, while BEIS itself was inevitably distracted by Brexit.

Nevertheless there was a lot of optimism around the table that change was coming and that perhaps the sector needed to be more patient.

Key takeaways

• The market still lacks a proper framework to realise value.
• A co-ordinated response is needed.
• Data access is key.
• Consumer awareness of flexibility and consumption is vital.
• Extra resources are needed for regulator and policymakers to keep up to speed.
• Showcasing successes would help drive interest in flexibility.

Views from the table

Fiona Navesey, director of wholesale electricity markets, Centrica

“We have to get flexibility markets operating at a local level where people can buy and sell their ability to flex their demand. We need to move on from pilots, implement the lessons learned and make flexibility markets a reality.”

Chris Harris, head of regulation, Npower

“Currently, the array of market products available to prosumers do not fit together well and can be prone to high price volatility and sudden regulatory change.”

Stakeholder views: aggregators at the ready

Alice Cooke

Regulators are behind the curve when it comes to the emerging market for flexibility, according to the aggregators at the working party. They suggested regulators must predict all the possible outcomes of new, or as-yet-unconceived, ideas and safeguard consumers and the industry against any extreme adverse effects: a near impossible position.

As a result, regulation is often based on assumption, not fact – and this is an issue. “We’re in danger of creating imaginary regulations that bear no relevance to the market, because they were conceived theoretically and too far in advance,” said Dr Alastair Martin, chief strategy officer of Flexitricity.egulators are behind the curve when it comes to the emerging market for flexibility, according to the aggregators at the working party. They suggested regulators must predict all the possible outcomes of new, or as-yet-unconceived, ideas and safeguard consumers and the industry against any extreme adverse effects: a near impossible position.

Aggregators considered whether instead of regulators defining a market structure for everyone to work within, they could let the industry advance and catch up with appropriate measures as and when required.

There are three institutions that have the potential to create frequent barriers to aggregator participation in a flexible energy system (and in some cases do): Ofgem, National Grid, and BEIS. Their conduct is crucial to achieving an industry working at its optimum capability. Those three aside, it was discussed that emerging barriers often occur at the grid edge – but centralisation would be the wrong solution to this problem.

Other issues identified included how demand-side response is awarded only one-year contracts in the capacity market, while new-build power stations can be granted 15-year agreements. There was, the group felt, no answer as to why this is the case.

It was then discussed that investors like to put money into tangible things, or as it was put, “things that they can kick”, and a suggestion that this was a drag on investment.

The table was also keen to identify the changing, and increasingly important, role of energy efficiency.

Key Takeaways

• Regulators are behind the curve because they work speculatively and so far in advance of the market.
• Centralisation of the grid is not necessarily the answer to emergent barriers at its edge.
• Why are power stations awarded 15-year contracts while demand response gets only one year?
• Investors want to get behind tangible things, “things they can kick”, and this poses its own set of problems.

Views from the table

Neil Pennington, thought leader in innovation through decentralised technology

“I can see a future where a billion devices all aggregate together on a small scale, and that’s exciting.”

Dr Alastair Martin, chief strategy officer, Flexitricity

“A vast amount of energy is wasted because consumers don’t have adequate controls in place to properly manage it.”

Stakeholder views: network operators caught in a bind

Tom Grimwood

Among the network operators there was clear consensus that the main barrier to the transition to a flexible energy system is the difficulty in establishing local markets. Although they can unlock a huge amount of value for others, the networks themselves said they can access only a limited portion of this value. While flexible solutions can save large amounts of money when compared to traditional reinforcements over their 40-year life spans, the savings in any given year are relatively small.

The revenues they can offer are therefore insufficient on their own to entice potential participants to enter local flexibility markets.

Providers will need to stack these revenues on top of those from the capacity market and balancing and ancillary services, which will instead form the foundation of their business models.

The network operators said if these markets do not function well, then neither will local flexibility markets. There are a lot moving parts and it’s not easy to get them all working together.

There is also a “chicken and egg” problem. In order to create flexibility markets, they need to demonstrate their value to potential providers. But this is difficult to do without having these very same markets in place.

Furthermore, the network operators said they face a difficult balancing act when setting the technical specifications for contracts. If the terms are too onerous, then flexibility providers will be deterred from taking them up. If the terms are too lax, then this could cause problems for the operation of the power grid.

Another issue they raised was the way in which flexibility is treated in terms of their spending allowances and incentives under the RIIO framework.

For networks, the benefits of flexibility will come from squeezing the most use out of their existing capacity and thereby avoiding more expensive grid upgrades. This inherently means operating with less spare capacity to take up the slack if something goes wrong.

But as network operators are penalised for supply interruptions to customers, they have a clear incentive to avoid these kinds of risks. There should be greater rewards for adopting flexible solutions to offset the increased risks they entail.

They said the technologies needed to create a flexible energy system have largely reached maturity and the main challenge they now face in this regard is knitting them together to form an integrated system. The reliability of communications will become increasingly important in future as this begins to determine the overall reliability of the grid.

The network operators said overcoming these barriers and others will require clarity, certainty and decisiveness in terms of regulation and policy. They welcomed the strong support from government and Ofgem for the Energy Networks Association’s Open Networks Project.

Key takeaways

• The amount of value networks operators can by themselves offer for flexibility is insufficient to draw providers into local markets.
• The creation of these markets is therefore dependent on the more valuable markets for ancillary and balancing services functioning well.
• Even then, they will have difficulty in demonstrating the value which local markets will be able to offer in advance of them being created.
• A flexible energy system will be inherently riskier in terms of the potential for supply interruptions and the current financial incentives for network operators fail to reflect this.
• The main technical challenges are the integration of different technologies and ensuring the reliability of communications.
• To overcome these barriers, networks require certainty, clarity and decisiveness from policy makers and regulators.

Views from the table

Matt Watson, innovation and low carbon networks engineer, WPD

“You’ve got to get the commercials right. You’ve got to get the tech right… It’s such a big departure from our traditional way of operating that it takes a lot of effort to move things forward. And just as you think you’ve got it, then something else changes in the market.”

Stewart Reid, head of asset management and innovation, SSEN

“If the flexibility market is to work for all customers, the products and services sold through it need to be credible and trusted and devoid of unintended consequences. You could say that the marketplace is a bit like a smartphone – we need the apps that run on that phone to be attractive and trusted by customers. Taking this analogy, we also need to consciously decide with regulators on the level to which these ‘apps’ are regulated. Do we go down the Apple route with high levels of governance and standards or a more open unregulated route?”