What losing priority dispatch will mean for new renewable projects

New EU rules recognise that renewables are now able to fend for themselves, so new projects will no longer enjoy priority dispatch or be protected from imbalance exposure. By Simon Bradbury.

The European Union’s Clean Energy Package constitutes something of a watershed moment for renewable technologies within the arrangements that govern Europe’s electricity industry. Previous rounds of European legislation, as well as national initiatives, sought to create a framework fostering investment in renewables in order to support their development and increase penetration. In addition to creation of support mechanisms, measures have often involved some level of insulation from, or special treatment within, the functioning of the electricity market.  

However, the reality is that the days of renewables being a fringe or emerging activity are over – renewables are a mainstay of electricity markets. Through the Clean Energy Package, the European Commission acknowledges the coming of age of renewables and is seeking to create a more appropriate framework that requires renewable participation within, rather than protection from, the markets.

To deliver this outcome, the Clean Energy Package proposes changes on several fronts.

Perhaps the most eye-catching of the proposals is the removal of priority access and dispatch arrangements. At present, by virtue of the 2009 Renewable Energy Directive, renewable generation is provided with assurances that it will be able to sell and transmit its output at all times whenever generation is available. More specifically, subject to ensuring safety and reliability of the grids, network operators are required to guarantee transmission and distribution for and to give priority in dispatch to electricity from renewable sources.

The proposed baseline going forward is for all dispatch to be conducted in a non-discriminatory and market-based manner. This means that, with the exception of sub-500kW scale or demonstration projects, priority dispatch arrangements will no longer be available for new renewable generation projects. This is not as radical a change as it may appear: because many renewable technologies, such as wind and solar, face low or zero short run marginal costs, priority dispatch on economic grounds for these technologies is the likely outcome anyway. Even for technologies such as biomass, the nature of its support under the Renewable Energy Support Directive (which is generally a payment per megawatt-hour of production) gives a low or negative marginal cost of production.

Nevertheless, the removal of priority dispatch opens the question of how to treat redispatch and curtailment. The proposals in this regard follow the Commission’s pro-market philosophy. The desired arrangement is for redispatch and curtailment decisions to be taken using market-based mechanisms and to be financially compensated. This means that renewables projects will need to participate in balancing markets in order to secure compensation in the event that their output is reduced by the grid operator. In other words, renewables are to participate in the markets just like other technologies.

This is reinforced further by the removal of insulation from balancing responsibility.  Looking ahead, through the Clean Energy Package, the Commission requires that all market participants have financial responsibility for imbalances they cause. So renewable generation will no longer be protected from imbalance exposure and will, either directly or under contractual arrangement with a delegated party, face imbalance costs.

Greater market exposure for renewable generation in turn means the wholesale market needs to be better tuned to the needs of renewable generators, to allow them to manage their risks. In recognition, the Clean Energy Package pushes for smaller trading “clip” sizes and closer-to-real-time trading opportunities in the wholesale markets to improve options for trading and balancing.

It is clear the footing for new renewables projects is changing, reflecting the fact that renewables have moved beyond being an emerging element to now being a central feature of the market. New capacity, excluding very small scale and innovation projects, will no longer be able to get formal priority dispatch status, and balance responsibility will apply. Fully integrating renewables into the market is the only way forward, and future projects will need to get to grips with the risks associated with market participation.

While, for good reason, priority dispatch is being stripped away and market integration is being promoted for renewables, the Clean Energy Package also contains a potentially contradictory message in respect of another activity. Much of the focus of the Clean Energy Package is upon tapping into decentralised energy and unlocking the potential it offers, with aggregation high on the list of desirable activities. In this regard, the Clean Energy Package calls for a level playing field for aggregators in terms of market participation and ancillary service provision.  

However, one recommendation is that aggregators should only be required by exception to pay compensation to other parties for the effects that aggregation activities have on the imbalance positions of others. This is important given the effects of aggregation on third party imbalance positions. Aggregation typically alters the consumption pattern of a customer without involvement of, or notification to, the retailer who supplies that customer.  This means that the relevant retailer is exposed to imbalance because consumption is different from expectations.  

So, while insulation from balance responsibility is being removed for new renewable projects, the opposite appears to be suggested as the default position for aggregation. It remains an open question whether this is an appropriate transitory step to foster aggregation, in a manner similar to that in which renewables were supported in their infancy, or is at odds with the desire for a level playing field.