UK demand reserve scheme criticised by leading aggregator

Henry Evans

27-Aug-2014

A scheme devised by Britain’s electricity system operator National Grid to provide demand side reserve during peak winter hours has come under fire from the head of a leading European demand response company. But National Grid said its scheme compares favourably to alternative balancing tools.

In June, National Grid revealed details of reserve capacity it intends to secure for the next four winter periods from two balancing mechanisms in a bid to minimise tightening capacity margins.

One of these is called the demand side balancing reserve (DSBR), which is designed to compensate heavy energy users for reducing consumption during peak hours ( see EDEM 10 June 2014 ).

The two mechanisms were behind a favourable reassessment of capacity margins made in June during what is expected to be a relatively tight period for the UK power market from 2015-2016 ( see EDEM 30 June 2014 ).

ICIS’s assessment of Winter ‘15 Baseload on Friday at the UK power market placed the contract £0.30/MWh below where Winter ‘14 Baseload was assessed as the Season +1 product on the corresponding date in 2013, partly reflecting market confidence in Winter ‘15 supply.

But Should the DSBR fail to deliver the consumption cuts expected, there could be potential for additional risk premium to be added, particularly to peaks products covering the period of tightening.

The DSBR mechanism has not been universally welcomed by the demand side of the industry and has now come in for criticism from the co-founder of REstore, a demand response aggregation company contracted by National Grid to provide demand side capacity under its short-term operating reserve (STOR).

Payment cap

“REstore and the broader aggregated community in the UK are not enthusiastic at all about the DSBR given there is a cap on availability payments imposed by National Grid,” said REstore’s co-founder Pieter-Jan Mermans.

“We prefer an environment where demand and generation compete on a level playing field, offer the same or similar technical specifications for the grid operator and by consequence, bids are compared in the same merit order.”

Under the terms of the DSBR, companies tendering to offer demand reserve are eligible to receive a fee for “establishing their demand reduction capability”, which is equivalent to an availability fee.

This fee is capped at a maximum of £10,000 (€12,470)/MW, which will be paid to companies capable of reducing demand for at least two hours.

“Capacity is part of the private market and prices should be the result of competitive bidding processes,” Mermans said.

“We don’t really see the need to artificially cap to £10,000/MW the value of demand response or the value of any MW that is on standby for capacity or ancillary services.”

Windfall?

Under the terms of the UK’s new capacity mechanism, power generators entering the auction could benefit from a far larger windfall by earning up to £75,000 for the availability of each megawatt of generation ( see EDEM 19 March 2014 ).

National Grid responded by saying it had received tenders from multiple aggregators for the DSBR scheme and it was encouraged by the degree of participation.

“The £10,000/MW set-up fee compares very favourably with current availability rates being paid in STOR for the same period,” a National Grid spokesman said.

“Essentially the likely availability rates in STOR are significantly less than DSBR for the same period of time, and STOR is a much more demanding service.”

Mermans’ criticism follows warnings from the UK manufacturers’ organisation that incentives from the DSBR for reducing power consumption will fall not be enough to bring many manufacturers on side ( see EDEM 19 June 2014 ).

Mermans added that “transitional conditions” under which demand side capacity has been invited to tender for contracts undervalues any advances the industry has made to compete with gas-fired generators on a reliability and cost basis.

“The facts are present that demand response can really offer high reliability capacity at lower cost into the capacity market and ancillary services,” Mermans said, citing a successful precedent set by demand side involvement in US capacity markets as well as the UK’s STOR and France’s ancillary service.

On a separate note, Mermans welcomed the opportunity to take part in the UK’s new capacity mechanism, the first auction of which will take place this December in preparation for securing over 50GW of capacity for delivery in Winter 2018/19.

REstore is also involved in an auction process being conducted by Belgian system operator Elia to obtain 1.2GW of peak capacity for the upcoming winter. Henry Evans




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