Future of Ancillary Services in SEM: Final Design Considerations

In this latest ElectroRoute Insight, we delve into the recent SEM Committee final design decision on the Future Arrangement for System Services, which is a crucial element of policy required to incentivise the investment into and efficient operation of enabling technologies.

Background

EirGrid and SONI, the respective Transmission System Operators in Ireland and Northern Ireland, are each tasked with ensuring the reliable and secure operation of the power systems in Ireland and Northern Ireland. Central to achieving these standards is the existence of range of system services and reserve products (together known as ancillary services).

As the level of renewable penetration increases on the island, the importance of these services has materially increased. Via the launch of the DS3 programme initially in 2011, the island of Ireland became a test laboratory for much of the world regarding the procurement of services specifically to allow a high degree of instantaneous renewable penetration operate while maintaining system security.

The DS3 program has been essential in achieving 40% renewable energy penetration on the island of Ireland, however, the program was designed to meet the needs of Irelands power system in 2020. As we now look to 2030 and beyond it is imperative that the groundwork for a modernised electricity market, which promotes the transition towards flexibility and greater renewable energy integration, is actively prepared. Central to this is the shift from the current DS3 Regulated Arrangements to future competitive arrangements for the procurement of system services. The introduction of the Future Arrangements for System Services (FASS) program on the island of Ireland is essential for delivering a power system that can handle up to 95% System Non-Synchronous Penetration (SNSP).

FASS Design Decision

On the 18^th December, the SEM Committee published[1] its final design decision for the FASS program. In this article, we share our thoughts on what is expected to be the biggest changes in the Irish market since the introduction of ISEM in 2018.

Initial Phase

The initial phase is focused on securing the key reserve services (FFR, POR, SOR & TOR) through a competitive daily auction process known as the Day-Ahead System Services Auction (DASSA). These actions will initially focus on procuring reserve services across the island of Ireland, meeting the jurisdictional requirements of both EirGrid and SONI. The auction will occur after the Day-Ahead (DA) market clears, with the regulatory authorities deciding to push the timing of the DASSA auction out to 15:30. This is something the industry will be extremely grateful for as it gives optimisers sufficient time to evolve their daily bidding strategy following the publication of the DA result.

The auction will secure system services over a 24-hour horizon, with the DASSA employing a pay-as-cleared model, settling prices for each 30-minute Trading Period, with auction winners receiving commitments for each period.

At first glance, there are many similarities between what’s being proposed in Ireland and what’s already in place in Great Britain’s ancillary services market. Opinions in the GB market vary widely depending on who you ask, but there’s no doubt that competitive auctions for ancillary services have opened the door for more participants, including renewable energy providers and battery storage operators.

This has driven down costs for consumers, but it’s also reduced revenues for asset owners who previously benefited from higher prices in a less liquid and competitive environment. The auction system has given National Grid ESO the flexibility to quickly adapt to changes in the energy mix, especially with more wind and solar in operations, and has kept the grid responsive to supply and demand shifts.

Further, competitive bidding in GB has made the process more cost-efficient and introduced innovative trading strategies to ensure new technologies such as battery storage take on a more prominent role, ultimately diversifying and strengthening the grid’s services.

Design Elements

The proposed design of the DASSA introduces several distinctive features that set it apart from the GB market. One key innovation is the inclusion of zero-volume bids and secondary trading, which allow renewables to take a more active role in the ancillary services market. This not only creates additional revenue streams for renewable projects but also enables traders to maximize returns by capitalizing on these new dynamics.

The introduction of a secondary market presents battery optimisers with significant potential to adopt dynamic strategies. By continuously adjusting an asset’s position within the revenue stack, they can ensure the asset generates the highest possible returns. This flexibility is key to staying competitive in a rapidly evolving market.

One of the biggest surprises in the regulators’ decision paper was the proposal to remove the Final Assignment Mechanism (FAM). The SEM Committee highlighted several flaws in the current FAM design, most notably its failure to incentivise ex-ante availability, a key objective of the original High-Level Design (HLD), a point we at ElectroRoute strongly agree with. Instead of driving proactive positioning by units, the FAM merely acted as a compensation mechanism based on units’ final positions at gate closure. Additionally, the inability to update bids closer to real-time made the FAM outdated and ineffective at capturing the true value of services.

While the SEM Committee believes that a fully automated secondary market and the removal of certain compensation protections will reduce the need for a top-up auction, we believe further consideration is merited here. Grid code requirements continue to mandate that all available units provide reserve during a frequency event, meaning that even unsuccessful DASSA participants serve as a backup and should be compensated if utilised. Although the FAM’s initial design had its flaws, we remain unconvinced that removing it entirely from the overall DASSA framework is an appropriate step.

Missed Opportunities

While the DASSA is poised to bring significant changes to the ancillary services market, there are some missed opportunities in the FASS program so far. The proposed products under DASSA offer limited innovation. Aside from the introduction of negative reserve products and the consolidation into a single replacement reserve product, there’s little variation in the reserve offerings for the initial implementation.

In contrast, the GB ancillary services market is continually evolving its reserve products to meet the changing needs of the power system, especially as renewable energy penetration grows. This constant adaptation ensures the market stays flexible and responsive to shifting energy demands. ElectroRoute suggest that a similar position is adopted on the island of Ireland

Another area where DASSA falls short is the proposed bidding structure, which lacks the complexity seen in GB. Complex bidding allows traders to adopt more flexible strategies, fostering greater competitiveness in auctions. In a market expected to be highly saturated from the outset, introducing complex bids would drive innovation and help secure the most competitive prices throughout the trading day.

Open Questions

While the work done by the TSOs and SEM Committee on the FASS program and the DASSA design must be commended, there remains a pressing need for clarity on several critical open questions. Chief among them is the interim arrangement between the conclusion of the DS3 program and the full implementation of DASSA. Given the industry’s experience with similar large-scale projects, delays are almost inevitable, and the lack of a clear transition plan could create uncertainty for market participants. It should be of no surprise that any potential cliff edge in the revenue model for market participants will severely impact the appetite for investment.

Conclusion

There’s no question that the ancillary service market in Ireland is on the cusp of significant change as it moves toward more competitive structures. However, somewhat sudden changes in the final design such as the removal of the FAM and a lack of clarity in other areas will add somewhat of a concern to participants. The industry will now look to the TSOs to provide clarity on the SEM Committee decision, which will provide much-needed certainty on several key issues that have are as yet unclear.

Additional consultation will no doubt be needed before we have a clearer picture of the full mechanics of the DASSA. The decisions made on the back of these consultations will not only shape the future of ancillary services but will also set the stage for how renewable and storage assets integrate into this evolving market. Ultimately, how these challenges are addressed will determine the success of DASSA and its long-term impact on Ireland’s energy landscape.

About Us

ElectroRoute is an active participant in the storage sector in Ireland, having contracted over 275MW of energy storage since 2021, and our storage and flex origination have considerable experience in the area of storage trading and operations. Should you have any queries, or wish to get in touch, please contact us at info@electroroute.com