An information paper on the future of DS3 System Services was published on the 23rd of March, by the SEM Committee shedding light on the particularly cloudy future of the DS3 System Services programme in Ireland. The paper outlines how the regulated tariff system will stay in place until at least 2019 with 107 existing DS3 Interim Arrangements framework agreements to be extended until April 2018, falling into place with I-SEM timelines. A “glide path”, or stepped approach is to be implemented to dictate the potential price cap for each tariff year, with the actual tariffs to be based on annual calculations of system services volumes required and forecast system need. 2016 – €75m 2017 – €115m 2018 – €155m 2019 – €195m 2020 – €235m A panel based procurement approach will be designed in the absence of an enduring competitive approach allowing more flexibility to new participants who may have a chance to enter the programme every 6 months. The results of the qualification trials are expected to provide entry signals for new technologies but while the first panel based procurement exercise will take place in Q4 2017, the new fast services (FFR, FPFAPR and DRR) will be procured separately in Q2 2018. This recent delay sets the high level design decision of a competitive auction for procurement of system services back another year from the original go live of October 2017. While this hybrid regulated approach may provide some immediate certainty in the face of a significantly changing electricity and capacity market in Ireland, it moves away from the recommended guidelines published in the EU Third Energy package requiring balancing services to be procured as close to real time as possible. With no mention of long term contracts and no price competition it is difficult to see what real changes have been implemented in the transition from the old HAS arrangements. Some may view this as a missed chance for Ireland to become a world leader in this space, with another commissioned jurisdictional review looking at international best practices to be completed at the end of 2017, three years after the last one. https://www.semcommittee.com/node/2505

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  On 23rd May 2016 the SEM Committee announced that the DS3 System Service competitive auction process planned to take effect from October 2017 will be delayed by one year. The first auction will now take place in the first half of 2018, with the revised date of delivery of the services, October 2018. The initial auction design was proposed by the SEM Committee in December 2015 and was met with negative reaction from industry participants, particularly due to the complexity of the auction, the commitment model and investor uncertainty. Subsequently the Regulatory Authorities held a workshop in April where industry participants provided feedback on the proposed design and provided alternative approaches to the auction process with perspectives on the design given from conventional generators, demand side units, the wind industry as well as new entrants and new technology. This decision comes at the same time as the deadline for the DS3 Interim Arrangements tender which passed on the 25th of May. The interim arrangements are now expected to run for two years although it is unclear whether another tender process will take place for the second year of interim tariffs. Even though the DS3 programme is not specifically part of the I-SEM, it is a setback to the overall transition into the new electricity market. The delay comes as a big blow to new entrants in particular for whom DS3 System Services is a key revenue stream and leads to further misalignment with the first Capacity Auction.

DS3 Competitive Auction  

Auction design is a critical workstream in the DS3 System Services development. The auction design is a single, uniform, pay-as-cleared price, sealed bid auction for System Service products. Complexity comes from the fact that it is an auction for a contract to supply a package of System Services, rather than each service. Bids will come in the form of packages of products from each provider therefore a simple merit order is not applicable. One of the key frameworks of the auction design that adds intricacy is that a provider will be paid depending on their availability to supply a System Service. Availability is defined as payment for the volume of the service that has been made available by a System Service contract holder in that trading period regardless of the TSOs real-time requirement for that service. The new auction design must be carefully constructed to facilitate new investment while also taking advantage of the benefits from increased competition.

Next Steps

The SEM Committee is currently considering the appropriate next steps and scope for the auction design, in light of the arguments put forward by respondents and the emerging complexity in interactions with the I-SEM workstreams. “The SEM Committee will adopt a pragmatic and flexible approach when setting the scope of the first auctions in order to ensure a competitive process is carried out in 2018, with the potential for further development of that process in subsequent years.”1 The next stage of the DS3 Programme is expected to be the Qualification Trials which will be used to establish the mechanisms by which the characteristics of new technologies and new fast products i.e. FFR, FPFAPR, and DRR can become “Proven” and “Measurable”. A separate OJEU tender process will take place, with trials expected to commence from Q1 2017. The SEM Committee have said that they will liaise with the TSOs to produce and publish a new programme to take account of this decision and to ensure this new programme is aligned with the CRM process and the I-SEM project plan. If you are interested in discussing the services ElectroRoute can offer to maximise generator revenue through DS3 please contact the Client Services team for further information.    

References:

1:https://www.semcommittee.com/news-centre/ds3-system-services-notification-delay-auction-design

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  A tender was announced by the Irish TSO EirGrid which is set to be the first step in the transition to the new DS3 System Services Arrangements. The Central Procurement Process which will select the projects eligible to compete for DS3 System Services contracts, will open to industry on April 18th 2016 in anticipation of the Interim Regulated tariff going live in October of 2016. This is compulsory for all providers wishing to receive the interim regulated tariff for the delivery of System Services products and further compete in the competitive auction process. The Central Procurement notice will go out to tender on the Official Journal of the European Union (OJEU). Providing Units have 37 days to submit bids for a contract to supply 11/14 System Services to the TSO for the period of 1st October 2016 to 30th September 2017. Potential service providers will be required to detail their ability to deliver the DS3 services through a procurement exercise which will be the subject of further stakeholder engagement at the Bidders Forum which will take place on the 27th of April. Each Provider Unit must have an existing HAS contract, or show demonstrated experience of product provision in order to prove compliance. Bids after the deadline of 25th May will not be considered. Based on this approach the total pot available for System Services could potentially increase by approximately €20m, up from the current pot of approximately €50m. A separate tender will be used to establish the mechanisms by which the characteristics of new technologies can become “Proven” and “Measurable”. Qualification Trials will be used to measure the quality of provision of “fast” services i.e. FFR, FPFAPR, and DRR. Technology trials during the interim period will be open to all generators to prove the measurability of the fast services. Trials will also take place for new technology (storage, batteries, DSU etc) to prove their ability to provide all 14 products. It is expected that the maximum capacity of new technology projects for this trial will be 10 MW and a minimum set at 100 kW. Payments for both trials will be limited and are not expected to exceed €3m over the 2016/17 tariff year. The Qualification Trials will provide a great opportunity for new entrants to prove capability and measurability before the DS3 enduring arrangements beginning October 2017. If you are interested in discussing the services ElectroRoute can offer to maximise generator revenue through DS3, please contact the Client Services team for further information.  

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  The electricity grid as we know it is undergoing the biggest change in its 133 year history with renewable generators like wind and solar PV in particular pushing the system into an unprecedented level of uncertainty. The grid has historically been comprised of large conventional generators directly synchronised with the grid. These coal, gas or nuclear titans naturally provide synchronous inertia to the system which adds weight to the grid, stabilising it in the case of a contingency. A fat, gas and coal guzzling grid is easy to operate, just as it is easy eating burgers and chips for dinner every day but there comes a stage when a salad comprised of wind turbines and solar PV panels is the better option. Renewable Energy makes it more difficult to maintain a grid. Wind and Solar generators are not synchronously connected to the grid and do not have natural inertia. In the event of an imbalance between generation and demand, the system frequency experiences a deviation, a lack of inertia can lead to a rapid drop in grid frequency as the system is inherently “lighter” and less stable. The same way it might be easier to push a vegan out of a ring than a sumo wrestler. The fact that wind generation displaces conventional synchronous generation reduces both the total system inertia and the number of units available to provide frequency response services.

New opportunities for flexible plant

For the new look, light weight grid to operate safely and securely system operators must look towards new innovative solutions that counteract the difficulties encountered. The skinny grid has to hit the gym looking for strength in the form of increasingly important ancillary services and generators which can offer flexibility. Generators and devices which can offer these services can in turn access new potentially lucrative revenue streams. The weight of the system determines how fast of a response is needed and a skinny grid like Ireland’s with added uncertainty and variability of wind requires significant response within seconds. To achieve this, investments are being made into modern control systems, plant retro-fit, storage devices, demand side services and brand new network devices. A diverse range of technologies results in a more diverse set of characteristics and creates different challenges for the TSO in securely operating the system. Therefore it is important to not only incentivise efficient production of electricity but also system support so as to provide the appropriate economic signals to units that provide the most overall value. Increased renewable technologies offering zero marginal priced generation on the system reduce the conventional overall variable fuel cost but to achieve this a higher proportion of revenues will need to be allocated to system service provision. This means that system service provision will now become an important aspect of a generator’s revenue streams to recover their capital costs as seen in Figure 1.

Actions being taken by system operators

System operators in regions that are already experiencing difficulties with grid stability are taking action by providing significant incentives to procure sufficient system services to match their renewable generation increase. Ireland and Northern Ireland have set a challenging target of 40% from renewable resources by 2020. This level of renewable penetration into a synchronous system is unprecedented and poses significant challenges to the real time operation of the power system. The transmission system operators made a decision to double the amount of System Service products from a standard set of 7 reserve products to 14 products ranging from fast frequency and inertial response to ramping and voltage control. This means that the annual payment for these services is set to go up 400% to €235 million by 2020. In 2014-15, the total cost of balancing services in the UK amounted to almost £1 billion (£989m) with more than 50 per cent of the total cost of balancing services related to frequency response, reserve generation and reactive power services in the ancillary market. The Commercial Frequency Response market alone was worth £126m with spending split between Firm Frequency Response (FFR) from generators and Frequency Control by Demand Management (FCDM). This surge in the system service market has opened doors to new technologies which aim primarily access the expanding revenue stream. Europe’s first hybrid-flywheel energy storage plant owned and operated by Irish energy company Schwungrad Energie is expected to enter a test operational phase in February and intended to expand to 20 MW. A 10 MW battery storage array developed AES Energy is the first of its kind in UK & Ireland although a 200 MW tender for “Enhanced Frequency Response” directed at utility scale storage plant in the UK in early 2016 is expected to increase the presence of battery storage. “The call for expressions of interest, launched by the National Grid in September 2015 and closed in mid-November, resulted in 68 project submissions totalling 1.3 GW”, according to Adam Sims, senior account manager at National Grid. Wind generators have also been quick to react to the changing market. Wind power has historically been considered as a non-dispatchable source of energy to be used when available as priority dispatch. There has been a recent push by wind turbine manufacturers and grid codes to develop control systems to respond to significant frequency events. GE has developed two projects that integrate the battery technology into wind turbines allowing wind farm operators to reap the benefits of energy storage without the high costs of farm-level battery storage installation. Three 1.7 MW turbines will operate as part of a 140 MW project in Texas with GE seeking to roll out similar projects across Europe. It still rings true that significant frequency deviations are generally rare in large heavily interconnected systems such as mainland Europe. Synchronously connected systems can share inertia, active and reactive power so that the skinny grids in the link can be held up by some of the sumo wrestlers if needed. Frequency control is much more challenging in smaller isolated grids, especially if they have a high penetration of renewables. As renewable generation continues to increase we will see even the larger systems facing difficulties with system stability but isolated grids like Ireland and Great Britain are already encountering issues and looking further afield for solutions. More electricity systems are turning towards salads and the health food industry that can provide the best system services supplements will be the most in demand. ElectroRoute has recently launched its DS3 Advisory Services providing analysis and guidance to clients looking to maximise their revenue streams through the DS3 auction. For further information, please contact clientservices@electroroute.com.

References

“The Decision Paper” SEM-14-108 – All Island Project National Grid – Monthly Balancing Services Summary http://schwungrad-energie.com/projects/ http://www.pde.co.uk/2015/08/aes-10mw-battery-storage-facility

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