As the system operator for the transmission network, National Grid is responsible for ensuring supply and demand is kept in balance. One of its main tools for achieving this equilibrium is the balancing mechanism.
It’s certainly the most expensive of the various balancing and ancillary services procured by National Grid, accounting for around £400 million of the roughly £1 billion it typically spends each year. This bill is expected to rise significantly in coming years as more intermittent renewables come online.
Ever since its creation, the balancing mechanism has been the domain of large power plants. Up until now, alternative sources of flexibility – demand-side response, batteries and distributed generation – have been locked outside, peering in through the window with envy.
But, after years of knocking, the door is finally opening. Last month, Limejump entered the first truly aggregated unit into the balancing mechanism in the form of a 168MW “virtual power plant”.
The company’s chief executive, Erik Nygard, says it is an important milestone in the transformation of the energy system. “It signals a very positive message for the future of energy we’re all trying to build,” he says. “We’ve worked very closely with National Grid to break open this door. We hope everybody can come in because it’s great.”
Aggregators were already able to access the balancing mechanism if they were the registered supplier for the sites they were aggregating. Limejump secured a supply licence for this purpose in 2015.
However, the Grid Code also stipulates that balancing market unit (BMU) data submitted to the system operator must be aggregated at the grid supply point (GSP) level.
In a recently published roadmap setting its plans to widen access to the balancing mechanism, National Grid said in practice this meant the “supplier route” was previously only used in “locationally specific cases”. All involved single sites and were therefore not aggregated in any meaningful sense.
Limejump’s virtual power plant is the first BMU to be aggregated across multiple GSPs. To allow this to happen, Ofgem granted the company a derogation from the aforementioned rules on data submission.
It has instead been allowed to aggregate BMU data at the GSP group level. A GSP group covers all of the GSPs within a distribution network licence area, of which there are 14 across Great Britain. The derogation was specific to Limejump.
However, Ofgem recently approved a modification to the Grid Code called GC0097, which will allow others to do the same.
The modification will introduce a whole suite of reforms necessary for Great Britain to participate in a new Europe-wide balancing platform called TERRE (Trans-European Replacement Reserve Exchange).
The regulator has also given the all-clear to a similar modification to the Balancing and Settlement Code (BSC) known as P344, which will implement the common settlement arrangements to be used by countries participating in TERRE. This includes creating a new type of signatory to the BSC known as a “virtual lead party”.
A virtual lead party will be able to create an aggregated BMU without being the registered supplier for the sites it is aggregating – or holding a supply licence at all. Ofgem has issued a direction for P344 to be implemented by 28 February 2019.
Nygard is extremely excited by the changes he is witnessing. He says they demonstrate how National Grid and Ofgem are turning rhetoric into action.
He believes access to the balancing mechanism will be great for aggregators, adding another important layer to the stack of potential revenues on which their business models are built.
“It provides a more liquid market for flexibility,” he explains. “Today, we generally have monthly, quarterly or even annual tenders for flexibility.” This can be “a bit of a hit or miss situation. You don’t always know whether you’re going to get a tender.”
Nygard hesitates to say what proportion of the company’s revenues he expects to come from the balancing mechanism. It will vary over time as Limejump hunts for the best returns in the various markets in which it operates.
But, with the balancing mechanism accounting for such a large chunk of spending by the system operator, it will be probably be a “dominant piece of the puzzle”.
Included within Limejump’s virtual power plant are batteries owned by renewables developer Anesco. The company’s commercial director, Lily Coles, says the timing of the recent development is serendipitous.
Over the past year, the firm frequency response contracts which made up a large part of the investment case for batteries have plunged in value as the market has become saturated. Access to the balancing mechanism could more than fill this gap.
At time of writing, Anesco’s batteries at Clayhill in Bedfordshire and Breach Farm in Derbyshire have been participating in the balancing mechanism for around three weeks. Coles says they are “greatly encouraged” by their performance so far. Limejump is still trading only during daytime. Once it shifts to 24-hour operations in September, things will get even better.
She says their fast response times mean batteries are “ideal” for the balancing mechanism. “They’re better suited than conventional power stations that have to ramp up and cool down,” she says.
Coles believes this will translate into lower costs, allowing batteries to grab a big slice of the market. She cites a recent report from Aurora Energy Research (see graph) that forecast batteries will become the dominant technology for the provision of upwards balancing actions by 2030.
Nygard concurs, saying distributed generation and demand-side response should likewise be able to undercut large power stations: “We should drive a far more competitive market within the balancing mechanism, which is great for the end consumer,”
When asked whether the changes approved by Ofgem will put them on an equal footing, he responds with a tentative yes: “Time will tell. It’s very early days.
“But there is nothing that should be able to stop us from being able to compete head-to-head with the large power plants that have been there since the market opened. Nothing.”
Flexitricity founder and chief operating officer Alastair Martin is similarly pleased with the changes being implemented.
The company announced in April that it, like Limejump, had become a licensed supplier in order gain access to the balancing mechanism. It plans to launch a new service in October called Flexitricity+ for customers who want to sell their flexibility in this potentially lucrative market.
However, Martin says there are still several kinks that need to be ironed out before there is a truly level playing field with large power stations.
For one, companies looking to enter the balancing mechanism through the supplier route will still be required to create a BMU for each of the 14 GSP Groups, whether they intend to use them or not.
He says this is a “pointless” layer of additional bureaucracy that will add to costs and “ought to be swept away” in a future code modification. He says they can live with the problem – overcoming it with volume – “but we don’t really want to”.
Furthermore, he says National Grid’s systems and processes are outdated. They were set up to deal with a small number of large assets, not fleets of smaller ones, and need to be upgraded accordingly: “It is still quite difficult for National Grid to be fully optimised in their purchase of flexibility.”
Metering signals from these assets must be fed into the control room so they can “see what they’re paying for is what they’re getting”. At the moment, this is challenging.
Martin says National Grid is working hard on the problem but wishes changes would come sooner. “To be fair, so does National Grid,” he adds.
Nygard agrees. He says the requirement to register a BMU for each GSP Group is a “hindrance” and one he would be very happy to see removed,
That said, it’s not a problem he worries about much: “I think it works for us as it is.”
He says Limejump’s attention is instead focused on working out how to maximise revenues from the balancing mechanism and catching up with large generators which have years to hone their bidding strategies.
For now, he is glad their hard work is starting to pay off: “It makes us feel good, that’s for sure.”
Having spent years shut out in the cold, he is enjoying the warmth inside.
TERRE – a new Europe-wide balancing platform
TERRE is being developed by the European Network of Transmission System Operators for Electricity (ENTSO-E).
The platform will allow the trading of “replacement reserves” – the slowest responding of three categories of reserves set out in the European Commission’s 2017 guidelines for transmission system operation.
Replacement reserves are used to maintain the frequency of the power grid once a deviation from the correct level has already been contained and reversed by faster responding reserves.
Not all transmission system operators in the EU use, or will use, replacement reserves. But as one of the ones that does, National Grid is legally required to participate in TERRE under EU regulations which came into effect in December 2017.
Other system operators taking part in the scheme include those from France, Spain, Portugal and Italy. The system operators for the Republic of Ireland and Northern Ireland are also observers.
The project is currently expected to go live between October and December next year.