Carbon impacts need to be baked into flexibility markets

Flexibility markets should factor in carbon impacts, rather than just prioritising delivery at the lowest cost, an industry expert has urged.

Jeff Hardy, a senior research fellow at the Grantham Institute for Climate Change and the Environment at Imperial College London, also called for greater integration between markets at the local and national level to enable providers to “stack up” deals.

Hardy was responding to Ofgem’s proposals in January to fully separate the Electricity System Operator from National Grid and create an Independent System Operator (ISO) to help lead the way to net zero emissions. He made the comments for a new Utility Week report examining the potential roles and responsibilities of the ISO.

“Markets are trying to optimise delivering at lowest price, but clearly, at the moment, we need markets that also have a carbon element,” said Hardy. “BEIS has done some work that shows that most flexibility markets from national down to local, are quite carbon intensive.

“Sometimes up to 99 per cent of the technology is carbon intensive, like diesel generators, so that’s a problem.”

Hardy said “baking in” carbon intensity to market and regulatory structures will be a key task in coming years: “There is a big job for the ISO, probably together with the DSOs [distribution system operators] and with Ofgem, and across all of the markets – from wholesale capacity, balancing and ancillary service markets at the national level, and the markets that might be created locally, like flexibility markets, like local energy markets, like peer-to-peer trading.

He said other objectives may also need to be considered too: “Ofgem talks about a lot about decarbonisation at lowest cost, but is that the only objective? It might be about levelling up, or pandemic recovery or lots of other things. Markets are great at optimising, so what are you optimising against? What parameters are you putting in?”

Hardy also called for greater integration of flexibility at the national and local levels as well as peer-to-peer energy trading, saying the current lack of alignment makes it harder for providers to “stack up” deals and exploit the full value of their assets.

“Sorting out the relationship between regional distribution and system operation and national system operation will be critical,” he explained. “We could get ourselves in a terrible mess, if we have one set of rules on certain markets locally, one set for other markets nationally, and zero transparency between the actions taken locally and nationally.”

He said the ISO could help resolve the issue by ensuring consistency between technical standards, contracts terms, pricing and duration.

Click here to access Utility Week’s report ‘Imagining the system operator of the future’ produced in partnership with Mott Macdonald.