Over recent years, the ESO has gradually introduced a suite of three new frequency response services – Dynamic Containment, Dynamic Moderation and Dynamic Regulation.
Dynamic Containment, as the name suggests, is used to contain sudden changes in grid frequency following a fault. Dynamic Moderation is used to provide pre-fault response in particularly volatile periods. Dynamic Regulation is also used pre-fault but to correct small deviations in frequency as part of normal operations. For each of these services, there is a high product to reduce frequency and a low product to raise it.
These products have been procured separately in daily auctions for the 24-hour period starting at 11pm that evening. Until now, providers have had to decide in advance what capacity they want to bid into what auction for each of the four-hour time blocks.
Jamie Ward, a power trader at Habitat Energy, which operates a 400MW portfolio of battery storage, says this has often led to price spikes in certain auctions as providers simultaneously identify the same product as their best bet: “You can end up with this oversupply where everyone’s picking one service and that leaves another service necessarily under procured.”
Ironically, this means prices spiking for the products they didn’t go for: “There are always blocks that we look back once the day is over and say: ‘We should have been in Dynamic Regulation instead of Dynamic Containment for that block’.”
He says this inevitable outcome of the arrangements, which can leave providers missing out on revenues and consumers paying more, has been occurring on “an almost daily basis.”
However, over the last year or so, the ESO has been developing a new Enduring Auction Capability (EAC) platform that allows providers to bid for multiple products with the same capacity at the same time. The ESO hosted a series of mock auctions using the platform in September and October.
Selling by the basket
Under the new associated auction arrangements, providers submit their bids – or ‘sell orders’ – within ‘baskets’.
Each of these baskets relate to a single unit and must contain a non-curtailable ‘parent order’, which the ESO may either fully accept or fully reject. They can also contain up to 10 ‘child orders’ and up to 10 ‘substitutable child orders’. Each order specifies a product, a quantity in MW and a price in £/MW/h.
If the ESO wishes to accept a basket, then it must accept the parent order. It can accept a parent order without accepting any of the child orders, but it cannot accept a child order without accepting the corresponding parent order.
All child orders are curtailable, meaning they can be partially accepted. If a provider wants an entire basket to be curtailable, then it can set the quantity of the parent order to zero.
All substitutable child orders in a basket form a single ‘substitutable family’. This allows providers to offer the same capacity for multiple products and leave the ESO to decide on the mix it wants. The sum of the acceptance ratios for a substitutable family must be less than or equal to one.
For example, if a provider offers a basket containing a family of three substitutable child orders, then the ESO can accept 50% of the first, 30% of the second and 20% of the third. If the ESO wants to instead accept 60% of the first, then it must reduce the cumulative acceptance ratio of the others by 10 percentage points, perhaps to 20% for each or 25% for the second and 15% for the third.
Providers can submit multiple baskets from each unit for the same time block but these baskets will be considered mutually exclusive, meaning the ESO can only accept one. Baskets can also be ‘looped’ together into a ‘looped family’, meaning if the ESO accepts one basket in the family, then it must accept all of them.
The ESO selects which combination of baskets to choose using an algorithm that seeks to maximise social welfare across the entire auction. For each time block for each product, the algorithm will determine a uniform clearing price for accepted orders.
The auctions conducted using the EAC platform will initially only cover the dynamic frequency response services. But the ESO eventually plans to incorporate its revamped reserve services – Quick Reserve, which will replace Fast Reserve, and Slow Reserve, which will replace its Short Term Operating Reserve.
Of the three service types – frequency response, Quick Reserve and Slow Reserve – units will only be able to provide one in each service window. However, they will be able bid for all three by submitting mutually exclusive baskets.
Stacking and co-optimisation
Jonathan Wisdom, head of market change delivery at the ESO, says these new arrangements “should result in more efficient clearing across all of the markets,” creating value for both providers and consumers. Providers will be able to stack revenues across the different products.
Ward says the new arrangements will make a “huge difference” to their bidding strategies, allowing them to “take all of the learning from the past three, four years and optimise our bids a lot better than before.”
Chris McLeod, head of trading at Habitat Energy, says they should lead to more predictable, stable prices, with auctions clearing “more in line with the perceived wholesale market opportunity costs”.
The mock auctions in September and October involved 25 participants who provided around 3GW of capacity. Wisdom says they allowed providers to “make sure they understood the system and how they could use the full range of features” and the ESO to take on feedback: “What worked. What didn’t work. There’s obviously a user interface they’ve got to get familiar with.”
Wisdom says the ESO has “worked hard to develop the user interface of the EAC platform and increase the integration of technology through Application Programming Interfaces (APIs). These changes are key to improving automation and making tasks that are currently manual easier. It also provides users flexibility, as they can submit orders either through our UI or other applications connected via API.”
Ward says the ability to upload bids through an API is a “very welcome change”. Previously, bids had to be uploaded in an Excel spreadsheet, meaning no matter how you produced them, there was still “a human element” that was required to “actually click the button and upload it to the auction platform.”
Wisdom says some participants did raise concerns about the complexity of the new auction arrangements, but he says a lot of this complexity results from features they themselves requested: “Like anything in this industry there’s always a necessary level of complexity, but hopefully that complexity achieves the value we want to see.”
McLeod agrees: “These are complex products. They’re designed to solve complexity problems in the stability of the national grid, and so it’s right to assume there’s complexity in how these products are procured.”
Negative prices
Further adding to the auctions’ complexity is the new ability to bid at negative prices, which means asset operators actually paying the ESO to provide services.
They may wish to do so because Balancing Mechanism Units do not pay imbalance charges on deviations from their contracted position resulting from the provision of certain ancillary services such as frequency response.
As a result, storage operators that provide a service by importing electricity to charge their batteries, as is the case for high frequency response products, have effectively been able to get this power for free, even if the clearing price is zero.
Ward says clearing prices of zero have become a common occurrence, usually emerging in “at least a couple of blocks each day”. He says sometimes “a whole day” will clear at zero for a particular product.
Negative prices will allow the ESO to capture some of the value of the electricity providers would otherwise receive for free.
“The concept of negative pricing certainly introduces an element of risk,” says McLeod. “That means you really need to try and forecast your expected gain from providing that service very well. And it’s an unpredictable service because your actual response is at the mercy of what frequency does on the day.”
The emergence of zero prices also threw up an issue around non-delivery penalties, which were set in proportion to clearing prices such that all availability payments were clawed back for capacity that wasn’t actually available. However, this meant there were no penalties if an auction cleared at zero.
The ESO has therefore decided to introduce a new floor of £1/MW/h for auctions clearing at £1/MW/h or less.
One thing McLeod expects to stay the same is that frequency response auctions as a whole will be “largely saturated” for much of the year: “You expect the highest demand for the service to be in the summer months when inertia is lower and National Grid is basically having to contend with a system that’s got more renewables and all of the thermal assets on their summer outages.
“But we’ve already got about over 3GW of installed battery storage capacity in in the UK and currently across all of the services, you’re probably looking at a maximum procurement of about 2.5GW.
“That will grow over time as there’s more renewables deployed on the system but it’s already saturated and will continue to be outpaced with the growth of installed battery storage capacity.”