Operational and technical challenges for D3: Lessons from FENIX

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1 Operational and technical challenges for D3: Lessons from FENIX Gary Keane D3 Expert Stakeholder Workshop 3 March 2011

2 Pöyry what do we do? employees across 49 countries

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4 Agenda 1. Benefits of demand-side response 2. Overview of FENIX study on distributed energy resources 3. Recommendations from FENIX for GB 4

5 Demand-side (and DG) can provide benefit to the wholesale market and to networks (as noted in EMR consultation) Demand shifting can provide real benefits Demand (GW) Inflexible Flexible heat Flexible appliances Flexible EV 0 24-Jan Lower and more stable generation costs Management of peaks to minimise network investment 5

6 Increasing levels of intermittent generation will decouple demand and price peaks this will separate supplier and network interests Variability of wind generation will see price peaks occur at different times from demand peaks and price peaks will be both more variable and less predictable Example of potential difference between timing of peak demand and peak price 8 Effect of wind means that thermal generation peaks at 10am Annual peak occurs at 6pm GW Demand Wind generation Demand net of wind generation Hour of the day EMR is focused on wholesale market, and does not discuss how to manage the interaction with network requirements 6

7 As a result, major commercial and technical questions remain open Trade What changes will be required to existing commercial relationships? An EU project, Fenix, proposed a set of commercial relationships that allowed additional value to be distributed among participants Distributed Energy Energy Resource Electricity Sale of electricity / flexible demand services CVPP TSO Ancillary Services Local Network Services Market TSO TVPP Use of transmission system TAO Connection & use of distribution system DAO Revenue How will distributed energy resources be controlled? Fenix developed and used a bidding system together with direct dispatch 7

8 Agenda 1. Benefits of demand-side response 2. Overview of FENIX study on distributed energy resources 3. Recommendations from FENIX for GB 8

9 FENIX concept seeks to improve participation of Distributed Energy Resources in the electricity sector Trade Distributed Energy Resource Sale of electricity / flexible demand services CVPP TSO Ancillary Services Market TSO Use of transmission system TAO Local Network Services TVPP Connection & use of distribution system DAO Electricity Revenue CVPP and TVPP aggregate DER and provide route to market Key: DER: Distributed Energy Resource CVPP: Commercial Virtual Power Plant TVPP: Technical Virtual Power Plant TSO: Transmission System Operator TAO: Transmission Asset Owner DAO: Distribution Asset Owner 9

10 Regulatory and contractual frameworks need to support FENIX concept Effective FENIX arrangements require: Regulatory framework to support FENIX FENIX creates economic value by allowing DER to: participate in wholesale electricity markets and provide services to TSO and DSO Regulatory framework needs to enable DER participation Appropriate contractual framework within regulatory structure Contractual framework needs to: enable DER value to be realised provide a route to market for DER services clarify the commercial obligations / entitlements of the parties involved 10

11 Review seeks to identify regulatory barriers to the FENIX concept and make recommendations for regulatory change What kind of regulatory framework is needed for FENIX to be viable? How do current regulatory regimes compare to this? What changes need to be made to existing regulatory frameworks? Summary of regulatory recommendations made by previous studies of DER Definition of services offered by FENIX, which a regulatory regime should allow and reward Outline of the business model of Technical and Commercial VPPs Overview of how regulation is done in Europe Description of regulatory frameworks in GB, Spain, Netherlands and Austria Examination of current businesses operating as CVPPs or TVPPs in GB Specific barriers to FENIX, particularly in Great Britain and Spain Specific recommendations for changes to regulatory structure in Spain and Great Britain European-wide recommendations based on the lessons learnt from Spain, Great Britain, the Netherlands and Austria 11

12 Agenda 1. Benefits of demand-side response 2. Overview of FENIX study on distributed energy resources 3. Recommendations from FENIX for GB 12

13 GB: Barriers and recommendations for market operation We have also identified relevant areas of concern and made recommendations for change in relation to other aspects of the market Key current features Barriers to Fenix Recommendation/solution Wholesale Market Structure Central market for electricity is not very liquid It is difficult for smaller suppliers to buy and smaller generators/aggregators to sell within the spot and forward markets Seek to improve liquidity and to ensure that imbalance prices provide appropriate incentives to balance Locational Charges The distribution use of system charges for smaller generators is non-locational Smaller generators do not receive the benefits of operating near the demand Develop a locational distribution charging methodology to create a signal for generators to locate close to demand Metering Metering for most domestic consumers is basic, although new meters must have time discrimination Suppliers are reluctant to offer innovated metering systems as assets installed could become stranded if the customer changes supplier Improve the quantity and frequency of communication of metered data, including smart metering Renewables Support Mechanisms Current support system for renewables are more generous than may be required for onshore wind and other technologies Renewable generators have little incentive to particiapte in ancillary service provision where this entails a reduction in generation volume Support should reflect marginal cost of generation or an explicit incentive should be introduced for ancillary services from renewables 13

14 GB: Barriers and recommendations for distribution networks The first area where we have identified barriers to the Fenix concept and made recommendations for change is in the framework used to regulate distribution networks Progress in DPRC5 Regulated Revenues Progress in DPRC5 Government Support Key current features Distribution network revenues are based on their regulated asset base Innovation Funding Initiative (IFI) has had success in promoting innovation and popular with DNOs Barriers to Fenix Implicit incentive to build more assets means that active network management is only used where there are administrative or cost barriers The focus is more on measures to connect DER to the network as opposed to integrating it into the network Recommendation/solution Regulators must allow DSOs to benefit when they use active network management where this is appropriate rather than capital expenditure Funding arrangements should focus more on promoting DER integration so that the benefits of DER can be fully exploited Network Design Networks are often designed to maximize profit in the short term and do not take into consideration potential benefits from DG The regulator or industry groups do not provide any longer term framework on network design DSOs should not be required to guarantee physically firm access to all DG, and must be allowed to use lean network design methodologies DNO Power Trading DNOs are not permitted to trade in or contract for electricity in order to support the network DNOs must rely on constructing a network that can withstand any likely flows Regulators must allow DNOs to reward generators for contributing to active network management 14

15 Positive regulatory commitments are being made in relation to energy network regulation Transmission Distribution RIIO Aiming to ensure that price control arrangements are fit for purpose in the context of the future energy networks Anticipatory investment incentives Aiming to encourage TOs to invest in anticipation of future need Promotion of innovation and active network management solutions in DPCR5 Aiming to move away from fit and forget form of network management and investment 15 Network investment and passive management Regulatory step change? Balance between active management and investment Will energy market arrangements be developed that complement developments in network regulation?

16 Gary Keane +44 (0) , Pöyry Management Consulting King Charles House Park End Street Oxford, UK OX1 1JD +44 (0) Pöyry Management Consulting (UK) Ltd. Registered in England No King Charles House, Park End Street, Oxford OX1 1JD.

17 Regulatory framework recommendations fall into several categories Area DNO/DSO incentives and requirements Metering and communications Focus Changing the environment within which distribution businesses operate Creating enabling infrastructure Network access Allowing/encouraging DER participation Guaranteed connection but not firm access Market participation Market access for DER Demand side measures Time-dependent pricing Ancillary services Access by DER Technology support Appropriate forms of support to encourage flexibility 17

18 Desirable regulatory framework features for DER Area Requirements Detail DNO/DSO incentives and requirements Allowance of full recovery of DG connection costs Incentives and allowances for innovation Consistent treatment of OPEX and CAPEX Longer term planning framework Islanding and statutory requirements removes the temptation for connection to be delayed in order to defer the costs faced by a DNO/DSO, which can occur even with a statutory requirement to offer terms of connection innovative solutions to network problems, such as the involvement of DER can only come about through investment in research and development would allow more switching between the two, an important step for fully integrating DER within the network important for operators to have a view of what the network should look like from an economically-efficient point of view in order to make informed investment decisions statutory technical requirements such as voltage and frequency limits may need to be relaxed in some situations in order to increase the reliability of network when using DER 18

19 Desirable regulatory framework features for DER Area Requirements Detail Network access Guaranteed Rights to Connect Non-firm capacity connections Assess DER s contribution to SoS essential if there is to be an increase in penetration of DER encourages the use of actively managed networks essential step in moving from a passively built distribution network to a more actively managed one True reflection of costs and benefits of DER necessary for DER to have appropriate incentives to connect and operate in a manner that benefits the economy as a whole 19

20 Desirable regulatory framework features for DER Area Requirements Detail Market participation Metering and communications Full market access for DER More open, liquid and transparent markets Establish technical and communication standards Full information flows for new and existing DER Wider use of real-time metering DER should be able to compete on an equal standing with centralised generation, although aggregation may be needed to permit it to do so necessary to enable independent agents to innovate in order to integrate distributed energy resources and allow participation on a more equal basis lack of technical standards is a major barrier to the uptake of more innovative metering solutions. means that schemes would no longer be invisible to network planners and operators would add value for DER by encouraging suppliers/cvpp to make full use of the DER flexibility by participating in the market and by providing services to the TSO and DSO 20

21 Desirable regulatory framework features for DER Area Requirements Detail Demand side measures Ancillary services Technology support Reduction in profiling Timedifferential pricing Full participation from DER Localised as well as national ancillary services Optimised support mechanisms Targeted support for DER means that more demand and generation is more exposed to within-day price variation providing a different cost for electricity consumed at different times would provide a currently unavailable incentive to shift demand from peak times increase the value of flexible load allow DER to fully participate in the ongoing security and reliability of the grid at the distribution level sufficient subsidy is available to ensure that distributed generation, both renewable and conventional, is economically and financially viable, but marginal enough (in line with the economics of the technology) to need to compete to provide the flexibility and other services necessary for active networks to become a reality where new technologies require support in the early stages of development 21

22 General regulatory recommendations Area Requirements Detail Distribution network revenue regulation Metering and communications Allow DNOs to benefit when they use active network management Appropriate network unbundling Smart metering with real-time communication Interoperable smart metering Reduce use of demand profiling Regulatory regimes must be devised that allow network owners to benefit when they increase the economic efficiency of their networks by substituting operational expenditure for capital expenditure It is imperative that measures introduced to ensure a level playing field between users of distribution networks do not prevent DER from cooperating with network operators to the degree necessary for them to participate in active network management schemes Unless smart meters have the capacity for real-time communication with a third party agent and DER, using common protocols, then these meters will represent a barrier rather than an enabler to the implementation of VPPs In order to allow freedom for DER to choose between different VPPs, it will be necessary to ensure that common standards for interoperability exist in advanced communication and metering functions Infrequent meter reading and the profiling of demand prevents the majority of consumers from observing and responding to anything other than long-term changes in electricity prices 22

23 General regulatory recommendations Area Requirements Detail Ancillary services Subsidies for renewable energy generation and CHP No unjustified barriers to distributed generators equal participation in ancillary services markets Support mechanisms must allow generators to benefit from ancillary service provision through VPPs Where not already in place, introduce market based mechanisms for procuring ancillary services Remove arbitrary limits on service provides and ensure VPPs can participate In designing support mechanisms, ensure that revenues available to renewable generators and CHP are not reduced when it is economically beneficial for them to contribute to the provision of system or ancillary services 23