Policy update: National Grid publication on System Needs and Product Strategy 19 June 2017 1
National Grid released its System Needs and Product Strategy and Future of Balancing Services reports on 13 th June 2017. Both widely anticipated, the reports signal National Grid s procurement plans for its balancing services over the next five years and launches a consultation on simplifying their product range. Aurora s key takeaways The outlook provided by National Grid is generally a positive message for providers of balancing services. The system need for services is expected to increase by as much as 100% in some areas over the next five years while the availability of traditional service providers is expected to fall. With the expected volatility of system needs, the flexibility of contracting services near real time will be valued by National Grid and will likely command a premium. Providers targeting contracts with less lead time would likely achieve higher payments, especially as balancing needs are usually highest when traditional providers are less available. Current design of balancing services is unsustainable. Patchwork of overlapping products with arbitrary criteria lead to lack of market transparency and unclear price signals. The detail provided on the future of balancing services is less than many had expected and hoped. National Grid has not released anything concrete. They have instead explained their principles and methodology for simplifying their balancing services products. Methodology provided for product simplification suggests the future services strategy will likely create deeper and more liquid markets. By standardising and/or merging products, future balancing services products will likely procure larger volumes per tender and see more competition amongst technologies. Increasing system needs Generally, the growing market size and the falling availability of traditional suppliers is a positive sign for existing and prospective providers of balancing services. The market size is growing rapidly and National Grid is acknowledging that there will be more volume (and spending) in balancing services. Within the next five years, National Grid expects the top percentiles of frequency response and reserve requirements to grow by around 100% (Exhibit 1). The need for reactive power is also expected to grow. This is a due to increasing wind and solar penetration, which squeezes out transmission connected synchronous generation on the system. The intermittency of the generation mix has an additional effect of increasing volatility of the system need for balancing. The system need for managing inertia is also increasing, although it is unclear whether National Grid will procure more associated balancing services. To 1
manage inertia, National Grid s strategy is to reduce the system need rather than procuring more services. This implies curtailing nuclear and wind, and replacing the generation with synchronous plant, which is potentially quite costly. The black start requirement is expected to remain stable. However, National Grid expects the availability of current providers to fall. Going forward, National Grid will investigate alternative sources of black start providers including upgraded thermal stations, small generation paired with large generation and intermittent generation. Forecast of frequency response and reserve requirement (GW) 15 97.5th percentile 50th percentile Primary response and upward reserve 12 9 6 3 0 High response and downward reserve -3-6 -9-12 -15 2017/18 2018/19 2019/20 2020/21 2021/22 Source: National Grid Exhibit 1 A premium on flexible and near real time contracting National Grid expects the system need for balancing services to become more volatile. This places a premium on services procured in real time relative to ones tendered further in advance. While certain firm system needs will continue to be procured ahead of time, these products are expected to grow at a more gradual rate compared to the overall system need. National Grid will weigh the flexibility of real time procurement of services against the lower cost of procuring services ahead of time. Procuring frequency response 2
and reserve at short notice is usually costlier when the system need is high (e.g. when few synchronous generators are on). Providers with the commercial flexibility to take shorter contracts near real time would likely have an advantage in future balancing services tenders. Current design unsustainable National Grid has acknowledged that products within the current market design are overly complex and inefficient. Due to the patchwork nature of product procurement over time, National Grid currently procures over 20 different products across a spectrum of technical requirements and routes to market. This results in unclear price signals and different levels of competition across similar products. Balancing services as it currently stands advantages experienced providers with detail knowledge of the rules. The existing market provides opportunities for providers that can choose between products, but also sets limitations for those that can only enter one. This creates an advantage for technologies/strategies that have the flexibility to shift towards the higher value products. These issues in the current balancing services are widely known and are now officially recognised by National Grid. The plan to change their products is therefore expected across the industry. Few concrete details of future strategy National Grid has outlined a three-stage process to simplify its current suite of products with the engagement of providers. They are: 1) Rationalisation: Review of the current service suite to remove products that are either no longer required, or have been superseded by later products. Existing contracts will be honoured. 2) Standardisation: Standardise parameters or merge into single products in each service market. This includes providing clear and transparent value functions to represent the relative value of different capabilities of providers. 3) Improvement: Continued development of the product to ensure they meet the changes in technical abilities and commercial arrangements of service providers. This includes providing a balance between short-term liquid markets and long-term contracts. National Grid has not provided any concrete plans for its products. Details will only be created and finalised pending consultation following the timeline below: 3
Timeline of implementation Key task Application period Rationalisation Jun 2017 Deadline for consultation responses 18 July 2017 Improvement strategy Jun 2017 to Sep 2017 Standardisation Jun 2017 to Nov 2017 Frequency response product improvement Jul 2017 to Apr 2018 Reactive power product improvement Jul 2017 to Jul 2018 Reserve product improvement Oct 2017 to Oct 2018 Black start product improvement Dec 2017 to Feb 2019 Auction design trials on frequency response market End 2018 Likely result of deeper and more liquid markets The product simplification methodology proposed will likely lead to deeper and more liquid markets. This is potentially good for existing and potential providers of balancing services that would benefit from a clear price signal and the possibility of secondary trading of contracts. The focus on establishing clear value functions and a transparent assessment process will produce sharper price signals and a market that more accurately values flexibility. The recognition of long-term contracts will be important for encouraging new investment. Further clarity moving forward will be welcome. With the anticipated entry of disruptive battery technology, one could expect to see major changes in the balancing services markets within the next few years. Sources National Grid, System Needs and Product Strategy, 13 June 2017. http://www2.nationalgrid.com/uk/services/balancing-services/future-of-balancing-services/ National Grid, Future of Balancing Services, 13 Jun 2017. http://www2.nationalgrid.com/uk/services/balancing-services/future-of-balancing-services/ 4
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