ESB Generation & Wholesale Markets Response to:

ESB Generation & Wholesale Markets Response to: DS3: System Services Consultation Finance Arrangements February 13 th 2013

Part One: Introduction ESB Generation and Wholesale Markets (ESB GWM) welcome the opportunity to respond to this consultation. The ESB GWM generation portfolio comprises of both conventional and renewable generators. The successful delivery of the DS3 programme is therefore important to the ESB GWM business. We welcome the work being carried out by Eirgrid and SONI in relation to this. The main points of ESB GWM s response to this consultation are summarised below. Part Two of the consultation response gives more detailed comments. Responses to the specific consultation questions raised are outlined in the Appendix. 1.1 Summary of Main Comments ESB GWM support the introduction of the new system services in order to facilitate higher levels of renewable generation required to meet both Governments 2020 targets ESB GWM are now of the view, that given the level of system services that are required on the system in order to facilitate increased amounts of renewable generation, that these system services are kept separate to capacity payments. Capacity payments are for incentivising generation adequacy whereas system service payments are required to incentivise generation flexibility and as such the two should not be linked. ESB GWM agrees in principle with the value based approach for determining the system services pot subject to total cost recovery for provision of the services at a very minimum. This approach should also be extended to include existing Ancillary Services. The consultation assumes that synchronous generators can all comply with the proposed ROCOF Grid Code modification, and so neither the cost nor the value of the provision of inertia to the system has been captured. ESB GWM considers this to be a serious flaw in the consultation. ESB GWM strongly recommend that in order to incentivise investment in provision of these services that: o remuneration for provision of the services should reflect the fact that new additional costs (both capital and O&M) are being incurred by generators and new revenue streams are required to cover this. It is inappropriate to simply move monies out of one pot into another 2

o system services payments should be paid on the basis of capability to provide the service o tariffs should be fixed for at least five years o the performance scalar concept as outlined in the consultation should be radically changed Part Two: Detailed Comments 2.1 The System Services Pot and Linkage with Capacity Payments Change in how generators earn revenues As levels of intermittent generation in the SEM increase the revenue streams for generators are changing. Whilst historically energy and capacity payments have been the most important revenue streams, with Ancillary Service (AS) income small in comparison, this is likely to change substantially. The system now requires generators to provide different services. Operational flexibility is increasing in value and at the same time energy payments will be decreasing in value due to the low marginal cost of wind generation. The system services pot should reflect this shift. New costs require new revenue streams The pot available for system services should also reflect the fact that new additional costs will be incurred by generators for the provision of the new system services required on the system. New revenue streams will therefore be required in order for generators to be incentivised to provide these services. It is not appropriate to simply move monies from the capacity pot into system services. Capacity and system service payments should be separate since they are addressing separate requirements. Linkage between capacity and system services pots System services payments are required in order to incentivise the enhanced operational flexibility of generators that is needed in order to achieve Government 2020 renewable targets. Capacity payments under the current Capacity Payment Mechanism (CPM) are designed to incentivise sufficient levels of available generation capacity in order to ensure generation adequacy and that the security of supply standard is met. It is clear that both schemes have different objectives and therefore should not be linked. Methodology, fixing and distribution of system services pot The consultation proposes a methodology for valuing the system services. ESB GWM is in broad agreement with this approach, and also agree that the consumer 3

should share in any net benefit that arises. This value based approach should also be extended to determining the pot for existing AS. ESB GWM believes that consideration should be given to how the pot for system services could be fixed and fully distributed to providers of the services. For example, any monies not paid to providers due to poor performance, could be redistributed to providers with good performance. 2.2 ROCOF The consultation assumes that the ROCOF issue has been resolved and all generators can meet the proposed new standard. The valuation of the Synchronous Inertial Response (SIR) product therefore assumes that this service is no longer scarce and so has little value. The costs of compliance with the proposed new ROCOF standard have not been included in the consultation. Achievement of the new ROCOF standard is crucial if the System Non-Synchronous Penetration Level (SNSP) is to be increased and the reduction in system production costs, as outlined in the consultation, are to be obtained. Yet the substantial cost implications associated with achievement of the new proposed ROCOF standard have not been addressed at all. This issue is of fundamental importance to the successful implementation of DS3 and needs to be addressed by the TSOs and the Regulatory Authorities (RA). Separate to this consultation response ESB GWM have submitted proposals to the CER on how this issue should be dealt with and are happy to discuss these proposals further with both the TSOs and RAs in order that an efficient and swift solution is achieved. 2.3 Investment Decisions In order to be able to provide the new system services generators will have to consider the investment required to do so. However many of the proposals in the consultation will lead to revenues being uncertain and difficult to forecast and therefore investment will not be incentivised. The consultation proposes that tariff rates should be reviewed on a three to five year basis which clearly leads to uncertainty around future revenue streams. ESB GWM considers that product rates should be fixed for five years in order to give confidence. Also proposed in the consultation is a dispatch payment basis. Generator dispatch is getting more and more difficult to predict as the level of 4

intermittent renewable generation on the system increases. Linking payment to dispatch therefore creates another layer of uncertainty. ESB GWM considers that investment would be better incentivised if payments were based on capability to provide the service. The performance scalar concept is also introduced in the consultation, where performance below 50% is not remunerated. This measure also creates massive uncertainty as to the level of future revenues. (Further comments on the performance scalar are given in 2.4 below) Investors will require higher returns in order to be incentivised in the face of such uncertainty and unpredictability. Ultimately then the end-user will end up paying a higher rate for provision of the same service. 2.4 Performance Scalar Currently AS are remunerated based on capability to provide the service, with penalties for non-performance. The proposals in this consultation are significantly different, both in terms of payment basis and also performance. Comments on payment basis are given in 2.3 above. It is proposed that there would be a sliding scale of reduced payment rates between 50-90% performance with no payments to be made for performance below 50%. ESB GWM considers that this approach is draconian. All generators that provide services required for the system should be compensated. However, we recognise the importance of reliability and so would be supportive of a reduced scalar for performance in the range of 0-49%. It is unclear how the performance scalar will be applied for services that are event driven and infrequent in nature. Clarification is required on whether rolling averages of performance will be used. It is important that the process does not lead to situations whereby generators are no longer incentivised to provide services as they may already have fallen below the payment threshold and know that within the timeframe they will be unable to reverse this. A time limit could be introduced on how long reduced performance payments would apply if the generator has not been given the chance to prove itself. Services providers should have the ability to declare themselves unavailable for services when they know in advance that they will be unable to provide that service. Non-provision of services when declared unavailable should not be penalised or impact of performance. 5

It is essential that service providers are given the opportunity to input into the development of the Performance Monitoring Process for System Services. 2.5 Products Synchronous Inertial Response (SIR) As currently designed the product includes an arbitrary minimum load threshold below which providers of inertia will not receive payment. ESB GWM are of the strong view that all providers of inertia should be compensated. Payments could be scaled so that lower minimum loads receive higher payments, however all providers should receive payment. It is unclear how the performance of this product would be measured. The product volume appears to be a desktop calculation. However the consultation stipulates that disturbance recorders would be required in the performance monitoring of fast acting products such as SIR. Actual inertial response of synchronous generators will be dependent on the make up of the system at the time of the frequency event. It would therefore be inappropriate to have a contracted value to which performance would be measured. More detail is required on how this would work in practice. Steady State Reactive Power The product as designed currently does not take into account the ability of many conventional generators to provide higher levels of reactive power capability at lower active power loads. Currently only a single declaration of reactive power is allowed, and therefore the lowest capability level across the active power range must be declared. Remuneration of this service should reflect the full range of reactive power capability of a generator for its entire active power range. If the TSO requires increased reactive power, it can obtain this by allowing units to declare reactive power capability in accordance with their capability chart instead of one single value across the MW range. Fast Acting Products & Performance Measurement It is proposed to introduce disturbance recorders for use in the performance measurement of the fast acting products (SIR, Fast Frequency Response, Fast Post Fault Active Power Recovery and Dynamic Reactive Response). Performance of generators in such short time frames as these products cover will be difficult to measure against a contracted value, as there will be considerable transient effects in the waveforms which will differ from event to event depending on the magnitude of the system disturbance event and also the system conditions and configuration at the 6

time of the event. In such circumstances it is unclear how performance could then fairly be ascertained. More details on how this would work are required. 2.6 KEMA Costs & Generation Investment Scenario ESB GWM does not consider that the portfolio assumed in the Generation Investment Scenario is fully reflective of the generators that will be providing the system services. For example no costs to coal plant have been assumed. With regard to KEMA report, unfortunately there has been insufficient time in order to be able to verify the costs contained in the report. OEMs would have to be consulted in order to do this and the consultation time line did not allow for this. There is also insufficient information in the report around the detail and breakdown of these costs. For example the enhanced cost for existing CCGT investment is not broken down to show how much of the cost is attributable to having a reduced min load and start up times or faster frequency response. For more specific examples, there is crucial detail missing i.e. how much MW reduction in minimum load was obtained for the cost of the capability was it 5% or 25% of nominal capacity. If more information can be provided, ESB GWM is willing to investigate the costs further and meet bilaterally with the TSOs if required. If you have any questions or would like to discuss any of the matters raised further please contact: Jag Basi (jag.basi@esb.ie) Regulation Manager, ESB Generation & Wholesale Markets 7

Appendix: Response to Consultation Questions Question Value of System Services to the Electricity System Do you agree that the proposed value based approach to informing the amount of funding available for System Services is necessary and appropriate to deliver the required services to achieve the renewable targets? Financial Modelling and Analysis Approach To what extent, if any, should the capital costs inform the decision regarding future system services? Do you agree with the proposed methodology for determining the aggregate available pot for System Services? Allocation of System Services Revenue Which of the four methods outlined to allocate the funds between the System Services products would you prefer or is there another approach which should Response Yes, in principle agree with the value based approach. However the level of revenues available should be sufficient to ensure that service providers can at a minimum recover the costs incurred for the provision of these services. The capital costs, combined with any associated operational costs, associated with the provision of the services should be used to set the minimum revenue requirement. As stated above, ESB GWM agree in principle with the value based approach for calculating the pot available for provision of system services. Also agree that in principle the consumer should share in any benefits that are incurred as a result of the increased renewables on the system. However it must be recognised that provision of these new services will incur new incremental costs (both capital and operational costs) to generators and the revenue for the provision of these services should at a minimum allow generators to recover these costs. Without this generators will not be incentivised to provide these services. Agree with the TSO preference for the third option whereby the allocation between products is calculated based on their relative value to the system. However, independent of its value, the allocation per service should be sufficient to 8

be considered? Remuneration Approach Is the rationale for proposing dispatch-dependent payments clear? Is there further justification, not included in earlier consultation responses, for adopting a more capability-based approach? Proposed Contractual Arrangements and Payments Are the proposed general contractual and payment arrangements clear? incentivise the required level of that service. The TSOs have explained their arguments for their preference for dispatch-dependent payments. However, ESB GWM does not agree that this is the best compromise in terms of incentivising service providers and minimising costs to consumers. Dispatchdependent payments are by their nature less predictable. This unpredictability will increase in the future as the running regime of generators changes to accommodate increasing levels of intermittent renewables. Investment decisions will therefore need to take into account the increasing uncertainty of revenue streams and will require higher levels of return in order to be justified. Ultimately the consumer will end up paying more. Compliance with the European Target Model for Electricity and the changes that will mean for the SEM mean that there is currently a lot of uncertainty for generators in the SEM. A capability-based payment structure for system services would ensure that at least some part of revenues into the future will be more predictable. No Product Volume: How product volumes would differ depending on whether payment is dispatch or capability based is not fully clear for all products Performance Scalar: How this would work in operation is not fully clear. How many events is performance measured over? Performance Monitoring: It is not clear how some of the performance of products can be accurately measured. The timeframes associated with many of the products are in the immediate aftermath of a system event. It is not clear how a contracted value could be compared fairly to the actual response given that responses will vary depending on 9

system conditions. Contract award: It is unclear on what basis contracts will be awarded. It is important that the process is fair and transparent. More clarity is also required with regard to the timing of the contract award. Investors would need certainty on contracts and tariff levels for system services in advance of financial commitments being made. 10