Power supply: Is 2016 the year of flexibility?

Jon Lawson

Members of POWER-GEN Europe and Renewable Energy World Europe’s Advisory Board discuss the importance of a flexible power supply and the steps needed to deliver a truly robust network, ahead of the conference and exhibition place in Milan, 21st to 23rd June 2016.

The roundtable participants: Giancarlo Benelli - Senior Consultant, Green Engine Consulting S.R.L; Philippe Delage – Consultant, DELAGE Conseil; Simon Hobday – Partner, Osborne Clarke LLP; Fabien Roques – Senior Vice President, Compass Lexecon.

Why is flexibility so important now?

Fabien Roques: Our power systems are undergoing a profound transformation. We’ve got new technology coming in, supported by governments, and we have active consumer participation – the so-called pro-sumers – reshaping the system. This is leading to a true ‘Copernician revolution’. Our power systems, which were built to transport power from large-scale centralised plants to consumers, will need to be redesigned to allow two way exchanges with energy produced and optimised locally to a large extent. We also need the system itself to become more flexible to make sure that it is balanced at all times. In a nutshell, the growth of renewables and pro-sumers means that we need more flexibility in the system to accommodate their intermittency.

Simon Hobday: It's always been important to have a flexible system. You've got to keep the supply and demand in balance otherwise the network falls over. Historically, it was relatively easy for a centralised body such as a system operator to balance that supply and demand mix, because they controlled generation and could take a relatively good forward view on demand. Today’s system is much more volatile and difficult to predict. As a consequence, we now need new approaches to deal with fluctuations.

Giancarlo Benelli: Since the 1980s we've seen a 70 per cent increase in electricity demand within the EU. And, in recent years, intermittent renewables have taken on an increasingly important role. New methods need to be introduced to fill the supply gaps – such as flexible fossil fuel plants or the commercialisation of energy storage.

Philippe Delage: Flexibility has always been important. We used to have power generation units set up with specific commitments to deliver an amount of power at a particular place and time. Today, smaller initiatives are readdressing the equilibrium. In addition, the European market means that if your generation cost is too high, or its quality is insufficient you will no longer be able to stay in the market. This evolution has made the analysis of flexibility slightly different and so important. Furthermore, if you sell your flexibility, you get paid for ensuring the satisfaction of the end user. Developing flexibility allows power suppliers to arbitrage, between, for example, the price of gas, the price of oil and the price of solar energy, the latter of which is mostly free, so far. Flexibility is generally viewed as a constraint, but it's also an opportunity. The issue now is, how do we formalise flexibility in order to better serve this market?

How is it being delivered in new plants and retrofit?

FR: It must be recognised that there are different potential sources of flexibility both on the supply and demand side. First you’ve got embedded flexibility, which can ramp up or down depending on the characteristics. Some of them are more flexible than others. Besides, the demand itself can provide flexibility. So you can have demand response programmes to ensure that you balance the system. In addition, flexibility can be provided through new supply or demand solutions. On the supply side, you have flexible open cycle gas fired turbines or smaller scale reciprocal engines, etc. On the demand side, aggregation of demand response from industrial suppliers and/or residential users is promising. And we should not forget new transmission lines with neighbouring markets that can help leverage flexibility across borders. The final thing is storage, either small scale decentralised or large scale utility scale applications.

SH: In the UK, flexibility is currently being managed under the capacity market and other mechanisms such as National Grid's balancing services. Different plants operate differently – some can be flexible, others can't. The other area is around demand side, which means demand flexibility as well as energy efficiency. All too often the debates around energy shortages come down to producing more. We should perhaps be looking harder at using less, or using what we have more efficiently.

GB: Efforts have been under way to extend power ramps in existing plants and to innovate more in new power stations. This includes reducing the GT minimum load, approaches to starting up more quickly and better utilisation of gas infrastructure.

PD: New plants and retrofit require similar approaches. There are two aspects: the hardware, which under continuous improvement, being quicker, stronger and able to sustain wider ranges of operation; and the control system. Digital systems are likely to help improve both power generation and transmission or distribution. That’s the very essence of flexibility.

What is the cost of flexibility and how is the market going to incentivise it?

FR: In theory, you can incentivise flexibility by arbitraging between prices at different points in time. If you’ve got a very flexible asset, you can sell in the reserve and balancing markets. This begs the question as to whether your power market is designed in a way that reflects the value of flexibility in the system in real-time. If not, then you won’t make that much money by arbitraging. So the key here is to ensure that you’ve got a market design that generates value for flexible assets.

SH: I don’t think there is a cost of flexibility per se. Flexibility is a consequence of the increasing intermittent generation, which politicians have mandated. That generation has a cost attached to it, which has got to be dealt with through the energy sector.

GB: This is a complex question. Every investment is motivated by its own specific techno-economic analysis. To start with you have to consider the type of generation, the age of the plant and the distinction between capital and fuel cost. It's much better to think in terms of the impact of a decision on dispatching priorities.

PD: I'm with Simon on the question. We can't simply identify a cost of flexibility. Actually the value of flexibility is mostly perceived through the cost of non-flexibility. I would prefer to ask: what does flexibility prevent? If flexibility means that we are preventing blackouts then we have to look at the cost of the blackout. As for incentives, the market will provide flexibility anyway, we really need to look at how will we organise the market and what the key parameters are that might require a specific, differentiated offer from the operators and distributors.

We’ve talked about the potential costs of flexibility – but who should bear them?

FR: Flexibility has a value for the power system, as it is a key component of the service provided to consumers, namely reliable electricity at all times. In other words, flexibility is one element of the total cost to consumers. We need to put in place a market design that will deliver flexibility as part of that reliable energy service. In a number of European countries, the market design does not provide the right incentives and does not remunerate flexibility adequately. We need to reform the market to provide the right incentives to market participants to deliver flexibility at the lowest possible cost for customers.

SH: Improving flexibility should provide a saving not a cost in the long term. We should incentivise its provision through the market. To the extent flexibility is regarded as a cost, it will be paid for by end-users.

GB: In the short-term, it should be the end customer. But longer-term new technologies might be able to shift the load seamlessly across the network, providing much better value for customers.

PD: Actually paying for flexibility may not be visible to the consumer. Today no one can see how they pay for energy efficiency (or lack of efficiency). Ultimately, the end user will pay for flexibility as they pay for all kind of characteristics. And this will be accepted, especially as they become more aware of the benefits of flexibility.

How can plants be flexible and still meet tougher emissions standards?

FR: This question is particularly relevant to existing thermal plants that face increasingly stringent emission standards, and at the same time are being operated differently to maximise the value of flexibility. Of course, there are sometimes competing demands on thermal plants because they want be more flexible, but this may go against their efficiency and emissions standards. It’s up to operational managers to decide where to draw the line and whether it is worth upgrading these assets or if they should instead be retired in favour of other flexibility options. In fact, this is the reason why many coal plants in Europe have chosen not to upgrade in order to meet the next round of emission, the economics simply don’t square.

SH: In this context, ‘plant’ could mean lots of different things. Coal is facing other constraints through a combination of UK and European emission standards and the political drive from UK politicians is to have coal phased out. Gas is actually a relatively low emitter of carbon – and is therefore a more carbon-friendly fuel, but because of the costs it incurs to operate and the current profiles within the UK energy market, gas itself is not nearly as cost efficient to operate as it used to be. So, that then takes you back to alternative ways of doing things, whether that's demand-side, storage, energy efficiency or something else.

GB: Most power companies are committed to sustainable objectives so we're starting on good footing. The top priority should be to direct investments towards research into new, more efficient technologies and better plant designs. We should aim to make units more flexible, responsive, efficient and effective at lower loads. Incentivising plants to roll-out new technologies, including energy storage systems will be absolutely essential for this. And this will only become more important as we replace older plants, with each new facility providing a new opportunity to do better than before. We should also incentivise energy recovery within these plants in order to improve consumer approval of the industry. To sum up, there are three key ways that this can be done. Firstly, these newer plants should be decentralised and closer to customers – particularly in the case of renewables so that the energy they produce can be used locally more immediately to avoid the need to balance it across a wider grid. Secondly, these plants should be used more to power electric vehicles. And finally, the plants should be more energy efficient themselves, for example recovering excess heat to heat hot water – as in Combined Heat and Power plants.

PD: Those are two different questions actually, and they're mostly independent. The question is only strategic for those who want to take advantage of today’s rules or of short term opportunities. In the longer term, the question will have limited consequences.

What are the biggest challenges of managing and implementing flexibility as part of the system?

FR: The biggest challenge will be to put in place a market and regulatory framework that will remunerate flexibility in a fair way, and level the playing field between different assets.

SH: One of the challenges is a lack of settlement period billing for smaller customers. So you've got half-hour settlement for large customers but not for smaller customers. This makes it more difficult to bring in wider balancing benefits, although that should change as smart meters are rolled out. There is a degree of misunderstanding between consumers and elements of the industry that still like building large kit to generate power. Ultimately, large infrastructure is still an important part of the industry; we can't do without it. In addition, the understanding, knowledge and potential of what is coming in terms of decentralised energy, power management, data analytics and a more cost-efficient, smart way of providing energy is going to force change and this may not be welcomed.

GB: The most important challenges are technological innovation and the need to provide clear and long-term energy policies that offer choice between the various environmentally-friendly options.

PD: New technologies, new ways to operate, new architecture on the grid, new consideration of what is distributed power generation rather than centralised generation. There's a lot of changes. But ultimately it will allow us to build something better. Going even further, all centralised and decentralised generation could be replaced by a kind of cloud in which we produce, consume, and generate our energy and also bring back the recovered energy.

How can the industry overcome these challenges that you’ve identified?

FR: I think the industry needs to proactively engage with policy makers and regulators to reform power market rules to provide a fair remuneration for flexibility. It is too often the case that flexibility is not valued properly in current markets and it is too often the case that there is not a level playing field between different flexibility sources.

There is a big effort needed to make policy makers and regulators understand how flexibility is critical to maintain the stability of the system going forward and that it is important to remunerate it in a fair way. The industry can talk to policy makers and regulators to really shape the rules of this market in the years to come.

SH: We need to drive new, smarter technologies and commercial approaches. There's a lot of money around interesting start-ups and their initial funding rounds. At the other end of the scale there's a lot of money being invested by very large businesses from outside of the sector, such as internet companies, who can spend hundreds of millions of pounds investing in 'the next big thing'. There's a real issue around how you promote industry-scale proof of concept. In the world of smart that means a trial of two or three million users. Finding funds for that is a real issue. It is something that's being looked at by all stakeholders from governments to multinationals and players in the industry (and others outside of it). To succeed we will need different ways of looking at value chains, business partnerships, and collaboration to unlock the value. But, when it does happen it's going to drive change fast – it will appear to have come out of nowhere.

GB: It is crucial to provide a clear and stable energy policy that truly looks to the long-term. We need to stimulate investment in the sector as a matter of urgency – it needs to be completely restructured through the introduction of novel technologies, allowing a cheaper and cleaner source of power for a new generation of smart cities.

PD: Creating a more sophisticated system to balance supply and demand will take some time. There will probably be both spectacular successes and dramatic failures, as mostly these evolutions will be driven by market competition. I remain very confident in the potential of flexibility on the system to enable the enormous task of bringing electricity to the world.

The POWER-GEN Europe and Renewable Energy World Europe conference and exhibition will take place on 21st to 23rd June 2016 in Milan. The event remains the destination of choice for stakeholders to gain and exchange key insights and learning as all aspects of Europe’s energy transition come under the spotlight.

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