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Abstract

The article presents a model of regulating ancillary services provision in a decentralised manner. A concept of the operation of local markets for ancillary services is presented. Exploitation of the service provision capabilities of recipients, distributed sources,

and local system operators is proposed. The role of Distribution System Operators is discussed, as well as of energy traders, as intermediaries in the procurement of regulating services from distributed providers.

A DECENTRALISED MODEL OF THE REGULATING ANCILLARY SERVICES MARKET

Paweł Bućko / Gdańsk University of Technology

This study has been financed with funds allocated to science in 2008-2010 as research project N511 376235

1. INTRODUCTION

Currently, ancillary services are procured and managed in a centralized model by the Transmission System Operator (TSO). The services procurement mechanism, although included in the mechanisms of Balancing Market (BM), in practice operates as a separate mechanism, especially in terms of trade. Integration covers mainly the technical aspect of BM operations [3, 4]. Power required in various types of reserves is treated as a technical limitation in the development of daily coordination plans. System power plants mainly participate in the provision of the services; the biggest recipients may be involved to a very limited extent. Price for the services is not determined in an auction cycle, but their pricing is based on either simplified estimation of the service provision costs (with regard to primary and secondary regulation), or at the rate negotiated in bilateral agreements (with regard to emergency reserve, prices are determined on the basis of the rates negotiated in annual contracts). Primary and secondary reserve is valued based on the prices for generation forced in sources, which result from cost-based pricing and in practice are regulated prices. Emergency reserve is priced based on the rates negotiated in annual contracts. The rate cannot be currently modified in relation to the actual system condition. Therefore, in practice there is no active competition of reserve suppliers.

The mechanism needs to be modernized if the services are to be provided under competitive conditions. It is proposed to decentralize the regulation services management. In order to exploit the opportunity to provide services by distributed sources and receivers, it is appropriate to introduce intermediaries to the regulating services market. The task of these traders is to aggregate the capabilities of distributed entities and to manage the service provision. In a natural way such traders may assume the role of Distribution System Operators (DSOs). It is proposed to establish local balancing markets managed by the DSOs, and operating as a complement to the system BM. Establishing local balancing markets must be associated with a modification of the system market’s operating principles.

The power reserves necessary for the system’s safe operation is strictly conditioned by the achievable accuracy of demand forecasts. Currently, in the centralized structure of regulating services management, the reserve requirements are adjusted to the system demand forecast. This leads to their overestimation. The current central demand forecast not only increases the required power reserves, but also does not create conditions for use of any regulating mechanism other than that on the generation side. Lack of stimulating mechanisms renders recipients’ regulating capacity practically unused. The market decentralisation may provide such stimulation.

Supply of various services is not evenly distributed in the system. Distributed generation’s current small share in the total generation in the system means that the available range of primary and secondary regulation is concentrated in large system power plants. Market decentralization (in the current generation structure) with regard to primary and secondary regulation will not at present bring about big benefits. The situation will change qualitatively only as the generation capability decentralisation progresses. Distributed sources’ increased share will increase the supply of such services in the area under DSOs’ management.

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The emergency reserve services supply distribution and energy balancing capabilities between the transmission system area and the distribution system areas are more balanced. It is hereby proposed that the decentralization of balancing and services procurement in the first phase will relate to these regulating activities.Most of the effects of implementing these markets’ can be achieved through the launch of organizational activities, and their expected effect will consist in the generation of incentives to exploit the regulating capabilities of recipients and DSOs’ active role in the system balancing management.

Decentralization of the regulating services procurement for secondary reserve will effectively be possible if accompanied by decentralisation of the secondary regulation structure in the system. Due to the significantcosts of implementing such structures, its rationale may be analyzed when the supply of these services in the DSO areas of OSD has considerably increased. The decentralisation’s second phase will be conditioned by the appropriate development of distributed sources.

2. MODIFICATION OF THE SYSTEM BALANCING MARKET OPERATION

2.1. Changes in the Balancing MarketThe following medications are proposed for the Balancing Market’s mechanisms:• primary and secondary regulation services should be priced based on an offering mechanism, subject

to rules similar to the energy balancing service procurement rules• procurement of balancing energy and regulating power reserves should be optimised together,• buyers (recipients, traders, and DSOs) should be capable of assuming active positions in the BM

mechanisms,• DSOs (and traders) should be capable of the emergency reserve service provision (agency in service

procurement in the distribution grid areas).The evolution of secondary regulation related market mechanisms may aim at further decentralization,

associated with the introduction of a hierarchical and pluralistic structure of the secondary regulation in the system. This phase may be contemplated in the event of distributed generation’s significant development in thedistribution grid areas.

2.2. Primary and secondary regulation bidding mechanismCurrently the Schedule Units offering primary and secondary regulation do not quote prices for these

services. The service provision is priced for each customer individually based on the forced generation cost. Therefore the service providers cannot compete on price. In order to enable such competition, it is proposed that entities obliged to maintain the efficiency of control systems shall submit price bids for the service provisionin daily cycles, synchronized with price bids for balancing energy submitted to BM.

The demand for reserves in primary and secondary regulation for each hour of the day shall be determined, like presently, on the basis of technical criteria.

In such a case the service providers are selected based on the price quotes’ auction. It is proposed that the services for each supplier shall be billed based on the equilibrium price for the hour of trade. This settlement of accounts method increases the market participants’ tendency to submit bids resulting from actual costs incurred by the bidder. To avoid the abuse of market power by dominant players, it is proposed to set an upper limit for an acceptable market bid contingent upon the costs incurred by the service provider. Due to the complicated service provision costing rules, it is proposed that the upper price bid limit for a Schedule Unit shall be dependent on the forced generation cost determined for the purpose of BM.

At present the basic elementary interval of time for electricity billing in domestic trade is one hour. In such settlements the effects of second and minute regulations are often averaged and do not consider the power plant units’ actual participation in the regulation. In settlement of accounts for the balancing energy resulting from implementation of second and minute regulations

the system condition should be identified more frequently than once every hour (e.g. every few minutes).It seems that the most reasonable would be to introduce billing by the ex post principle, on the basis of the system condition’s temporary identification. To simplify the billing process, the temporary prices may beintegrated over longer periods of time, e.g. hours.

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2.3. Joint optimisation of balancing energy and regulating power reserves procurementAll regulation reserves and balancing energy should be procured on the joint optimisation principle. The

criterion should be the total of all costs incurred by the BM operator. The currently used criterion leads to minimization of the balancing energy procurement cost (including costs of forced generation and of starting the units). After supplementing with the regulating services procurement cost items, the criteria function has the following formula:

where:OPChi – price bid of the schedule unit for the provision of primary reserve service in the hour hPjh – scheduled usage of primary reserve of the schedule unit i in the hour h OWChi – price bid of the schedule unit for the provision of secondary reserve service in the hour hPjh – scheduled usage of secondary reserve of the schedule unit i in the hour h OIChi – price bid of the unit i for the provision of emergency reserve service in the hour h RIhi – scheduled usage of emergency reserve of the schedule unit i in the hour h OFChik – price bid for electricity generation in the range k of the bid of the schedule unit i in the hour hEhik – scheduled electricity output in the range k of the bid of the generation unit i in the hour h CWi – price for forced generation by the unit iERhi – electricity input to the system during start of the generation unit i in the hour h, in the amount resulting from the initial start up conditions and the relevant start up characteristicsRZhi – decision variable (0 or 1) representing start up of the generation unit i from the cold state ending in the hour hCUZi – price for start of the generation unit i from the cold stateRChi – decision variable (0 or 1) representing start up of the generation unit i from the warm state in the hour hCUCi – price for start of the generation unit i from the warm stateRGhi – decision variable (0 or 1) representing start up of the generation unit i from the hot state ending in the hour hCUGi – price for start of the generation unit from the hot stateNO – number of the generation units submitting balancing bidsHk – number of hours covered by the optimisation.

Benefits of the joint optimisation of purchase costs of various regulating services are accounted for in analyzes of various power systems [1, 5, 6, 7].

2. 4. Active participation of buyers in Balancing MarketAt present electricity buyers are represented on BM by passive schedule units. Allowing active participation

in the balancing of schedule units assigned to the BM participants that take electricity buyer positions is meant to allow these units’ submittal of offers for reducing energy demand, at certain price levels determined in the offers. Inclusion in the electricity balancing of offers submitted by buyers will have an impact on the level of global settlement prices designated for BM.

(CRO prices and derivatives). The buyer’s offers will be competitive to the now accepted offers of generation units. In addition to influencing the MB price level, the receiving schedule units’ active position is supposed to enable trading and distribution companies’ brokerage in the submission of the aggregated regulating bids obtained from entities dispersed in the distribution grid or participating in balancing groups.

2.5. Provision of emergency reserve service by Distribution System Operators and trading companies

Currently, the emergency reserve service may be provided by pumped storage and gas power plants (via active TSO Schedule Units) and end-recipients (who have entered into a contract for the provision of the

RPp

RWp

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service with the TSO). Due to the scale of the system Balancing Market, the TSO is willing to enter into contracts for the emergency reserve service provision directly with recipients, who are ready to offer sufficiently largepowers – the pool of potential service providers narrows to the largest recipients with the technical capabilities of dispositional control of their own consumption. Also medium-sized industrial recipients have these technical capabilities, but due to the smaller powers they offer they may not conclude agreements directly with the TSO.

It is proposed to allow the emergency reserve service provision by trading companies Distribution System Operators. They could offer the service in quantities suited to the scale of BM, and they would make adequate power available as a result of aggregation the capabilities of entities dispersed in their own grids.

2.6. Decentralisation of secondary reserve procurementThe current structure of the system and the existing regulating solutions are adjusted to centralised

procurement of the secondary reserve services and its use by the ARCM system controller. The small share of distributed generation makes these sources remain largely outside the central dispatch or TSO’s coordination. As a consequence, they are not used for the secondary reserve service provision, and this function in the system is fully implemented by large system power plants.

If the share of distributed generation will grow, then utilisation of these sources’ capacity for the secondary reserve service provision should be considered. Effective utilisation of the distributed reserves for secondary regulation will be possible if the configuration is modified with secondary regulation automatic controls in thesystem. The current system with one central regulator may be replaced with a system with several areal regulators and one central regulator that collaborate in a pluralistic or hierarchical system. A pluralistic structure is the most adequate to the current ties relative to organisation of the electricity commodity market at the KSE National Power System with the wholesale and retail markets. As shown in [2], in the case of decentralized regulation, organized in a pluralistic structure, there are fewer consequences in terms of regulation energy flows betweenregulation areas, and if the structure of separate areas is properly planned it is easier to organize the energy market, and the interareal settlements for energy flow in particular. To achieve this, there must be sufficientsecondary regulation reserves available in each regulation area. Implementation of a decentralized structure should be correlated with the rate of decentralization of power generation in the system. Decentralization will allow for efficient use of local regulation reserves and will be an additional incentive promoting furtherdevelopment of distributed generation.

It should be noted, however, that modification of the secondary regulation structure will require extensionof the data and regulation signals transmission system.

3. LOCAL BALANCING MARKETS

3.1. Local balancing market tasksIt is proposed to establish local balancing markets in the grid areas managed by DSOs. The purpose of

such markets should be to use local energy balancing capabilities of the recipients and generators connected to the distribution network, who are not subject to the central coordination provided by TSO.

The result of establishing such markets by DSOs should be the possibility to actively control non-balancing of an area for the purpose of settlement on the system Balancing Market, by utilisation of the balancing bids submitted to a DSO on the local market. A consequence of the establishment of local balancing markets should be providing the local market operators with the option to make active bids for schedule units of such participants of the system BM. A local market operator can then act as an intermediary and aggregator in the energy balancing service provision between distribution grid areas and the system BM.

Following the local balancing market establishment DSOs will obtain the opportunity to reduce the cost of participation in the system BM and to submit balancing bids (resulting from balancing offers locally acquired) to the system market. The system BM will use balancing bids submitted by local market operators, according to the rules of competition of bids accepted at the system BM.

It is proposed that within local balancing markets the energy balancing service shall be acquired, as well as the emergency reserve service. At present there are sufficient technical resources to provide such services in

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distribution grid areas. In the future, when the supply of other services to local markets increases (mainly due to distributed generation development), expansion of the scope of such markets’ business with other types of services should be considered. The introduction of a secondary reserve as a service to local markets will require the secondary regulation structure decentralization discussed earlier.

3.2. Local energy balancingThe local energy balancing service will be procured in a local balancing market on the basis of offers

submitted by recipients (for energy consumption reduction) and generators (for output increase/reduction compared to the contractual position), and traders (for change in the energy consumption by a balancing group). It is proposed that the formulation of offers on a local market and optimisation of their selection by a local market operator shall be similar to the rules of the system BM.

Simplification of the rules of offering on a local market with respect to offering time periods is proposed.Submittal of offers with validity periods over one day should be permitted. In designing the offering process the organizational costs of potential market participants should be limited. The daily offering requirement may impede participation in the market, particularly as regards recipients.

The possibility of current use of energy balancing offers requires modification of the dispatch proceduresof the power of distributed sources and recipients by DSOs. Effective exploitation of recipients’ balancing capabilities requires the offered power’s availability to DSO dispatch. The service should be activated in a manner agreed with the dispatch (automatic response to signals transmitted from DSO, or access to power by way of remote command). As regards recipients who announce their willingness to participate in the energy balancing, remote (from DSO) control is possible of the power of specific receivers (in accordance with the general principlesagreed between the DSO and the recipient) or by sending remote commands to the recipient. As regards exploitation of a recipient’s balancing offer it is appropriate to establish rules of recipients’ prior notification ofthe need to use the offer by the DSO in advance, stipulated in the respective bilateral agreement.

A portion of the power used by a DSO on the recipient side may be procured by way of DSM procedures. The accounts for an energy balancing service so provided may be settled between DSO and the recipient, whose offer is used, subject to rules different from the general billing principles on the respective local balancing market. The settlement shall be tailored to the principles adopted in the demand side control strategies in use in the respective area.

3.3. Procurement and usage of emergency Making emergency reserve available to a local market should be (as in the system market) preceded by

conclusion of a future contract for the service provision by and between the DSO and the supplier. Accounts for the service provision (because of its probably rare use) should in all cases be settled on the basis of two rates negotiated with the service provider (stipulated the future contract):

• for the readiness to provide it (billed at a time when the regulating power is available for the DSO’s dispatch),

• for the usage (billed with regard to the regulating energy obtained from the supplier as a result of the service’s deliberate use by the DSO).

The readiness to provide the service should be procured on the basis of periodic auctions, organized by DSOs in the areas of the respective local balancing markets. The following entities may provide the emergency reserve service to a local market:

• generators with technical capabilities of emergency power’s fast delivery to the system (gas-fired,hydro),

• recipients offering the option of quick reduction of their energy consumption,• traders that intermediate in submitting offers of the market participants included in a trader’s schedule units.Contracts for the emergency service provision should include agreed rules of quick access to the power

and, possibly, principles of prior notification of the need to use the power.DSO may use DSM strategies for exploitation of the emergency power located at distributed recipients.Exploiting the emergency reserve offers obtained from a local balancing market the local market operator

may submit aggregate offers to the system BM. The DOS role shall be limited to the intermediary in the service provision. The emergency reserve service shall be used to restore secondary regulation reserves.

After possible decentralization of the secondary regulation structure, the emergency reserves shall be in the first instance used to restore local power reserves in secondary regulation.

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REFERENCES

4. LOCAL MARKET IMPACT ON THE SYSTEM MARKET OF REGULATING SERVICES

Local markets should create a competitive offer for the service providers on the system BM. Exploiting the regulating offers obtained from their local markets and aggregating them to the volumes that may be offered on the system market, local market operators will create a competitive offer for the existing service providers. With the proposed organisation of the markets, the competitive offer of the service will mainly focus on balancing energy and emergency reserve.

Local use of reserves for areal balancing will allow for a reduction of the operating costs of system BM participants operators RB (demand for balancing energy in this market will decrease). In the context of local balancing market operations not only the exploitation of dispersed balancing capabilities is important, but also the opportunity to forecast the demand more accurately than on the system market. The effect of these two factors should reduce the global balancing costs.

It is expected that in the proposed structure the main effect will be achieved through the exploitation of local balancing capabilities, while the balancing energy transfer to the system market will be an additional effect of a smaller scale.

In this author’s opinion, in order to propose a secondary regulation market structure it is necessary to obtain the ability to cover the local demand for the service. An undesirable situation is when the structure of markets and allocation of regulating power would require large flows of regulating energy: intertribal and between areas and the system market. The purpose of the local markets’ establishment should be to exploit local regulating reserves and to create incentives for their development.

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Energetyki, 2007 , vol. XXXVII, specjal issue: XII International Scientific Conference “Current Problems in Power Engineering – APE07” , 2007.

5. Chen J., Thorp J.S., Thomas J.R., Mount T.D., Locational pricing and scheduling for an integrated energy-reserve market. Proceedings of the 36th Hawaii International Conference on System Sciences, IEEE, January 2003.

6. Chicco G., Gross G., Competitive acquisition of prioritizable capacity-based ancillary services, IEEE Transactions on Power Systems, vol. 19, issue 1, Feb. 2004.

7. Korab R., Łączna optymalizacja energii bilansującej i operacyjnych rezerw mocy na konkurencyjnym rynku energii elektrycznej, Przegląd Elektrotechniczny, No. 9, 2006.

Paweł Bućko / Gdańsk University of Technology