-
A European Project Supported by the European Commission within
the Sixth Framework Programme for Research and Technological
Development
This document contains information, which is proprietary to the
FENIX Consortium. Neither this document nor the information
contained herein shall be used, duplicated or communicated by any
means
to any third party, in whole or in parts, except with prior
consent of the FENIX Consortium
Contract Nº: SES6 - 518272
FENIX Regulatory Framework
(WP 3.2.5)
Main authors: ELIS Dafydd, HUTTON Andy, SOOR, Simardeep WARHAM,
Tim
Company: Pöyry Energy Consulting
Address: King Charles House, Park End Street, Oxford, OX1 1JD,
UK
Telephone: +44 (0)1865 722660
Fax: +44 (0)1865 722988
Email: [email protected]
Further Authors: IBERDROLA: MARTI Juan, CORERA José Manuel
GAMESA: NEIRA Oscar
RED ELECTRICA: ALVIRA David
ZIV: YARZA José Miguel
LABEIN: MADINA Carlos
ECN: van der WELLE Adriaan, JANSEN Jaap
PÖYRY: MATERAZZI-WAGNER Christine,
POSPISCHIL Wolfgang, OLSACHER Nicole
WOODHOUSE Stephen
BRADBURY Simon
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Document information
Document ID: Fenix-WP3-POYRY-1
Date: November 2008
Issued by: Pöyry Energy Consulting
Work Package / task: WP3.2.5
Status: Final
Dissemination level: Internal WPs
Distribution: Partners
Document history
Version Date Modification Author
0.9 Dec 2006 Draft for comment Hutton, Elis & Warham
1.0 Dec 2006 Final report Hutton, Elis & Warham
1.1 Jul 2008 Draft Final for comment Soor, Elis & Warham
3.0 Aug 2008 Draft Final for comment Soor, Elis & Warham
4.0 Nov 2008 Final report Soor, Elis, Bradbury &
Woodhouse
Approvals
Version Name Company Date
1.0 Tim Warham Pöyry Energy Consulting December 2006
3.0 Stephen Woodhouse
Pöyry Energy Consulting July 2008
4.0 Stephen Woodhouse
Pöyry Energy Consulting November 2008
Abstract
This document describes the aspects of the regulatory framework
that are considered critical to the development of flexible
networks with significant contribution from Distributed Energy
Resources. Barriers that presently undermine the development of the
virtual power plant concept are identified and analysed. Incentives
that would be necessary to encourage development are described and
regulatory constructs that are considered necessary for such
outcomes are presented. Due consideration is given to realising the
full value attributable to Distributed Energy Resource and
allocating it optimally. The entire analysis is undertaken with
particular reference to the context of GB and Spain, but is
informed by experience of other European countries.
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CONTENTS
TERMINOLOGY
....................................................................................................................
1
EXECUTIVE SUMMARY
.........................................................................................................
4
1. INTRODUCTION
.........................................................................................................
12
1.1. The Fenix
concept........................................................................................................12
1.2. Objectives of the Fenix project and of this report
...........................................................12
1.3. Report structure and approach
.....................................................................................12
2. PREVIOUS WORK ON REGULATION FOR DISTRIBUTED ENERGY RESOURCES:
A LITERATURE REVIEW
............................................................................................................................
14
2.1. Previous European Projects regulatory analyses
.............................................................14
3. GOALS OF REGULATION FOR
FENIX............................................................................
23
3.1. Increased participation in wholesale markets
.................................................................23
3.2. Provision of ancillary services from DER
........................................................................25
4. CVPP AND TVPP BUSINESS
MODELS............................................................................
28
4.1. CVPP business
activities................................................................................................28
4.2. TVPP business
activities................................................................................................29
5. CURRENT REGULATORY FRAMEWORKS FOR ELECTRICITY
MARKETS............................ 31
5.1. Liberalised Market Regulatory Overview
........................................................................31
5.2. Regulation at the European
level...................................................................................33
6. CURRENT EUROPEAN AND NATIONAL POLICY AND REGULATION FOR
DISTRIBUTION NETWORKS AND DER
........................................................................................................
38
6.1. European level
.............................................................................................................38
6.2. Great Britain
................................................................................................................42
6.3. Spain
..........................................................................................................................51
6.4. Netherlands
.................................................................................................................65
6.5. Austria
........................................................................................................................71
6.6. Conclusions
.................................................................................................................74
7. VPP CASE STUDIES
(GB).............................................................................................
77
7.1. Introduction to Case Studies and VPP Business
Activities................................................77
7.2. CVPP Case Study 1 - SmartestEnergy
............................................................................78
7.3. CVPP Case Study 2 – EDF Energy (Energy and Customer Branch)
...................................80
7.4. CVPP Case Study 3 - Flexitricity
....................................................................................82
7.5. TVPP Case Study 1 - EDF Energy Networks Branch
........................................................84
8. BARRIERS WITHIN CURRENT FRAMEWORK
.................................................................
86
8.1. Great Britain (Northern
Scenario)..................................................................................86
8.2. Spain (Southern Scenario)
............................................................................................91
8.3. Netherlands
.................................................................................................................97
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8.4. Austria
........................................................................................................................98
9. FUTURE REGULATORY FRAMEWORK
.........................................................................
100
9.1. Design of Regulation
..................................................................................................100
9.2. Summary of recommendations for Great Britain and Spain
...........................................102
9.3. Regulatory recommendations
.....................................................................................103
9.4. Implementation considerations
...................................................................................105
APPENDIX 1 –
BIBLIOGRAPHY..........................................................................................
108
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TERMINOLOGY
The following list sets out explicitly the definition of some of
the key concepts discussed in this paper and their acronyms. For
convenience, we have reproduced here the definition of the terms
CVPP and TVPP found in the Fenix Glossary (version 0_2).
(G)DUoS (Generation) Distribution Use of System Charges levied
to demand or generation for use of the distribution system
AMR Automated Meter Reading A system for reading of meter data
without physical inspection
BETTA British Trading and Transmission Arrangements GB Trading
arrangements post 2005, creating single GB wholesale market
CAPEX Capital Expenditure Expenditure on assets such as cables
and transformers
CCL Climate Change Levy GB tax on energy for commercial and
industrial consumers
CHP Combined Heat and Power Generation technologies where heat
and power are produced simultaneously
CVPP Commercial Virtual Power Plant A CVPP is a VPP with an
aggregated profile which includes cost and operating
characteristics for the DER portfolio, it does not include
distribution network location/constraints.
Services/functions from a CVPP include trading in the energy
market and balancing of trading portfolios.
The operator of a CVPP can be any third party/BRP with market
access; e.g. an energy supplier.
DER Distributed Energy Resource Term encompassing distributed
generation, energy storage and demand management
DG Distributed Generation Generation connection to medium and
low voltage distribution networks
DNO Distribution Network Operator GB term for distribution
business, including asset ownership and operation
DSM Demand Side Management Load shifting or other demand
response in order to gain added value
DSO Distribution System Operator Party with responsibility for
operation of low and medium voltage networks
DTe Directie Toezicht Energie Regulator of the Netherlands
electricity market
ELEG Embedded Licence Exempt Generator Smaller distributed
generators which are not required to hold a generation licence
IFI Innovation Funding Initiative GB incentive to innovate for
Distribution Network Operators
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LEC Levy Exemption Certificate Certificate gained by some
renewable and CHP generators sold to offset CCL
LS-VPP Large Scale Virtual Power Plant Aggregation of multiple
DER into unit with similar scale to central generation
MNa Nederlandse Mededingingsautoriteit Netherlands competition
authority involved in electricity market
NETA New Electricity Trading Arrangements England and Wales
wholesale trading arrangements between 2001 and 2005
Ofgem Office of Gas and Electricity Markets GB independent
regulatory body for both gas and electricity markets
OMEL Compania Operadora del Mercado Espanol de Electricidad,
S.A. Operator of Spanish wholesale market
OPEX Operating Expenditure Expenditure on ongoing costs such as
labour
PPA Power Purchase Agreement Medium to long term export
contracts. Generally used for output from wind farms etc.
RD Real Decreto (Royal Decree) Spanish primary legislation,
equivalent to UK Acts
RE Régimen Especial Spain’s regime for promotion of generation
under 50MW including cogen and renewables
REE Red Eléctrica de España Spanish Transmission Operator
RES Renewable Energy Sources All sources of renewable power
including wind, solar, wave and biomass
RO Renewables Obligation UK Obligation for suppliers to source a
specified percentage of power from renewables
ROC Renewables Obligation Certificate Certificate to prove
generation from renewable source for Renewables Obligation
RPZ Registered Power Zone GB incentive for innovative connection
options in Distribution Networks
SoS Security of Supply Aspects relating to the reliability and
availability of an adequate electricity supply
TNUoS Transmission Network Use of System
Charges levied to demand and generation for use of the
transmission system
TSO Transmission System Operator Party with responsibility for
operation of high voltage networks and often overall system
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TVPP Technical Virtual Power Plant A TVPP is a VPP with an
aggregated profile which includes the influence of the local
distribution network on DER portfolio output.
Services/functions from a TVPP include system management for DSO
and TSO and ancillary services.
The operator of a TVPP requires detailed information on the
local network; typically this will be the DSO.
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FENIX REGULATORY FRAMEWORK (D 3.2.5) EXECUTIVE SUMMARY
It is predicted that the levels of Distributed Energy Resources
(DER) in Europe will grow significantly in future. This is due to a
combination of political pressures to improve environmental
performance and security of supply, and technological advances in
fields such as Distributed Generation and responsive demand.
In this context, the European Union now proposes a binding
target for 20% of EU energy consumption to come from renewable
sources by 2020. It is expected that this will lead to much higher
quantities of wind generation in the future. Given the variability
of wind generation and implications that this has for operating
reserve requirements, DER is likely to have increased importance
for the operation of the electricity system in the future.
Currently, distributed generators tend not to participate
actively in wholesale electricity markets. They do not usually
provide ancillary services to the System Operator, and the practice
of using Distributed Generation to actively manage distribution
networks is not widespread. Similarly, controllable demand and
electricity storage are not significant participants in markets for
power and ancillary services.
The Fenix concept was developed in order to improve the
participation of DER in these areas. This is achieved by
aggregating the output of a large number of Distributed Energy
Resources using a Virtual Power Plant. The Virtual Power Plant can
control the Resources within its portfolio, trading the energy
generated and offering ancillary services to the Transmission
System Operator and the Distribution System Operator.
There are four underlying themes associated with this
deliverable:
• the regulatory framework needs to facilitate DER integration,
not just its connection;
• in the context of liberalised energy markets, the integration
of DER requires effective communication between the unbundled
aspects of the electricity supply chain and appropriate commercial
incentives for the parties to utilise DER efficiently and
economically;
• electricity market regulation to date has predominantly
focused upon cost minimisation and the promotion of competition and
the integration of DER has not been a priority; and
• although there are major variations in the detailed design and
operation of electricity markets in different countries, meaning
that the regulatory recommendations must be specifically tailored
for each country, there is a common set of themes which emerge from
the overall recommendations provided in this document.
Current Regulatory Context
The technologies required for realisation of the Fenix concept
are already commercially available or at an advanced stage of
development. Initial economic analysis of the concept suggests that
there are economic gains to be realised by its implementation. The
regulatory regimes in the countries studied in this report present
real obstacles to widespread implication of the Fenix concept,
despite the lack of technical barriers and the magnitude of
potential economic benefit for consumers. Some of these barriers
are so significant that they risk preventing the development of
Fenix-like schemes in Europe.
A new draft Renewables Directive was issued by the EC as part of
its package of climate change measures at the beginning of 2008.
The development of this legislation will be important for the
future development of Fenix products. The present drafting relating
to priority dispatch and priority access (contained within Article
14 of Clause 2 of the draft Renewables Directive, dated 17 October
2008, which is subject to further revision) reads as follows:
“Subject to requirements relating to the maintenance of the
reliability and safety of the grid, which shall be based on
transparent and non-discriminatory criteria defined by the
competent national authorities:
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a) Member States shall ensure that transmission system operators
and distribution system operators in their territory guarantee the
transmission and distribution of electricity produced from
renewable energy sources;
b) Member States shall also provide for either priority access
or guaranteed access to the grid-system of electricity produced
from renewable energy sources;
c) when dispatching electricity generating installations,
transmission system operators shall give priority to generating
installations using renewable energy sources insofar as the
operation of the national electricity system permits and based on
transparent and non-discriminatory criteria.”
Progress to date
The electricity industry across Europe has undergone a process
of liberalisation during the last two decades, driven by pressure
to introduce competitive market forces from both national
governments and the European Commission. This report examines in
detail the current regulatory framework in Great Britain and in
Spain, the locations of the Fenix demonstrator projects. The
British market is considered to be a front-runner in liberalisation
with the major reforms dating from 1989 and almost continual reform
taking place since that time. It is not that the GB situation is
felt to be perfect; rather that many of the problems have been
encountered and addressed, if not completely solved. Spain has also
introduced competition in generation and supply, and faces
challenges of its own as it seeks to develop its electricity
system. Progress has been made across Europe in the following
areas:
• open, competitive wholesale electricity markets;
• open network access for distributed generation;
• transmission system operators have been formed which procure
balancing and ancillary services with incentives to procure these
services economically and efficiently;
• incentives and obligations have been placed on relatively
independent distribution network owners/operators to connect
distributed energy resources; and
• strong support mechanisms are operating for renewable
distributed generation, whether through feed-in tariffs, tradable
certificates or supplier obligations.
Remaining areas for resolution
A number of the problems being experienced by Member States are
relevant to the Fenix concept. Some of these are:
• Data on electricity use and production from most consumers and
smaller distributed generators is estimated or read at long
intervals, often only once a year. Market data to represent their
consumption or generation is then either applied through
pre-determined average profiles or simply netted off the aggregated
position of a large supplier. Data that would allow their actual
contribution to network costs to be evaluated and optimised
(real-time generation or consumption, for example) generally does
not exist.
• The charges levied on demand and generation connected to
distribution networks still do not accurately reflect costs of
providing and operating the network and any benefits of location or
flexibility are mostly hidden.
• Distribution network operation is still for the most part
passive. New technology is applied to reduce the cost of ownership
and to improve quality of service in order to reduce penalties for
poor service quality. However the concept of active network
management, optimised both in their planning and operation with the
full integration of distributed energy resources, remains for the
most part elusive.
• The balance between regulated revenue allowances to the system
operators for capital expenditure (capex) and operational
expenditure (opex) often fail to provide appropriate incentives for
them to use DER to manage the networks. This means that active
network
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management using DER is not being undertaken in cases where it
could offer a more economic and efficient solution than additional
infrastructure investment.
• Markets may have been opened, but the full participation of
DER is still fraught with difficulties. Vertical integration is
commonplace in the wholesale markets, which can limit liquidity and
transparency. This tends not to encourage innovation on the part of
larger supply businesses to increase the utilisation of DER.
Innovative companies seeking to use aggregation and active
management operate at the fringes of the market, with the result
that DER utilisation is limited.
• Support mechanisms tend to focus narrowly on pure renewable
sources such as wind and solar with their well-known challenges
from market and network perspectives. Meanwhile flexible,
controllable sources close to demand such as combined heat and
power that can make significant contributions to greenhouse gas
emissions reduction as well as to network management are often
excluded. Furthermore, support mechanisms that pay prices
considerably in excess of those necessary to make sources of
renewable generation viable tend to remove incentives for
flexibility and innovation. Excessive support produces inefficient
allocation of resources and derives less benefit per unit of
subsidy.
• Participation of distributed demand and storage is largely
absent in either markets or networks. This is primarily due to a
lack of price signals or other incentives, but also to a lack of
metered data and the absence of mechanisms for automatic
response.
These problems, when taken together, represent a major challenge
to DER in all Member States.
Proposed regulatory changes
There are a number of steps that should be taken by electricity
market regulators and/or policy-makers in order to remove barriers
to Fenix and allow the economic benefits of the concept to be
realised.
Metering and communication
Where governments or regulators mandate the use of smart
metering, such meters should be required to be capable of real-time
communication with other devices,
including a third party aggregator. The Energy End-Use
Efficiency and Energy Services Directive (2006/32/EC) made it a
requirement for smart metering to be installed where it could be
shown that this would result in energy savings. Some Member States
have embarked on extensive programmes of smart meter installation.
The specification of smart meters being introduced varies from
country to country, however. Unless these meters have the capacity
for real-time (or close-to-real-time) communication with a third
party agent and DER, using common protocols, then these meters will
represent a barrier to rather than an enabler of the implementation
of Virtual Power Plants.
Governments and regulators must ensure that different smart
metering and related
control technologies are interoperable. A range of technologies
is emerging in metering and communications and there is an
inevitable degree of competition between different technologies and
standards in these areas. 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 to permit changes form
supplier to supplier (or between CVPPs and/or TVPPs). Where
industry does not define agreed standards of its own accord,
regulators will have to intervene in order to ensure that this
occurs.
Governments and regulators must seek to reduce the degree to
which demand is profiled and ensure that real data is used to a
greater degree in billing and settlement. 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. This is a barrier preventing demand from
participating actively in markets for electricity in individual
balancing periods, potentially resulting in sub-optimally large
wholesale price variations over the course of each day. It also
reduces the incentive for controllable demand to participate in the
market in order to minimise the price it pays for its
electricity.
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Distribution network revenue regulation
Governments and regulators must allow the owners of distribution
networks to benefit when they use active network management to
defer or avoid capital expenditure, where
this is socio-economically efficient. Regulators have attempted
to improve the operational efficiency of network businesses by
incentivising them to minimise operational expenditure while
allowing them to make a return on their regulatory asset base. This
has meant that distribution network owners have an implicit
incentive to maximise their asset base (to the degree allowed by
the regulator) while minimising their operating costs. This serves
as a barrier to the implementation of active network management and
the use of DER to provide distribution-level ancillary services.
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.
Governments and regulators must ensure that unbundling of
network businesses is not
implemented in a way that creates a barrier to beneficial
cooperation between DER and
network operators. The accounting separation of network
activities within vertically-integrated utilities is already
required under European law, and it is likely that this requirement
will be strengthened under the third European legislative package
for electricity and gas markets. Several Member States have
requirements for legal unbundling already in place for distribution
networks. 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. In particular this means that DSOs must be allowed to
communicate with the operators of distributed generators to the
degree that this is necessary to operate active network management
schemes, and that connection methodologies designed to be
transparent and consistent for all generators are allowed to be
sufficiently flexible to allow generators the option of reducing
connection costs by cooperating in active network management.
Ancillary services
Where the electricity industry does not achieve this of its own
accord, regulators must
ensure that there are markets for ancillary services where this
is possible and that there are no unjustified barriers to
distributed generators’ participation in these markets. The market
for ancillary services at a transmission or distribution level is
usually a monopsony (i.e. a single buyer), with the TSO or DSO
contracting for a range of services on terms stipulated by
themselves and approved by the regulator. For some services, such
as frequency response, many TSOs currently do not use any
market-based mechanism to obtain these services, instead requiring
generators to provide the services as a condition of their
generation licence. This has the effect of limiting the providers
of some services to specific classes of generator, to the exclusion
of other generators such as distributed generators or controllable
demand, who might be able to provide the same services at lower
cost. Such arrangements should be replaced with market-based
mechanisms, unless there are strong arguments for retaining them.
TSOs can also impose limits on the minimum size of generators that
provide ancillary services. Where this occurs such limits should
not be set arbitrarily and should not exclude Virtual Power Plants
from participating in ancillary service provision.
Subsidies for renewable energy generation and CHP
Support mechanisms for renewable generation and CHP must allow
such generators to
benefit from participating in ancillary service provision
through a Virtual Power Plant. The Renewables Directive
(2001/77/EC) already requires support mechanisms for renewables to
be cost-effective. Currently, the subsidy offered to energy from
renewable generators is often so generous and in such a form as to
serve as a disincentive to contribute to ancillary service
provision. In designing support mechanisms, therefore, Member
States must ensure that, for example, through adequate additional
regulation, revenues available to renewable generators and CHP are
not reduced when it is economically beneficial for them to
contribute to the provision of ancillary services. For example,
curtailment compensation should at least match potential revenues
foregone. Furthermore, the introduction of socio-economically
efficient time-dependent and location-dependent incentives should
be promoted.
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The message of the present report is that these challenging
goals must all be met for distributed energy resources to be
thoroughly integrated in order that Europe may make this vital step
towards the future of electricity networks.
Summary
The proposed regulatory changes specific to GB (the Northern
scenario) and to Spain (the Southern scenario) are summarised in
Table 0.1 and Table 0.2 respectively. General regulatory
recommendations are summarised in Table 0.3.
SPAIN Key current features Barriers to Fenix Recommendations for
change / solutions
Regulated revenues
DSO revenues are fixed, with year-on-year increases based on
demand growth and RPI. Connection costs are paid by generators.
Costs of new assets are borne by generators, but increases in
opex reduce the DSO‘s profit: an implicit disincentive for lean,
active networks.
Regulators must allow DSOs to benefit when they use active
network management to defer or avoid capital expenditure.
Network design DG seen as a distorting element that complicates
the operation and planning of the networks. Planning methodology is
conservative
Network design methodology is focused on connecting rather than
integrating DG
DSOs should not be required to guarantee physically firm access
to all DG, and must be allowed to use lean network design
methodologies
Invisibility of DG to the DSO
Small generators are not required to send production data to DSO
and can assume physically firm access
DER is essentially invisible to DSOs, making it impossible to
use them to manage the network
Real-time metering of distributed generation should be mandated
(delegated dispatch is a step in this direction)
Wind / other renewable generation
Subsidy for wind is non-marginal so that there is no incentive
for wind generators to participate in balancing markets
Little incentive for wind (and other renewable generation) to
participate in ancillary service provision where this means a
reduction in output
Regulator should put an incentive in place for wind to
participate in downward balancing markets
Distribution- level ancillary services from DG
Reactive power standards for wind and co-generators are defined
in a static table
There is no way for these generators to provide reactive power
services to DSOs dynamically in real time
Wind generators should be allowed and incentivised to contribute
to real-time provision of reactive power depending on network
status
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SPAIN Key current features Barriers to Fenix Recommendations
for
change / solutions
Transmission level ancillary services from DG
Limits exist for the minimum plant size that can contribute to
AS, and for most services the use of mixed production units is
forbidden.
VPPs with a number of different technologies in their portfolio
are not able to contribute to A/S provision.
If not technically needed, minimum plant sizes and constraints
on mixing technologies in aggregated AS provision must be
removed
Metering Metering for most domestic consumers is basic, although
new meters must have time discrimination
Domestic consumers’ metering technology does not have sufficient
IT and communications technology to participate in a VPP
Common standards should be adopted for smart metering that has
the capacity to interact dynamically with VPPs
Supply Most consumers’ tariffs are independent of time-of-day or
season.
Consumers are not exposed to within-day or within-year
fluctuations in price, so they have no incentive to change their
demand profile
All consumer tariffs should be time-varying and dynamic in order
to incentivise economically efficient demand response
Demand-side participation
Only large consumers participate in demand-side management
schemes.
A large proportion of demand (small consumers) does not
participate actively in markets
Time-varying tariffs and public awareness programmes should be
introduced to encourage DSM at a domestic level
Table 0.1: Spain: barriers and recommendations for change
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GB Key current features Barriers to Fenix Recommendations for
change
Regulated Revenues
Distribution network revenues are based on their regulated asset
base
Implicit incentive to build more assets means that active
network management is only used where there are administrative or
cost barriers
Regulators must allow DSOs to benefit when they use active
network management where this is appropriate rather than capital
expenditure
Government Support
Innovation Funding Initiative (IFI) has had success in promoting
innovation and popular with DNOs
The focus is more on measures to connect DER to the network as
opposed to integrating it into the network
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
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
Table 0.2: GB: barriers and recommendations for change
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General Recommendations for change / solutions
Distribution network revenue regulation
• Regulators must allow the owners of distribution networks to
benefit when they use active network management to defer or avoid
capital expenditure, where this is socio-economically
efficient.
• Ensure that unbundling of network businesses is not
implemented in a way that creates a barrier to beneficial
cooperation between DER and network operators in planning and
operational timescales
Metering and communication
• Regulators must seek to reduce the degree to which demand is
profiled and ensure that real data is used to a greater degree in
billing and settlement
• Where regulators mandate the use of smart metering, such
meters must be required to be capable of real-time (or
close-to-real-time) communication with other devices, including a
third-party aggregator.
• Regulators must ensure that different smart metering and
related control technologies are interoperable.
Ancillary services • Where the electricity industry does not
achieve this of its own accord, regulators must ensure that there
are markets for ancillary services where this is possible and that
there are no unjustified barriers to distributed generators’
participation in these markets.
Subsidies for renewable energy generation and CHP
• Support mechanisms for renewable generation and CHP must allow
such generators to benefit from participating in ancillary service
provision through a Virtual Power Plant.
Table 0.3: General recommendations
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1. Introduction
1.1. The Fenix concept
The vision behind Fenix is described in Fenix Deliverable 1.4.0
as follows:
“The current policy of installing distributed energy resources
(DERs) has been focused on connection rather than integration;
typically DERs have been installed with a ‘fit and forget’
approach, based on the legacy of a passive distribution network.
Under this regime, DERs are not visible to the system so whilst it
can displace energy produced by centralised generation it cannot
displace centralised generation capacity. Without active management
or representation to the system, DERs lack the functionality
required for system support and security activities, so centralised
generation capacity must be retained to perform this function.”
The Fenix concept moves beyond this ‘fit and forget’ approach,
and allows DER to become visible to other participants in the
system and therefore participate more fully in wholesale
electricity markets, in the provision of ancillary services at the
transmission (system) level, and in the provision of network
support services to the DSO at the local distribution level.
Fenix would enable DER to participate in these activities by
means of Virtual Power Plants (VPPs). A VPP aggregates the output
of a range of DER and presents it to the TSO as if it were the
output of a single entity. In this way, a VPP is a representation
of a portfolio of DER that encompasses all their relevant technical
and commercial characteristics.
As well as aggregating the output of the DER portfolio, a VPP is
capable of behaving intelligently and dynamically in at least two
ways. First, a VPP is capable, as Deliverable 1.4.0 puts it, of
incorporating ‘network constraints into its description of the
capabilities of the portfolio’. Second, it is able to interact in
real time with some or all the resources in its portfolio in order
to increase or reduce its outputs in response to external
signals.
1.2. Objectives of the Fenix project and of this report
The aim of the Fenix project as a whole, as described in
Deliverable 1.4.0., is “to conceptualise, design and demonstrate a
technical architecture and commercial and regulatory framework. A
framework that enables power systems based on DER (via VPPs) to
become the solution for the future cost efficient, secure and
sustainable EU electricity supply system.”’
This report falls within Work Package 3 of the Fenix project.
This work package has two main objectives. The first is ‘to develop
a commercial framework for a future electricity market that enables
and supports system operation of a large scale Virtual Power Plant
(LSVPP) with significant DERs. The second is ‘to quantify the costs
and benefits of such a “Fenix future” market compared to “Business
as Usual”.’
Specifically, this document reports the findings of task 3.2.2:
Fenix Regulatory Framework. The objective of this task was to
analyse the current regulatory frameworks for distribution networks
and DER, identify regulatory barriers that may be preventing
realisation of the Fenix concept, and make specific regulatory
recommendations that allow the benefits of the Fenix idea to be
realised.
1.3. Report structure and approach
The Chapters in this report can be grouped into three
sections.
The first Chapters discuss the type of regulatory framework that
would be necessary in order to facilitate the commercial
implementation of Fenix. Chapter 2 presents an overview of recent
research projects that have been undertaken into Distributed Energy
Resources, concentrating in particular on the consideration they
gave to regulation. Chapter 3 outlines the goals of regulation for
Fenix, describing how Fenix allows fuller DER participation in
markets for power and ancillary services. Chapter 4 describes the
business models of the CVPP and TVPP.
The second section examines the current regulatory framework
within Europe, identifying areas where current regulation is not in
line with the requirements for implementing Fenix. Chapter 5
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describes the current regulatory frameworks for selected
electricity markets within Europe. Chapter 6 describes current
policy and regulation for DER both from a European level
(concentrating mainly on EU Directives), and at a national level in
a selected number of EU Member States. Chapter 7 looks at case
studies of existing commercial entities in Great Britain who are
involved in activities that are similar to those of a Virtual Power
Plant. Chapter 8 looks in detail at the Northern and Southern
demonstration projects and identifies barriers that exist to these
projects under the Spanish and British regulatory frameworks.
Finally, Chapter 9 makes specific recommendations for regulatory
changes that need to be made in order to allow the Fenix concept to
be implemented across Europe.
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2. Previous work on regulation for Distributed Energy Resources:
a literature review
There has been a great deal of research activity in the area of
regulatory issues surrounding the uptake of DER, and particularly
distributed generation (DG), both at EU level and in GB. Previous
EU projects in the 5th and 6th frameworks have taken different
approaches to the subject of regulation. Almost invariably, as in
this project, consideration of the regulatory framework has formed
a small component of a larger technically-orientated project.
These studies have concentrated largely on DG, excluding other
forms of DER such as controllable demand and electricity storage.
Despite this focus on generation technologies, the extensive work
undertaken in these studies have yielded several results of
relevance to Fenix. On a technical level, DISPOWER, Micro Grids and
DGFACTS all demonstrated that DG can contribute to active network
management.
Many of the studies also had notable regulatory implications.
DISPOWER demonstrated the potential economic benefits of regulating
distribution system operators so as to encourage active network
management. The findings of the Micro Grids study also emphasised
the need for regulation to encourage use of active network
management, and suggested that conditions for DG could be improved
by creating a market for aggregators in the form of VPPs. A
recurring theme in the studies is the need for transparency and
cost-reflectivity in areas such as network connection charging and
imbalance prices.
The following sections provide an overview of the work
undertaken in and the findings of the European-level projects
DG-GRID, DISPOWER, Micro Grids, DGFACTS, DECENT, and SUSTELNET.
They also describe a number of British initiatives that considered
barriers to DG in the GB market.
2.1. Previous European Projects regulatory analyses
DG-GRID
“Enhancement of Sustainable Electricity Supply through
Improvements of the Regulatory Framework of the Distribution
Network for Distributed Generation”
Under the DG-Grid project a regulatory review and international
comparison of EU-15 Member States was undertaken. The focus of the
review was DG and the power grid and included those aspects for
each state that were considered most relevant by the authors and
contributors. The range of issues covered included level of
unbundling, DG support mechanisms, current market participation and
framework developments.
A comparison between Member States examined the differences
in:
• DG market share;
• unbundling level;
• specific DSO regulatory barriers and steps taken so far;
• Support Mechanisms and Balance Access;
• Network Access Issues and steps taken so far; and
• Technical Requirements.
The final conclusions of this document were that “So far the EU
policies have only indirectly been treating DG as one means to
achieve other policy goals, e.g. renewable energy sources (RES)
targets and security of supply. With the creation of a common EU
policy framework for DG, the regulation for DG would be more
focused at promoting DG.”
Although this document was wide ranging and providing a valuable
insight as to the range of regulatory environments existing in the
EU it is very much a high level overview rather than an in-depth
analysis. The overall recommendations concentrate on connecting
rather than integrating DG.
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DISPOWER
“Distributed Generation with High Penetration of Renewable
Energy Sources”
In many European countries DSOs are urged by regulation to
concentrate on cost cutting. There is almost no flexibility to
create value and revenues based on innovative investment,
operations and services. The implementation of advanced information
exchange between generation and consumption is a precondition for
intelligent management of the network, which enables the DSO to
provide market access to DG and use several network and ancillary
services to provide reliability and controllability, and hence
improve customer benefits and cost-effectiveness. The existing
regulations mainly contradict an optimal integration of DG, as they
usually favour centralised generation. However, equal chances for
centralised and distributed generation are a precondition on the
way to a level playing field with correct economic signals. Costs
and benefits resulting from DG should be recognised, allocated, and
valued properly. A dynamic regulation should be able to react to
technological developments as well as to changes in market
conditions. A regulatory environment favourable for DG has to
support structural changes in planning and operation of the
distribution networks.
Lucrative business might just be maintained by focusing on new
DG-related business activities, diversified business model and
active network approach. In parallel, regulation schemes need to
develop such that a wider range of options is available for the
DSOs to optimise their operations.
Advantages DG could provide for the network are:
• enhanced system reliability;
• emissions reductions through both increases in energy
efficiency and the displacement of coal generated electricity;
• avoided transmission line losses and costs;
• congestion relief in the transmission system; and
• other avoided infrastructure investments.
Disadvantages for DSOs caused by DG are that:
• increasing DG penetration may result in decreasing revenues
for DSOs, as DG units generally are located closer to demand and
less transport is needed; and
• increasing penetration of DG may lead to increasing costs, due
to necessary adaptations of the system (stability, power quality
and protection).
Integrating DG and Demand Side Management (DSM) to form VPPs
(virtual large loads as well) could provide profit for the energy
supplier, a turnkey application for the consumer and economic
returns for the DSO. Of course the implementation of advanced
information and communication technology (ICT) systems is a
precondition for the operation of VPPs.
In an active role DSOs could act as market facilitator,
operating a network with bidirectional energy flows and
interactions with consumers and DG. New services and activities
could be introduced, such as:
• Additional reliability: Some consumers might have high
requirements on reliability and power quality.
• System information: Sharing of DSO’s network information
(actual profiles, load flow…) with energy suppliers, DG operators
and DSM initiatives.
• Local balancing services: The balancing of the system,
especially in terms of voltage control, could be managed by the DSO
and profit shared with the TSO or the DG operator.
• Storage: Electricity storage operated by the DSO to support a
levelled profile or for shifting generation to higher price periods
could be also offered to energy suppliers or DG operators.
The adapted business model in Figure 2.1 displays the new
activities.
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Figure 2.1: Adapted business model for DSOs (Source: Dispower,
ECN, Scheepers)
Micro Grids
“Large Scale Integration of Micro-Generation to Low Voltage
Grids”
A review of the regulatory framework in several European
countries shows present practices, addressing technical
requirements for the connection and integration of DG in order to
maintain safety and power quality standards. Various policies also
provide financial support schemes for the different DG technologies
to generally trigger growth in this sector. But still a number of
barriers exist, such as low electricity prices in general, high
investment costs for DG and, most importantly, lack of market
support mechanisms.
Favourable market conditions for DG, especially micro scale,
could be produced by ensuring:
• free access to electricity market for DG generators, rewarding
services to the network as well as energy exported;
• consideration for the intermittent nature of some RES in the
development of balancing schemes;
• incentives for DSOs to change from their present passive
operation philosophy to active network management;
• development of a market for aggregators (virtual power plants,
virtual consumers); and
• cost-reflective network pricing presenting costs and benefits
of DG.
Micro-grids could provide considerable advantages, if integrated
efficiently:
• reduction of overall system operation costs;
• reduction of network losses;
• postponing network investments;
• improvement of reliability;
• adaptable to specific power quality requirements; and
• supporting network services in cases of
disturbance/failure.
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DGFACTS
“Improvement of the Quality of Supply in Distributed Generation
Networks through the Integrated Application of Power Electronic
Techniques”
The DGFACTS project aimed to solve the quality of supply
problems associated with the integration of DG into the electric
distribution network. The FACTS (flexible alternative current
transmission system) concept was introduced to DG networks by
designing a set of modular systems (DGFACTS) in order to optimally
improve distribution networks with high DG and RES penetration.
The primary objectives of the project were to:
• increase stakeholder awareness of the higher efficiency and
sustainability levels that can be achieved with new RES and DG
technologies;
• decrease barriers for generators connecting to the
distribution network by adapting FACTS technology to allow
distribution network operators to manage quality of supply; and
• make new electricity grids more compatible with RES and DG
without compromising quality and safety.
The technical requirements especially concerning power quality
for DG and RES were analysed in detail. An overview can be found at
http://dgfacts.labein.es/dgfacts; Deliverable D1, page 93.
DECENT
“Decentralised Generation Technologies - Potentials, Success
Factors and Impacts in the Liberalised EU Energy Markets”
The DECENT project identified the main barriers and success
factors to the implementation of DG projects within the EU. As part
of its activities, DECENT conducted a survey which assessed what
effect respondents thought each of a number of factors had on the
pervasion of distributed generation. Table 2.1 shows the results of
this survey.
Table 2.1: Results of survey into factors affecting DG uptake
(%). (Source: DECENT)
The survey showed that global environmental concerns, easily
accessible networks and prioritising renewables in power dispatch
were felt to have the greatest beneficial influence for DG uptake.
The presence of large industry players was generally believed to
have an adverse effect due to the perception that large industry
players can discourage DG to enter the market.
Respondents disagreed on whether full liberalisation had a
beneficial or adverse effect. This is due to the fact that
liberalisation is often put forward as the single path to allow
full participation within the markets for all players, but in this
case it could reduce incentives to construct and operate
distributed generation.
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Based on these observations and related analysis, the following
areas were suggested for further research:
• technical solutions to imbalances;
• market solutions to balancing problems; and
• the role of (ICT) in co-ordinating markets and network
operations.
SUSTELNET
“Policy and Regulatory Roadmaps for the Integration of
Distributed Generation and the Development of Sustainable
Electricity Networks”
The SUSTELNET project analysed the interaction of European
electricity infrastructure and markets. The project aimed at
developing regulatory road maps that are appropriate for
decentralised generation as well as being suitable for centralised
generation and network development. It discussed barriers that may
block future penetration of DG, and identified the following as
concerns for the GB market:
• the network issues regarding long term system dynamics, such
as technical, functional and socio-economical factors;
• how policies should be reviewed with in regards to pricing,
market access, benefits and costs;
• whether discussions of regulatory change are happening too
slowly to enable Government targets to be met, and whether more
interaction between the regulator (Ofgem) and the Government could
quicken the pace;
• who would will pay for the extra system costs imposed by the
Government’s sustainable energy targets;
• how back-up capacity would be incentivised in such a way as to
ensure that the technologies which the Government wish to promote
are not undermined;
• how active management could be promoted in such a way that
overall costs of deploying sustainable energy technologies are
minimised;
• whether transmission access decisions will add another barrier
to renewable energy deployment; and
• how biomass generation (identified as having an important role
in achieving the lowest overall cost to the system due to its being
non-intermittent and dispatchable) would be promoted.
The suggested GB regulatory roadmap produced by SUSTELNET is
shown in Table 2.2
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Table 2.2: Regulatory roadmap for GB (Source: SUSTELNET)
To a large extent these timelines have been met for GB. The
focus is still on simply encouraging more DG to connect rather than
integrating it into the overall system.
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2.1.1. GB-Specific Projects
Embedded Generation Working Group
The EGWG was set up in 1999 following a consultation into
Network Access Management Issues in order to examine:
• ways of assessing the degree to which distribution network
operators facilitate competition in generation as well as
supply;
• how design and operation processes could take fuller account
of the contribution made by embedded plant to the operation of the
network;
• the charging regimes employed towards the connection and
operation of such plant;
• the issues which need to be addressed in respect of smaller
and domestic generators;
• the information provided both with respect to the structure of
charges applied to embedded generators (including micro generators
and the use of dual or net metering) and to the opportunities
geographically to developers to connect plant; and
• in the longer term, the scope to design and operate networks
with much higher concentrations of embedded plant and the way in
which incentives might alter the approach DNOs take towards
embedded generation.
In January 2001 the group reported back with a consultation
document outlining the issues and subsequent recommendations to
improve the uptake of DG in the GB market. A number of these
recommendations have been fully investigated (if not implemented)
and these are discussed in more detail in Section 3. In summary
however, two key recommendations were made:
• Ofgem should review the structure of regulatory incentives on
DNOs, in particular assessing the effect on all stakeholders of the
new statutory duty on DNOs to facilitate competition; and
• a longer-term group should be established in order to further
the implementation of the recommendations.
Distributed Generation Coordinating Group
The Distributed Generation Coordinating Group was the group
formed in late 2001 to continue the work of the Embedded Generation
Working Group. Table 2.3 shows issues identified by the EGWG and
the results of the work of the DGCG, whether the barrier has been
removed, is in the process or has not yet been tackled.
As shown in Table 2.3, most barriers have been removed, however
some still remain. In addition, there are a number of barriers
further to those identified that preclude DER in general from full
participation in both the market and network services.
Electricity Networks Strategy Group
“The aim of the ENSG is to identify, and co-ordinate work to
address the technical, commercial, regulatory and other issues that
affect the transition of electricity transmission and distribution
networks to a low-carbon future.”
There are a number of work-streams within the ENSG covering
topics from horizon scanning to specific technologies such as
microgeneration. They work with both Ofgem and the DTI in order to
identify solutions as well as barriers. This is an ongoing project.
Some of the measures identified in later chapters are being
addressed through the ENSG.
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Table 2.3: Barriers to DG in GB market and progress to 2004
(Source: DGCG)
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3. Goals of regulation for Fenix
Fenix creates economic value by allowing DER to participate in
wholesale electricity markets and contribute to the provision of
system support services at transmission and distribution levels. At
the heart of the Fenix approach lie the concepts of the Commercial
and Technical Virtual Power Plants. An appropriate regulatory
framework for Fenix implies a framework where such VPPs are viable
commercial entities (based on the understanding that they deliver
material economic value).
It is important to approach the problem from the perspective of
a business model, rather than technical requirements, as all the
participants in the market are commercial operators and will
continue to be so. If the commercial and regulatory environment is
suitable then these parties are likely to deliver the desired
result.
This chapter details how Fenix allows DER to participate more
fully in markets, and outlines the business models of the CVPP and
TVPP.
3.1. Increased participation in wholesale markets
An ideal market for electricity would allow all generation to
signal the true cost of generation and all demand to signal the
true value of demand at any instant. Such flexibility would involve
a willingness and ability to vary in response to system conditions
communicated by means of price signals. Such flexibility will
always tend to result in lower prices in the wholesale electricity
market, increased energy efficiency and in practice will often lead
to reduced greenhouse gas emissions compared to markets where this
information is not available.
Current market arrangements prevent many distributed generators
from participating in markets in this way, and opportunities for
active participation by demand and from storage are also poorly
exploited.
3.1.1. Improved integration of Distributed Generation
Currently, small and medium-sized distributed generators are
often metered monthly or less frequently. This in turn means that
these generators cannot be exposed to within-day price variations
in real time (although crude timing capabilities can allow a
limited degree of seasonal and/or time-of day variation in payment
ex-post). As the penetration of distributed generation increases,
this will lead to an increased level of generation that is highly
price inelastic within-balancing-period. As a result, these
generators are unable to take advantage of within-day changes in
electricity prices, and consumers face higher electricity prices as
a result of the sub-optimal dispatch of plant.
Fenix allows distributed generators to respond to market prices
through real-time or near-real-time interaction with the CVPP.
3.1.2. Integration of demand side response
At present, demand is almost always inflexible: that is, it is
highly inelastic to short-term variations in price. One of the key
features of the Fenix concept is the ability through smart meters
and Fenix boxes to make demand visible to the system and
communicate price signals which can be acted on in an automatic
manner, thus rendering demand flexible and responsive.
Specifically, ‘network-driven’ demand-side management (DSM) is
concerned with reducing demand on the electricity network in
specific ways which maintain system reliability in the immediate
term and over the longer term defer the need for network
augmentation. The two prime objectives for network-driven DSM
are:
• to relieve constraints on distribution and/or transmission
networks at lower costs than building ‘poles and wires’ solutions;
and/or
• to provide services for electricity network system operators,
achieving peak load reductions with various response times for
network operational support.
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Therefore, concentrating here on the role of network-driven DSM
in achieving these two objectives, network-driven DSM projects can
be classified as follows:
• energy efficiency (focused as a priority on constrained
networks);
• classic load management, including interruptible loads, direct
load control and demand response;
• power factor correction (incentivising customers to improve
their power factor); and
• pricing initiatives, including time of use and demand-based
tariffs.
From a regulatory perspective, the key requirements for
encouraging DSM are that the behaviour of demand is visible (smart
metering and ensuring that the right actors have access to the
right data) and that true costs are faced by customers (or
aggregators, or energy management systems).
The potential benefits of the involvement of the demand side in
electricity markets are both lower wholesale prices and
optimization of electricity networks (as the vast majority of
network costs are related to meeting peak demands).
Although traditionally research in this area has focused on
using demand-side management to reduce or defer network investment
requirements, Fenix allows distributed generation to make an
equivalent contribution to load and power factor management.
3.1.3. Integration of electricity storage
From the beginning of electricity supply in the late 1800s,
battery energy storage was used to supply overnight direct current
demand while generators were shut down. Since that time,
decentralized electricity storage (principally with batteries) has
continued to be used, but in piecemeal ways embedded in consumer
systems and unavailable to the electricity networks or markets.
In general terms, electricity storage has applications in the
following areas:
• taking advantage of arbitrage opportunities in electricity
markets;
• improving reliability and power quality of the public
electricity supply system;
• increasing scope for the integration of renewable generation
into distribution networks;
• maximizing asset utilisation in distribution networks;
• electric transportation; and
• increasing overall cost-effectiveness and reducing CO2
emissions from conventional thermal generation plant by improving
energy efficiency and productivity.
Energy storage devices embrace a wide range of technologies. The
commonality between these devices is that they receive electricity
as the principal input, and produce electricity as the principal
output. The main point of divergence is the form in which energy is
stored.
Devices can also be classified in terms of the energy storage
duration, which can range from milliseconds to seconds (capacitors,
superconducting magnetic energy storage (SMES), flywheels and
batteries), to minutes (flywheels and batteries), to hours
(batteries, compressed air, hydraulic pumped storage).
Technologies can also be defined by whether electricity storage
is direct or indirect. Direct forms include capacitors, SMES and
possibly batteries while compressed air, hydraulic pumped storage
and flywheels would be considered indirect. Heat stores in CHP,
water reservoirs and fossil fuel stores are also relevant to the
subject of storage but are not considered here.
Demand-side management is also a form of electricity storage
through shifting consumption over time, but that is considered in
its own right in section 3.1.2.
Although there is a wide range of primary applications for
energy storage devices, users are not restricted to the application
that may be the principal motivation for the investment. For
example, a utility that embeds an energy storage device at the end
of a transmission line, in order to defer the
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upgrading of that line, could also, if the regulatory regime
permitted, use the device to arbitrage on within-day price
fluctuations. The same device may also qualify for payments for the
provision of ancillary services.
Intelligent aggregation techniques such as those of the Fenix
project are necessary in order to realise the potential of
distributed electricity storage in the optimal management of the
electricity network.
The increased integration of storage raises a number of
regulatory questions. First, the value of storage from the
perspective of the wholesale power market lies in its ability to
take advantage of arbitrage opportunities arising from price
volatility. Regulators often see price volatility as a problem, but
measures designed to remove it limit the revenues available to
storage facilities. Second, if incentives are well-aligned then
TVPPs (DSOs) will make use of new and existing storage to improve
reliability and power quality, but this type of behaviour may be
impeded if regulators prohibit such arbitrage activities. Thirdly,
in order for CVPPs to be incentivised to use storage in an
economically efficient way, it is necessary for market arrangements
to be such that the costs of balancing, response and reserve are
accurately apportioned. Finally, allowing distribution network
companies to make efficient trade-offs between capex and opex
should allow network operators to use storage for network
management purposes where appropriate.
3.2. Provision of ancillary services from DER
A key element of the Fenix project is the provision of ancillary
services by means of aggregated DER. Indeed it could be argued that
this is the single most significant feature of the Fenix concept.
Fenix strengthens other aspects of current routes-to-market for
DERs, such as the benefits of aggregation and access to wholesale
market prices, but in allowing DERs to contribute to markets for
ancillary services it allows DERs to participate in markets that
were previously inaccessible.
Fenix ancillary services could be provided at TSO or DSO level
and be location-specific or not. In general terms,
location-specific services would be aggregated by and for the TVPP
(DSO) while non-location-specific services would be aggregated by
the CVPP.
This section describes the potential for distribution-level
ancillary services to be provided by generators, in line with the
anticipated increase in electricity generation from distributed
resources. Whilst renewable electricity generation connected to
distribution networks represents a key component of energy policy
and targets, here the distribution ancillary service market
opportunities applicable to both renewable and non-renewable forms
of distributed generation are evaluated.
A pre-requisite for any ancillary service provision by DER is
that any service should be financially beneficial to the DER whilst
remaining economically and operationally attractive to network or
system operators. A study by Ilex Energy Consulting in
collaboration with the Manchester Centre for Electrical Energy,
UMIST1, used value-based approaches in order to derive a list of
possible ancillary services that might be provided by DERs.
The following paragraphs describe those services that were found
to have the potential to be provided by DER:
• TSO Frequency Response;
• TSO Regulating and Standing Reserve;
• TSO Reactive Power;
• DNO Security of Supply contributions;
• DNO Quality of Supply Services; and
• DNO Voltage and Power Flow Management Services.
1 ‘Ancillary Service Provision from Distributed Generation’.
Ilex Energy Consulting with the Manchester Centre for Electrical
Energy, UMIST, 2004.
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3.2.1. TSO Frequency Response
Frequency Response services are required by the TSO to maintain
the system frequency within statutory tolerances. Frequency control
is achieved through the real-time matching of generation to demand,
with a number of generators monitoring the system frequency and
adjusting their output accordingly. Distribution-connected Combined
Cycle Gas Turbine (CCGT) plants already provide this service to
TSOs.
A key feature of TSO frequency response provision is the
requirement for generators to be part-loaded. It is unlikely that
TSO frequency response services will be provided regularly by
renewable generation, as the opportunity cost of operating
part-loaded will be relatively high. This is because the
compensation for part-loading would not only need to recover the
cost of reduced revenues from energy sales and/or the costs
associated with the loss of renewables subsidy revenue (less any
variable operating costs such as fuel costs). It is therefore
unlikely that renewable generation will be able to compete
effectively in frequency response markets.
Although mandatory frequency response capabilities may become a
technical requirement for large distribution connected wind farms,
thereby ‘resolving’ any infrastructure constraints, the extent to
which the TSO will utilise such capabilities is likely to be very
limited.
The value of TSO Frequency Response in GB is estimated to vary
between £0.40/kW per annum for wind generation and £2.50/kW per
annum for CCGT technology (excluding holding costs).
3.2.2. TSO Regulating and Standing Reserve
Reserve energy is required to provide rapid access to
generation, to accommodate errors in demand forecasting, to provide
contingency arrangements for generation failures and to restore
frequency response capabilities.
The key differences between frequency response and reserve
services relate to delivery timescales. Typically, reserve services
are manually initiated and involve longer lead times. A consequence
of simplified service initiation procedures is a reduction in the
sophistication of control requirements, thus making reserve more
attractive to smaller providers.
It is unlikely that synchronised reserve will be provided by
renewable generation, as the compensation for part-load operation
would also need to recover the loss of revenue from renewable
subsidies, rather than simply the revenue from electricity net of
fuel costs. Non-renewable distributed generation in GB already
provides standing reserve services to the TSO at a value of
approximately £7/kW per annum. Increased DG participation could be
facilitated by Fenix-type aggregation services; currently the GB
system operator requires a minimum of 3MW deliverable service,
which may be provided by an aggregation of units.
3.2.3. TSO Reactive Power
TSO reactive power can be sourced from distributed generators
for transmission system voltage regulation. Reactive power sourced
at lower distribution voltages will reduce the reactive power
required from transmission-connected generation.
DG connected at lower voltage levels can make a significant
impact on the amount of reactive power exchanged between TSO and
DNO systems. The impact of reactive power management on the
transport capabilities of distribution circuits could extend the
transport capabilities of existing circuits. The value of this
service would be limited by the low cost of power factor
compensation equipment. It is unlikely that this would represent
significant income for DG. High DG availabilities would be needed
for DNOs to consider such services.
3.2.4. DNO Security of Supply Contributions
The evolution of planning standards could broaden opportunities
for DNOs to consider contributions to network security from DG.
However, as DNO networks generally comply with existing standards,
the requirement for security contributions from DG may be limited
in the short-term. In the medium to
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long term, load growth and asset replacements could increase
opportunities for DG to provide network support services.
The value of security provided by non-intermittent DG can be
related to the avoided or deferred costs of network reinforcement.
DG can also substitute for network automation facilities. This is
particularly relevant when considering security contribution of
intermittent generation such as wind.
Because of the drive to reduce Customer Interruptions (CI) and
Customer Minutes Lost (CML), GB DNOs have made considerable
investments in lower voltage networks. A result of this investment
is that distribution networks in GB are generally “over compliant”
with planning and security standards. For the foreseeable future,
the scope for DG to provide security services at these voltages
could be limited.
3.2.5. DNO Quality of Supply Services
In the future, there could be opportunities for DG to improve
service quality on lower voltage networks, given the contribution
of such networks to Quality of Supply statistics. This includes
reducing deviations from voltage and reactive power limits,
particularly at times of abrupt outages. In order for DG to improve
service quality on such networks, the generation must be connected
to them, thus restricting opportunities to relatively small sized
generation. A key requirement for DG, to reduce the impact of
outages, is islanded operating capability. Due to the complexity of
islanding, it is unlikely that DG will be able to significantly
reduce customer interruptions (CIs) and customer minutes lost
(CMLs) in the short or medium term.
3.2.6. DNO Voltage and Power Flow Management services
Voltage control and flow management problems are essentially
network-planning-related issues as they relate to supply
restoration times following network failures. This distinguishes
distribution-level voltage management from transmission-level
reactive power provision because of the localised and occasional
nature of the service. Because of the relatively low availability
of DG compared to the reliability of network components (and given
the UK’s deterministic voltage standards), opportunities may be
limited for DG to provide voltage support or overload reduction.
Generally, non-intermittent DG would be suitable for such
applications. Inverter-connected renewable generation represent an
exception, as reactive power is generally independent of active
power output so that an inverter could inject or withdraw reactive
power even when active power generation was minimal. Opportunities
to provide voltage and power flow management services will improve
with increased penetrations of DG due to the higher collective
availability.
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4. CVPP and TVPP business models
In order for the Fenix concept to operate successfully, there
must be a market for the provision of CVPP and TVPP services: both
these activities must be a viable commercial proposition. Before
proceeding to examine what regulatory frameworks need to be in
place in order to allow this to occur, it is useful to define the
commercial activities of these entities.
4.1. CVPP business activities
In a commercial context, the CVPP provides the following:
� visibility of DER in the energy markets;
� DER participation in the energy markets; and
� maximisation of value from DER participation in the
markets.
Figure 4.1 shows some of the key activities of a commercial
virtual power plant, which are explained in detail in the following
paragraphs.
Trading Operations
Primarily, the aggregation of DER for participation in the
wholesale market. The added value for an individual resource comes
from an increased negotiating advantage when trading within a
larger block coupled with spreading the costs of maintaining a
trading team (which might possibly be operating 24 hours a day).
When intermittent resources in differing locations or technologies
are brought together within a single portfolio then some of the
risk associated with variability can be offset. This portfolio
effect also falls under the trading operations activity.
Electricity Supply
Included in the activities of a CVPP for several reasons. First
is that the CVPP business model has been proposed as a new role for
the incumbent suppliers within the market. Vertically integrated
suppliers already command a significant generation portfolio and
more responsive demand and distributed generation could lead to a
natural evolution to a virtual power plant. If domestic customers,
including those with microgeneration, are to be engaged within the
new market then is it entirely plausible for the requirement for a
one-stop-
shop solution to be retained. Finally, if the supplier of
electricity is a separate party to that which gains value from load
flexibility then some complex contractual issues may arise (see
Deliverable 3.2.6 for discussion).
Demand Side Participation
Load flexibility is an important consideration for the future
CVPP. Currently, the attitude of the market is that most demand is
uncontrollable and generation must provide the flexibility to
handle varying load profiles, deviation from contracted positions
and any ancillary services. If in future the penetration of
renewable and other DG, much of which is uncontrollable and/or
intermittent, increases significantly it may be demand which can
provide the flexibility most economically.
Metering and Communication
Systems between CVPP and DER are the essential technological
enablers of Fenix. In order for flexibility to be properly
rewarded, it is important that both generation and demand are
measured
Trading Operations
with DER
Electricity Supply
Demand Side
Participation
Metering andCommunications
Control of DER
‘Hassle’ Reduction
Trading Operations
with DER
Electricity Supply
Demand Side
Participation
Metering andCommunications
Control of DER
‘Hassle’ Reduction
Figure 4.1: CVPP Activities
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