[Insights Article] Flexibility is the key to value

[Insights Article] Flexibility is the key to value

Event

Insights Article – April / May 2018 – by Rob Labinski

The value of the ancillary services demand response market is declining. A consensus in the feedback from consumers and aggregators is that the actions of National Grid, the DNOs and OFGEM are creating barriers to participation in Demand Response. You are crying out for security in the value from these markets, in order to build robust and bankable financial forecasts for investment in control, metering and storage. But things are changing so quickly it’s hard to understand where to focus your attention. To compound this problem, you sit in seminars where the only consumer who is happy to stand on stage and talk about the success they have had in Demand Response implementation has either been participating in STOR with diesel generators since 2013 or is part of an innovation project. What’s new, right?

This isn’t what gets us, nor your C&I colleagues out of bed in the morning. You are consumed with the day to day requirements of operating your businesses effectively, providing a valuable and effective service to your customers. But underneath it all you are vigilantes, looking for an opportunity to bring to justice the polluters and make the impact of our businesses on the environment less devastating. None of you got into energy because you think burning oil, diesel and coal is the only future. Maybe many of us could be corruptible in our opinions here, as we start to see the viability of large scale manufacturing in the UK becoming less attractive in a globalised market. Maybe the threat of unemployment and the loss of historical industrial towns would change our minds, but we are all aware that the tidal wave of populism is slowly forcing the hands of governments to make changes in the ways it enforces the “Green Agenda”. The Yale Programme on Climate Change Communication published that while 69% of the American population believe that global warming is happening and will harm future populations, only 53% of Americans believe that Global Warming is caused mostly by human activities. 32% said it is mostly down to natural causes. The European Perceptions of climate change (EPCC) report highlighted that in all four countries surveyed, a majority of the population (83-93%) thought that the world’s climate is changing. In the UK, 12% of people denied climate change, while in Norway only 4% reported the same view.

The survey also concluded that 84% of UK participants believed that human activity was in some way related to climate change, while 13% concluded that humans had nothing to do with climate change.

In a world where more and more of us are concerned about our impact on the environment and understand that our behaviour has the capability to reverse this trend, these worn out flag bearers need to be escorted off the stage and replaced with the ground breakers in the industry. You don’t want to see a market where the financials drive consumers to buy debt on storage projects and force integrators to partner with aggregators with less integrity to fabricate the numbers in the battery business case to make the models work. On the 1st March 2018 Utility Week reported that “a whopping 949MW of storage failed to secure [Capacity Market] contracts. Cornwall Insight energy analyst Tom Palmer says this is a “huge impact on the market” and “It just shows there is an appetite, but commercials don’t really stack up for many markets at the moment.”

At the Energy Storage Summit in March 2018, a panel of financiers discussed whether they agree with the forecast for storage revenues, sparking a lively debate about the ability for battery projects to capture TRIAD value after the Targeted Charging Review. The consensus was that it was too early to tell and that this benefit should not be included in any revenue forecasts. Someone somewhere therefore needs to talk honestly and transparently about the real value of flexibility in the UK energy market, today and into the future. As a result, you the C&I consumers, are making decisions more slowly and less effectively because it is difficult to see the value clearly and forecast changes with confidence. You don’t trust this difficult-looking game of Demand Response or the players who so indefatigably leave you voicemails on your mobiles on a daily basis. Ofgem, BEIS, National Grid and the Environment Agency know that they are within a period of transition where an ever-evolving myriad of NAPS reviews and MCPD U-turns and TCR reiterations is muddying the water, but they are striving to simplify and standardise this unregulated market. The ADE Demand Side Response Code of Conduct does not seem to have given you any more confidence. And the proposed model for market changes risks creating a “market for lemons”, where advanced technology and innovation will find it difficult to justify their investments when a broker, consultant or aggregator can provide simple access to the market. The best of you, the energy managers who have been neck deep in energy technology innovation since the 1970s when industrial scale wind generation was first proposed as an electricity source for the United Kingdom; my parents weren’t even dating in 1970 so I cannot claim to have had any influence here! Those of you who, on 27th May 2008, saw the tables starting to turn as the largest Frequency event recorded in the last decade brought manufacturers to a grinding halt as synchronous drives slowed down and plant started to drop offline due to machinery protection routines. You are now having to find ways of driving innovation and energy reduction in an everchanging market. Decreasing subsidies, short term forecast of value and risks to revenues which are unknown means we are entering an era of uncertainty, a time when energy as a service is becoming the safest financial bet. We are happy to pay for someone else to take that risk, and we are missing out in the meantime on the benefits of owning, operating and automating our own flexible, distributed energy systems.

You all understand the smart grid transition is here today. You can see the historical shift from day ahead to OTC markets, starting to reverse itself. You have heard that markets will become more volatile and inertia on the grid is reducing. Let me ask you: why is everyone clinging on with tooth and nail to the CM, FFR and FCDM projects an as an industry not engaging to capture the next generation of flexible markets? It isn’t enough to do TRIAD avoidance and claim that you have the Demand Response box ticked. It is right that the market is moving very fast. Kurt Baes and Florence Carlot of Arthur D. Little, noted that “the combination of favourable regulation and opening of energy markets has led to a proliferation of aggregators across the globe in the last years. In the UK alone, around 20 players have developed aggregation activities.” You will have noticed, to differentiate, many of the UK aggregators have become battery integrators and storage experts, shifting their focus and messages to capturing value in a market which provides simple fast and reliable response from storage. The days when C&I consumers primarily discussed the strength of identifying, enabling and hedging flexibility in a portfolio from Demand Side Load has shifted to an easier discussion of installing your own reactive power system to create flexibility, charging at the cheapest time or managing a fleet of electric vehicles (EVs). Alternatively, aggregators try to differentiate by complimenting DSR with energy services, PPAs and new utility contract options.

As a result, a trend of consolidation had been forecast following the acquisition and funding of a select number of aggregators to the tune of £100s of millions. It is also predicted that if uncertainty of revenues continues, the business model will become less stable for aggregators if they are unable to demonstrate synergies with the wider energy proposition. Those that will survive this transition will be the technology companies who have designed their core capability to adapt and evolve as the market and its flexible assets change over time.

Suggestions by consumers, that it is difficult to identify the consumers who are doing things differently and have realised the true value of flexibility in a meaningful way, have been proven to compound nervousness in the market. There are so many of you already utilising flexibility, so why don’t you speak up? My understanding from conversations with plant and operations managers, is that it is just natural to use flexibility as part of production optimisation. Take for example the paper companies amongst you: you are trading your pulping processes on the day ahead and imbalance market and optimising this flexibility in the Capacity and FFR Markets, while still meeting manufacturing requirements. Or let’s discuss the steel companies: you are investing in metering, variable speed drives and control upgrades across your manufacturing sites, driving towards greener steel making practices, by responding to price signals in real time.You don’t see this as revolutionary, you don’t label it as demand response, you just see it as the optimisation of your process, a way to sweat your assets. It’s what drives you and it feels natural to operate this way. It makes sense to review processes and practices considering the available technology developments in the market. Your goal is the same as your business; to produce these commodity products for the cheapest costs possible, utilising all flexibility, whether large and slow or small and variable and to try to consume more renewables and fewer fossil fuels. We know our consumers like to use FlexTreoTM and even find it ‘fun’ to work with. Can you believe that flexibility can provide better job satisfaction? We have now introduced a shift competition at one of our longest standing Flex Providers where each shift team is challenged to make the same amount of product, utilising the FlexTreoTM platform to deliver the cheapest cost per tonne. Each event captured over the past 12 months has delivered the shift teams between £1,500- £42,000 towards thier quarterly reviews, without impacting production KPIs or quality. Wilbert Dijkhuizen spoke on the 18th April 2018 at the Energyst event about how Lineage Logistics had created a specially selected team, bringing together his energy Broker, Utility and REstore to identify the most cost-effective way to manage power at his distribution centres in Wisbech and Gloucester in the UK. By bringing together the capability.

of the technology he has procured, with the knowledge of the wholesale energy market and the contract options from utlities, he was able to tender for and carefully design the first bespoke energy contract to maximise the value from FlexTreoTM. He is now taking full advantage of an automated dynamic balance of power consumption to capture maximum value from day ahead, within day imbalance, FFR and TRIAD optimisation. All without compromising core business requirements. This wasn’t because Lineage wanted to have a case study about Demand Response, it was because it is the most effective and advanced way to supply an outstanding, sustainable and cost-effective solution to his customers. Again, it felt like the right thing to do. The old grid came with incentives for electricity consumers to coerce them into certain consumption patterns, such as TRIAD and DUoS charges. Consumers were rewarded if they followed a grid-imposed consumption pattern. However, the new, smart grid does not need to rely on such coercion, instead real-time controllable flexibility allows for more efficient & cheaper balancing solutions. Determined by the real time stress on the grid, flexible resources can be deployed to balance and resolve the grid stress or supply shortages. These resources are then rewarded via other channels in the day-ahead and imbalance markets and are not solely driven by a TSO subsidised market, which is determined by what is essentially a procurement team. The value of this new grid is created and captured by real time requirements. We have just come out of a period where the UK grid ran without coal generation for three days and System Sell Prices for electricity were as low as £6/MWh as solar and wind provided consistent and reliable supply. This comes just a few months after imbalance prices rose to £990/MWh creating a £915.58/MWh opportunity for organisations with flexibility to capture using FlexTreoTM.

But as a consumer, you don’t see the technology to enable you to do this in the market place. The cold calls from aggregators have filled your mailbox, but no matter how many times you review the business cases proposed, you can’t seem to make sense of all the different.

incomprehensible numbers going into the front end of these financial assessments. Some use average power figures, others take peak divided by availability, others use exciting graphics and charts to demonstrate how their trading team is going to deliver exceptional value in the market auctions, while all seem to claim they are the biggest aggregator, have the largest portfolio or the most assets under management. The only requirement you really have is to work with a partner who is honest and transparent and whom you can trust. If you are going to make that transition from DR 1.0 to a more real time decision making process which enables you to capture new value from the Balancing Market, you will need a technology partner who is already doing this as their automation, control methodology, technology patents and forecasting models will be the key to make your flexibility the glue between all energy resources.

To read more – download the full insights article here.