Task 3 2 5 Nov08 FENIX Regulatory Poyry v4...

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

fenix‘… a step towards the future of

electricity networks’



Regulatory Framework

Version 4.0 Page i November 2008





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.


Version 4.0 Page ii November 2008





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


Version 4.0 Page iii November 2008





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


Version 4.0 Page 1 of 111 November 2008





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







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







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.







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:







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







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.







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.







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







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







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







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







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







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.







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.







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.







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.







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.







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







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.







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.







Table 2.3: Barriers to DG in GB market and progress to 2004 (Source: DGCG)







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.







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







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.







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







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.







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



fenix‘… a step to

Date post:	17-Feb-2021
Category:	Documents
Upload:	others
View:	1 times
Download:	0 times

Task 3 2 5 Nov08 FENIX Regulatory Poyry v4...

Documents