In today’s energy sector, it is rare to get electricity networks, retailers, generators and system controllers in the same room at the same time. Of course, before about 1990, all of these roles worked almost side-by-side within vertically integrated companies where corridors and meeting rooms were places of negotiation and arbitration of all of the differing incentives and drivers. But in a deconstructed market about to be transformed by distributed energy, how will decisions be made around how it is dispatched?
Different players, different drivers
While we’ve gained much through the unbundling of electricity markets, what we’ve lost is sometimes overlooked. Apart from pleasantries over coffee and personal relationships, deconstructed markets leave little room for open, incentive-free discussions about issues facing the entire sector. In most reformed markets, this is left to government and regulators to sort out, and so is limited by the scope of whatever inquiries or policies they are charged with developing.
When we do manage to get networks, retailers, generators and system controllers all in the one room, as I witnessed recently, conversation quickly turns to disruption and the changing nature of our industry. With growing amounts of utility scale renewables entering the system, the emergence of IT integrated battery and solar equipment, and the rise of virtual power plants, the first hour of these discussions tends to lead to consensus that we live in interesting times. It is the second hour that this blog is devoted to.
One of the interesting features of disruption is that everyone assumes they will be the one doing the disrupting, or at least controlling the way in which it will occur. But distributed energy will impact each player in the sector differently and each will be driven by different reasons for involvement:
- For retailers, and the new entrants soon to be troubling them, distributed energy provides a way to finally interact with customers on a basis which is less transactional and more “asset rich” (see my blog on this topic here). Their attraction to distributed energy lies in the ability to dispatch the contents of customers’ batteries at a time when that power is worth the most to them, giving a share of the benefits back to the customer. But for this to occur, the retailer must be able to decide when dispatch occurs, and the basis on which it will occur – perhaps on the basis of avoiding high wholesale prices or perhaps on the basis of the highest offer received.
- For network companies, distributed energy provides a mechanism to flatten the peak and avoid network capex, primarily by shifting load within and around the network to avoid upgrading system equipment. This in turn requires the network company to be able to decide when dispatch occurs, based on the timing of the network peak that it is seeking to avoid.
- For system controllers if distributed energy becomes mainstream through rapid residential penetration, its invisibility poses a risk to system balancing (see my blog on this topic here). This means that the system controller must be able, via some mechanism, to determine when dispatch occurs, based on overall system balancing requirements.
Can we afford to let the market decide?
But most conversations around distributed energy rely upon an assumption that the timing of all three of these dispatch drivers will align. In reality, there is little or no relationship between them. Wholesale price spikes occur due to a range of reasons including weather, unexpected outages of plant or networks, but are almost completely unrelated to the timing of the distribution peak. System control interventions generally follow unexpected drops in either supply or demand, and while these bear some relationship to wholesale price spikes, these are average impacts and do not reflect the wholesale trading book of any particular retailer.
Allowing the market to solve this would involve the establishment and resolution of dispatch decisions on financial, rather than engineering, grounds. Under this market system for dispatch, networks would bid against the internal business drivers of the retailer to seek dispatch at the time of the network peak, which would be balanced against the internal opportunities open to the retailer not to dispatch or to dispatch at another time depending on their trading positions. This would, of course, expose the network company to the risk of not winning, and so require a network investment to be made anyway to ensure that reliability was not impacted. In this way, a market system would remove from the network company any actual benefits from distributed energy. The role of the system controller is even less flexible.
Who controls the button is therefore one of the most critical questions to be answered around distributed energy. Twenty years ago, this would have been solved behind closed doors, with arguments made and settlements achieved for the good of the network. In today’s energy sector, the environment for decision making is very different. Let the battle for dispatch begin.
Who will, or should, win the war for dispatch? Leave a comment below or contact me to discuss the issue further.
Note: This article was originally published on LinkedIn, and has been republished on WattClarity with permission from the author.