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UK: Balancing actions and revenue impacts for embedded generators

  • United Kingdom
  • Energy and infrastructure - Clean energy

15-05-2020

Restrictions associated with the COVID-19 pandemic has meant that demand for electricity in the UK is currently at exceptionally low levels and this trend is expected to continue throughout the summer of 2020. Accordingly, National Grid Electricity System Operator (ESO) has taken measures that could have an impact on the output and revenue streams of embedded generators, namely, the “Last resort disconnection of Embedded Generation (Grid Code Modification 143)” and the new Optional Downward Flexibility Management (“ODFM”) scheme as outlined below.

These measures were implemented ahead of the bank holiday weekend (8-10 May 2020) in light of the forecasted demand levels. Our understanding is that no embedded generation was actually disconnected during such period via the emergency measure outlined below. However, the ESO did call upon the new Optional Downward Flexibility Management (“ODFM”) service over the weekend – there is understood to have been a reduction of approx. 238MW, mainly provided by wind farm generation curtailment. The next anticipated tight spot is the next bank holiday Monday, weather dependent.

Simon Davies comments:

“The industry will undoubtedly have a preference for market-based solutions (i.e. paid/contracted balancing services such as the ODFM) to provide the required flexibility during periods of very low demand, rather than the emergency measure enshrined in the “Last resort disconnection of Embedded Generation” modification, which does not compensate embedded generators and puts them at a disadvantage compared to transmission connected generators. Notwithstanding that these new measures have been implemented in response to the extraordinary COVID19 restrictions, the challenges that the ESO faces (e.g. managing low demand periods during high wind or high solar periods) will be enduring. As such, it remains to be seen whether this will be a catalyst for the ESO to expand the range of balancing services at their disposal by opening up balancing service markets to a broader range of participants, including embedded generators.

The ODFM undoubtedly presents a revenue opportunity for a number of embedded generators and storage asset owners who previously did not have the ability to access such markets (as they will generally not be parties to the balancing mechanism). However, this potential opportunity needs to be considered in light of existing commitments/restrictions both operationally and contractually, for example in relation to any power purchase agreement obligations to maximise output. This may mean that the scheme is more easily accessible for aggregators or generators who benefit from flexible merchant PPAs or route to market arrangements within their own group. As advisors, we need to be cognisant of these market developments when entering into new PPAs or route to market contracts”

Optional Downward Flexibility Management (ODFM) Service

The ODFM Service is a service which allows the ESO to access downward flexibility and the ability to control output from providers who cannot currently be accessed through the Balancing Mechanism or the ESO’s platform for Ancillary Services. Eligible participants must be capable of sustaining service delivery (i.e. generating plant export curtailment or site demand increase) for a minimum of 3 consecutive hours and be sized at 1MW or more (which may be through aggregation of separate assets behind the same Grid Supply Point). In respect of generators, they must be able to curtail completely and they must not have a condition in their DNO connection agreement whereby they are signed up to an active network management scheme/flexible connection.

Click here for an overview of the registration process and service parameters for participating in the ODFM service.

Last resort disconnection of Embedded Generation (Grid Code Modification 143)

This Grid Code modification (which has been approved by OFGEM on an urgent basis) sets out that under emergency conditions and as a last resort the ESO may instruct a Distribution Network Operator (DNO) to disconnect embedded generators connected to its system. Emergency disconnection would be actioned only once commercial means or means through the Balancing Mechanism were exhausted and there was still a need to take action for security of supply purposes. The modification is time limited and would remain in effect until 25 October 2020.

Embedded generators subject to such emergency disconnection would not be financially compensated. Interestingly, in this respect, OFGEM have queried how implementation of the modification interacts with Article 13 paragraph 7 of the Clean Energy Package, which concerns redispatching of generation and financial compensation arrangments.

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