Utility Week

20 | 13TH - 19TH APRIL 2018 | UTILITY WEEK Operations & Assets A mong the network operators there was clear consensus that the main barrier to the transition to a flexible energy system is the difficulty in establishing local markets. Although they can unlock a huge amount of value for others, the networks themselves said they can access only a limited portion of this value. While flex- ible solutions can save large amounts of money when compared to traditional reinforcements over their 40-year life spans, the savings in any given year are relatively small. The revenues they can offer are therefore insufficient on their own to entice potential participants to enter local flexibility markets. Providers will need to stack these revenues on top of those from the capacity market and balancing and ancillary services, which will instead form the foundation of their business models. The network operators said if these markets do not function well, then neither will local flexibility markets. There are a lot moving parts and it's not easy to get them all working together. There is also a "chicken and egg" problem. In order to create flex- ibility markets, they need to demonstrate their value to potential providers. But this is difficult to do without having these very same markets in place. Furthermore, the network operators said they face a difficult bal- ancing act when setting the technical specifications for contracts. If the terms are too onerous, then flexibility providers will be deterred from taking them up. If the terms are too lax, then this could cause problems for the operation of the power grid. Another issue they raised was the way in which flexibility is treated in terms of their spending allowances and incentives under the RIIO framework. For networks, the benefits of flexibility will come from squeezing the most use out of their existing capacity and thereby avoiding more expensive grid upgrades. This inherently means operating with less spare capacity to take up the slack if something goes wrong. But as network operators are penalised for supply interruptions to customers, they have a clear incentive to avoid these kinds of risks. There should be greater rewards for adopting flexible solutions to off- set the increased risks they entail. They said the technologies needed to create a flexible energy sys- tem have largely reached maturity and the main challenge they now face in this regard is knitting them together to form an integrated system. The reliability of communications will become increasingly important in future as this begins to determine the overall reliability of the grid. The network operators said overcoming these barriers and oth- ers will require clarity, certainty and decisiveness in terms of regula- tion and policy. They welcomed the strong support from government and Ofgem for the Energy Networks Association's Open Networks Project. TG KEY POINTS TO THINK ABOUT 1. The amount of value networks operators can by themselves offer for flexibility is insufficient to draw providers into local markets. 2. The creation of these markets is therefore dependent on the more valuable mar- kets for ancillary and balancing services functioning well. 3. Even then, they will have difficulty in demonstrating the value which local markets will be able to offer in advance of them being created. 4. A flexible energy sys- tem will be inherently riskier in terms of the potential for supply interruptions and the current financial incentives for net- work operators fail to reflect this. 5. The main technical challenges are the in- tegration of different technologies and en- suring the reliability of communications. 6. To overcome these barriers, networks require certainty, clarity and decisive- ness from policy makers and regula- tors. Stakeholder views: Network oper- ators caught in a bind "You've got to get the commer- cials right. You've got to get the tech right… It's such a big departure from our traditional way of oper- ating that it takes a lot of effort to move things forward. And just as you think you've got it, then something else changes in the market." Matt Watson, innovation and low carbon networks engineer, WPD "If the flex- ibility market is to work for all custom- ers, the products and services sold through it need to be credible and trusted and devoid of unintended conse- quences. You could say that the marketplace is a bit like a smartphone – we need the apps that run on that phone to be attractive and trusted by customers. Taking this analogy, we also need to consciously decide with regulators on the level to which these 'apps' are regu- lated. Do we go down the Apple route with high levels of govern- ance and standards or a more open unregu- lated route?" Stewart Reid, head of asset management and innovation, SSEN Brought to you in association with

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