Energy and balancing services are currently procured sequentially in separate markets. This means service providers must guess which market will bring them the most value and which market they are most likely to clear in. The result is likely to be suboptimal for several reasons, including inflated prices across wholesale and balancing markets as service providers add opportunity costs into their bids in each market.

There have been no quantitative studies to date that explore the theoretical historic and future efficiency savings when energy, reserve and response are co-optimised within GB. The outcome of this project will help inform the wider debate on future market reforms.  

Benefits

If energy and ancillary services were procured in a single process, we would expect the following benefits: 

• Market participants would not have to guess which market they would be cleared in. They would not incur opportunity costs.
• The clearing algorithm chooses which market to allocate each asset to maximise overall social welfare – this means the most valuable assets would be dispatched for the most valuable services, also reducing the overall cost of production.
• Avoid the ‘herding’ phenomenon, where some markets are illiquid, and others are saturated.
• No recent international case studies are available to give a sense of potential benefits. One example from the early 2000s is CAISO (Californian Independent System Operator). Prior to introducing co-optimisation, operating reserves were around 10% of annual energy costs. Despite dramatic uplift in intermittent wind generation, operating costs are now around 2% of annual energy costs.
• Financial: avoided opportunity costs; lower cost of production derived from more efficient allocation of resource. 

This project will enable the ESO to determine whether:  

• Co-optimising energy, response and reserve would have realised £xm system-wide savings and £xm consumer savings in 2022.
• Co-optimising energy, response and reserve could realise £xm system-wide savings and £xm consumer savings from 2023 – 2040. 

This information is central to the debate about central versus self-dispatch for the Department for Energy Security and Net Zero’s (DESNZ)) Review of Electricity Market Arrangements.  

It is also expected that this project will identify avenues for further research, including considerations for compatibility with EU market design and pricing rules of co-optimised markets.