Learnings

Outcomes

This innovation project explored a potential enduring market design for the procurement of stability services. The primary objective of our stability market is to ensure cost-efficient provision of services needed to maintain system stability and security in the interests of consumers. 

Stakeholder input was critical to shaping the case for change and informing decisions on key market design choices. We co-created with industry through industry webinars (available here) and a survey that allowed stakeholders to provide detailed views and feedback to design an effective market. 

The recommendation for the enduring stability market design was developed based on a qualitative and quantitative assessment of different market design options. The analysis used AFRY’s BID3 model and ESO’s stability requirement analysis based on FES 2019 data. 

The core recommendation of the Stability Market Design innovation project is to develop a combination of a dedicated short-term market (day-ahead) with a long-term market (building on the well-functioning pathfinder approach) for stability services, while retaining the BM option as a backstop. This approach combines the benefits of both the long- and short-term markets while mitigating the drawbacks of procurement in a single timeframe. This hybrid approach over multiple timeframes also aligns with stakeholders’ feedback during our engagement, with the majority favouring a combination of short- and long-term markets. 

Three distinct markets have been recommended following the completion of this innovation project. The long-term market will run at Y-4 stage and offer long-term (10+ years) contracts for the design and build of new solutions or major refurbishment. The mid-term market will be held at the Y-1 stage and aim to harness high-availability services in 1-year contract increments. The short-term market is intended to run at day-ahead to enable the ESO and market providers more flexibility closer to real-time. These outcomes are aligned with the initial objectives of this project to explore stability markets in more detail and recommend an implementation plan for starting to procure stability services.  

As evidence of the value driven through this innovation project, the first stability market will be initiated in 2023. The mid-term Y-1 market is being developed as a priority to access stability from existing assets and to begin to signal to the market our commitment to procuring these services. This market will be repeated on an annual basis to access stability on a high-availability basis, reducing risk for the ESO and providing a strong incentive to the market with some certainty through a one-year contract. The day-ahead market will allow the ESO to procure any top-up capacity closer to real-time, but we believe that to stimulate the required investment, a Y-1 market with longer contract duration is more valuable as a first step.  

Lessons Learnt

The core recommendation of the Stability Market Design innovation project is to develop a combination of a dedicated short-term market (day-ahead) with a long-term market (building on the well-functioning pathfinder approach) for stability services, while retaining the Balancing Mechanism (BM) option as a backstop.  
Other key recommendations: 

• Future arrangements should target and facilitate a diverse mixture of different technologies to provide stability solutions at least cost to consumers.  
• An enduring solution is required so that participants are able to optimise their asset stability characteristics in the design phase against expected stability revenues.
• Long term procurement should continue and be formalised into a systematic process so that providers are given the opportunity to develop a pipeline of solutions. Efficient signals for investment planning must be in place.
• The addition of a short-term market would offer a route for providers that aren’t able to make long term commitments and is expected to bring benefits in terms of dispatch efficiency and carbon reduction.
• Contract types should (initially) be simple to promote transparency and reduce complexity of solution value assessments. We are proposing a single duration & definition contract at each market timeframe to help manage complexity.
• We are proposing different eligibility in different timeframes. Long term multi-year contracts to underpin investment, year-long (T-1) contracts to manage forecast error and influence closure decisions, and short-term day-ahead contracts to fine tune positions and broaden the pool of potential providers – lowering barriers to entry and promoting competition. 

Further research topics regarding the more detailed development and design questions could include: 

• Exploring the interactions between stability and other services, such as voltage and frequency response.  
• Refining some of the market design options, as well as our procurement strategy including:
  • Which providers should be eligible for participation and payment?
  • What would be the volume split between the long-and-short-term markets?
  • What is the optimal contract duration for a long-term market?
• A thorough cost benefit analysis with an expanded modelling horizon beyond 2030. 

Phase 2: 
The core recommendation of the Stability Market Design innovation project (phases 1 and 2) is to develop three specific stability markets – long-term (Y-4), mid-term (Y-1) and short-term (D-1) – to meet stability needs cost effectively and aid the transition to a net zero power system. In parallel with these markets, the ESO retains the Balancing Mechanism (BM) option as a backstop alternative to increase system stability.  
Other key recommendations: 

• Market arrangements should facilitate a diverse mixture of different technologies to provide stability solutions at least cost to consumers and provide the appropriate signals for investment.  
• The long-term market will be formalised into a systematic process, building on the success of Stability Pathfinders, so that providers are given the opportunity to develop a pipeline of solutions. Efficient signals for investment planning must be in place, as well as a clear view of long-term requirements from the ESO which will be enhanced through the Centralised Strategic Network Plan. It is recommended that the Transmission Owners are invited to participate in long-term stability markets via a counterfactual route which maintains TO’s competitive access to financing large infrastructure projects. To minimise the effects of depreciating TO assets against the commercial provider, the ESO propose to extend long-term contracts as far as practicable (e.g., beyond 10 years) to reduce the impact which residual value may have on the assessment. In the long-term market, there is also a consideration for shorter-duration contracts (3 years) to advance the refurbishment of existing plant which is not viable in Y-1 timescales but does not qualify for 10+ year agreements.
• The mid-term market will provide an enduring route to market for new and existing assets to contract firmly for stability across a year (availability criteria apply). The Y-1 market will also provide an opportunity for current units contracted under stability pathfinders to extend the provision of their services in GB.  
• The short-term market will offer a route to market for providers that would like to stack revenues at the day-ahead stage (e.g., storage, dispatchable non-dedicated assets). Short-term contracts will be aligned with other ancillary services, such as frequency response, and contract on an EFA block (4-hour) basis. Furthermore, the short-term market will allow the ESO to fine tune procurement for peak requirements when better information is available. In future, it will also open the opportunity for the ESO to co-optimise certain stability products (e.g., inertia) with response products (e.g., Dynamic Containment) which could deliver further cost savings to consumers. 

Key lessons learnt also include:  

• The value of engaging with industry in a small focus group
• The importance of market participants and the ESO being open and transparent about market design principles
• The benefits of applying innovation project thinking to real-environment examples – for example, this project progressed its thinking in parallel with the ESO reviewing the stability needs of the system.