Learnings

Outcomes

Study Key Findings: 

• 24/7 CFE matching is coming soon: In Britain, several energy suppliers are already offering time-matched ‘green’ supply tariffs to commercial, residential and industrial consumers. Several leading consumers, including AstraZeneca, Google, Microsoft and Vodafone are committed to buying 24/7 CFE. Carbon reporting standards are likely to become more granular. 24/7 CFE could be accelerated transparently and efficiently through a 24/7 CFE EAC trading scheme, which could be implemented within a few years.  
• Trading of 24/7 CFE EACs is viable: Leading players in the energy market participated in the trading pilot. An ex-post system was modelled, which is consistent with current allocation of REGOs. The contract was defined with stakeholder input. The pilot successfully demonstrated that price formation would be possible, with results that were in-line with expectations from modelled output. The price duration curves showed a green premium, which depended on the required matching score, with prices rising sharply after 75% CFE matching levels.  
• Incentivises CFE investment particularly in storage and DSR: 24/7 CFE trading enables the transfer of premiums paid by consumers for 24/7 CFE EACs to support various CFE technologies with the most flexibility, benefiting the most. The additional revenue would be a benefit for CFE assets that cannot currently access REGOs, notably DSR and storage. Time matched certificates would allow storage operators to access a new revenue stream, by purchasing granular EACs and storing energy when certificate prices are low and selling EACs and discharging when prices are high. Purchasers of 24/7 CFE EACs would have stronger incentives for demand side response than from electricity prices alone, creating shorter payback periods for innovations automating DSR.  
• 24/7 CFE EACs enhance value of flexibility in times of scarcity: Shortage of CFE supply tends to occur at the same time as increased system tightness. In the GB system, shortages of CFE occur at times of low wind supply, and this is when 24/7 CFE EAC price would be highest. Conversely, at times of renewable curtailment, generally there is an excess of CFE supply and 24/7 CFE EAC prices will typically be very low or zero. During periods of scarcity, 24/7 CFE EACs provide a stronger price signal for carbon free power than energy prices alone. This was shown in both the modelling and trading pilot.  
• A 24/7 CFE EAC market would support the transition to a net zero power system: If accelerated, a move to 24/7 CFE EACs could support the goal of a net zero power system by 2030 by encouraging the matching of demand, storage and dispatchable CFE supply to the availability of weather-dependent renewables, through incentives for both investment and changes in behaviour. 
• Trading of 24/7 CFEs is mostly beneficial for system operation: The emergence of 24/7 CFE is not foreseen to introduce any major risks and would provide behavioural benefits in the operational timeframe and significant benefits in the investment timeframe. - - Beneficial for scheduling: The stronger price signal in times of scarcity should lead to helpful behaviours, particularly for batteries and DSR.  
  Congestion would not be materially impacted: A 24/7 CFE market is not expected to lead to material changes to the level of constrained boundaries within a national GB system. Congestion is generally associated with windy periods, but when the CFE market is tight, there is usually low wind output.                                                                            Should not create significant additional costs for redispatch: In theory, an additional revenue stream could add to redispatch costs. However, in practice, when CFE supply is being curtailed, there would be an abundance of CFE supply. When CFE supply is plentiful, certificate prices tend to zero.                                                                                Rules for storage need consideration: A 24/7 CFE market would create a new revenue stream for storage. This should boost investment, particularly in long duration storage, which sees the biggest improvement in margins in modelled results. However, it is worth noting that the rules for batteries and other forms of storage do not yet exist. Simply, storage assets should purchase certificates when charging and transfer the certificate to the buyer when discharging (generating), less any loss due to round trip efficiency. However, careful rule design and monitoring should be put into place to ensure benefits are maximised.                                                                                                                      Further work on implementation would be required: Lack of liquidity, imperfect co-optimisation, and uncertain behaviours are risks that should be considered. Alongside Ofgem and DESNZ, it would make sense for NESO to be actively involved in forecasting and monitoring how granular certificates will impact market participant behaviour. Mandatory reporting and establishment of price forecasts for 24/7 CFE EACs could support liquidity. While this was not an implementation study, implementation would need careful consideration and monitoring to reduce risk of unexpected or intended consequences. 
• Impacts are amplified in the case of a move to a zonal market: In a zonal energy market (a possible outcome of REMA), the ease with which CFE demand could be met varies significantly between GB zones. This would create zonal 24/7 CFE EAC prices, as well as zonal electricity prices.                                                                                                              24/7 CFE EAC trading could happen earlier than zonal pricing: Based on experience in other markets, it is expected that 24/7 CFE EACs could be implemented within 2 years, whereas a transition to a zonal market is unlikely to happen at that speed. 
  EAC prices would vary by zone: In a zonal market the dominant factor for the ability to meet CFE demand is the wind generation output. Areas with a high penetration of wind will have lower EAC prices. Based on assumptions of zonal splits, Scotland and the East of England have lower prices over the year. Limitations to the transportation ability of CFE leads to areas with high EAC prices, particularly in the south of England and South Wales. 
  Encourages regional investment: A zonal market would see regional CFE prices which can encourage the locational siting of CFE and storage. Margins for storage would improve most in zones with CFE supply and capacity constraints. 

• Mandatory reporting of CFE supply in real-time would improve transparency: Mandatory carbon reporting by all electricity suppliers to all consumers, could help improve transparency, aiding informed decision making for customers to decarbonise. 
• Analysis and monitoring are required: The introduction of a new trading scheme can impact supply demand dynamics, so preparation by NESO and other market stakeholders would be important. Further work on to help such a scheme support decarbonisation goals. 
• Accelerated introduction is likely to optimise benefits and minimise risks: Early introduction and adoption of 24/7 CFE EACs is recommended with monitoring and forecasting by NESO to improve visibility of participant behaviour and dispatch decisions. It is unlikely that consumers will be able to achieve 100% 24/7 CFE matching. The goal should be that consumers become aware of their matching score, and aim to improve this over time. Granular metered data should be used by Ofgem/the registry for 24/7 CFE EAC management, in place of the current REGO system. 

Lessons Learnt

These were the positives: 

• Weekly project meetings were held between representatives from NESO, AFRY, Granular Energy and NordPool. 
• A project SharePoint site was used to for Significant interaction with the public and stakeholders.
• Significant interaction with the public and stakeholders 

Using Phase 1 as a scoping phase worked very well. This meant that there was some flexibility in the approach for both the trading pilot and the modelling which were carried out in Phase 2. The scope and technical delivery were in line with the initial project expectations. 

Areas to improve: 

• The trading pilot had only 5 participants – it was difficult to get good participation in this new product and receive the requested input data from participants. 
• The survey with market stakeholders could have had a wider reach. A knowledge gap by stakeholders meant that this was difficult and may have led to bias in participants’ answers, driven by their specific interests.