Flexibility markets are undergoing a period of evolution in Great Britain, as the electricity system operator (ESO) looks to transition away from the legacy response and reserve services to a new suite of faster-acting services which are designed to support a zero-carbon grid. We saw the first of these new services go-live, the Dynamic Containment Low (DCL) service, back in October 2020 followed by the re-launch of Short-term Operating Reserve (STOR) as a day-ahead auction in April 2021, and most recently the introduction of Dynamic Containment High (DCH) in November 2021.
In the past year, we have seen the value of providing flexibility soar, with the gross value of response and reserve services up by 167% and 500% respectively on the previous year. Increased value has fundamentally been driven by the high and volatile wholesale market conditions observed since September 2021. Following the surge in wholesale gas, electricity, and carbon prices in September 2021, we observed record high tender prices across all major ancillary services as flexibility providers factored in the opportunity cost of not being active in wholesale markets or the Balancing Mechanism (BM). We saw the greatest increase in reserve service value in 2021, which is predominantly secured through the BM. Last year saw imbalance prices jump to all-time highs in line with wholesale markets, along with extreme imbalance price volatility. Price spikes of up to £4000/MWh were observed during periods of scarcity, lifting revenue accrued in the BM to record highs.
Identifying longer-term trends in flexibility markets is vital for investors and owners of any flexible asset. Our new Balancing Services Forecast provides a long-term view of the value of response and reserve services. The forecast covers DC, FFR and STOR markets, and will be expanded to include the new suite of response and reserve services over time.
Our balancing services forecasts are built around the Benchmark Power Curve (BPC), our long-term model of the GB power market which provides a holistic picture of the electricity market out to 2050. The flexibility forecasts sit within the BPC framework of low, central and high scenarios for commodity costs and the capital cost of different technologies (Figure 2). With this approach, whole-system parameters are fed into the model to calculate system inertia and forecast the requirement for ancillary services at EFA-block granularity out to 2050. This means that wholesale power prices, ancillary service requirement and inertia levels are being co-optimised at the same time within the model. Forecast service prices are a function of the three, as well as accounting for competition between ancillary services and the balancing mechanism and the capacity of assets able to participate in each service.
Our forecast for DC sees the continuation of elevated prices out to 2023, before prices ease, driven lower by wholesale prices and growing competition with over 3.3GW of nameplate capacity battery storage assets recently awarded capacity market agreements in the T-4 auction. As shown in Figure 3, DC requirement is forecast to rise in line with the largest in-feed loss on the system, rising as the North Sea link increases to full capacity (expected this year) and again once Hinkley Point C comes online (anticipated in 2026-27). From the mid 2030’s, we forecast DC requirement to fall due to the build-out of a more diverse mix of stability sources, with investment in grid-forming capacity incentivised by the ESO’s development of a formal stability market.
Firm Frequency Response (FFR) prices are forecast to peak in Q3-2022, with price erosion thereafter amid falling wholesale prices and the gradual phase-out of the service as it is replaced by the new suite of dynamic services. Dynamic Regulation (DR) and Moderation (DM) are due to go-live shortly, in March and April respectively. We do not expect these new services to be undersubscribed in the same manner as DC, as the services will each launch with a modest requirement of 100MW, which is anticipated to grow to 300MW by 2025. Forecasts will be developed for the new dynamic services once more information is published on how DM and DR feed into the ESO’s Frequency Risk and Control Report, enabling us to form a view on long-term requirement. Longer dated years in the forecasts for FFR and STOR can also be considered as proxies for the new Positive Slow Reserve and DM products, given the shared characteristics of these services.
Lastly, looking at our reserve forecast, STOR tender prices are expected to remain volatile out until the end of the year. Longer term, we are anticipating more capacity to come online which can provide STOR. The Negative Slow Reserve service was originally due to launch this summer, but the ESO has taken the decision to delay its launch, with a new implementation timeline expected this month. The new Slow Reserve is anticipated to be open to a wider pool of providers, potentially including the likes of renewables and DSR, which will likely act as a depressive price driver for reserve prices in longer dated years within our forecasts.
If you’re interested to hear more about our flexibility forecasts, we recently held a webinar to dive into the forecasts in more detail. For more information on the subscription service, please contact Tom Ross at email@example.com.