Andrew D
Welcome back to the Megawatt Hour, a podcast boxset series brought to you by Energy Voice in paid partnership with BDO. In this series, we'll be examining how energy storage technologies are reshaping, reinforcing, and recharging energy markets in the UK and further afield.
We've looked broadly at the technologies available for storing energy and some of the market and policy dynamics that have guided their deployment. This episode will be focusing on the key players who help manage the supply and demand of electricity so these assets and the wider market function as intended. We've termed them aggregators and optimizers, and we'll learn more about them shortly.
I'm Andrew Dykes, content editor at Energy Voice, where we are leading the global energy conversation.
I'm joined this time by my BDO co-host, senior audit manager Caroline Ingham. Caroline works across the natural resources, energy and shipping sectors, with a particular focus on power and renewables, and helps audit a range of clients in the sector.
We're also pleased to welcome Andrew Langlands, head of commercial at Flexitricity. Based in Edinburgh, the company provides a root to market service for electricity generation, storage and flexible load, helping to balance supply and demand on the National Grid. As part of his role, Andrew works with clients to oversee and help maximise the commercial value from their electrical flexibility.
We have two Andrews and two Carolines in our virtual studio today, so that might get a little tricky, but we'll press on nonetheless.
I think the best place to start this discussion is probably a question we perhaps haven't answered directly so far, which is: how does a battery or a storage asset owner decide how and when to charge and discharge the asset?
So I wondered, Caroline, could you maybe help answer that question and maybe tell us how that relates to the role of aggregators and optimizers?
Caroline
Yeah, sure. When you've got a battery storage project, you want to obviously make sure you can get an access to the marketplace and to do that we commonly see that aggregators play a key role in making sure that this can happen particularly for battery storage assets where they're bringing together a range of different generators.
And so the aggregators are there to try and help support and guide the generators to get the best part in sort of flexible services or whether or not they're going to actually merchant the asset on the market.
I'm probably best to hand over to Andrew Langland what role aggregators play in supporting generators with getting a route to market.
Andrew D
So is it fair to say there there's this middleman bundling together of energy to make sure that everyone either end of the chain has what they need?
Andrew L
Kind of! Our role at Flexitricty is as a route to market provider. So it's a wide role is to monetize the electrical flexibility that these assets can provide. We work with a whole range of different flexible energy assets from batteries to gas peaking assets, but also things like CHP and industrial commercial sites.
But yes, but specifically speaking about batteries our role is to maximise the revenue potential for these assets and we do that by providing holistic market access across a variety of different services - wholesale markets, balancing mechanism and obviously the one that's been grabbing a lot of the headlines in in the last couple of years is frequency response, particularly dynamic containment.
We're here as a as a route to market provider for these asset owners. Flexitricity as an optimizer, we are an energy supplier, so we would literally become the energy supplier to that site, buy and sell all the power that that flows through the beaters there or deliver services such as dynamic containment.
Andrew D
To take a step back, I suppose the company itself, you're one of the first in the UK to provide these kind of services - could you give us an idea of the history of the company? You're about 10 years in now?
Andrew L
Absolutely. Yeah. We were founded in 2004.
Andrew D
I'm way off.
Andrew L
Well, actually our first commercial operation was 2008. We were the first to provide aggregated short term operating reserve in 2008. STORE is a reserve service and so slightly different from the balancing mechanism which is used by National Grid to help balance supply and demand on the system. Short term operating reserve is a reserve service that they procure for any kind of unexpected shortfalls, you know, interconnected trips or something along those lines and they need additional capacity to step in.
Yep, first to deliver aggregated frequency response. In 2012, we had a contract with National Grid for a service called Frequency Control by demand management. This was a static frequency response service that if frequency hit 49.7 Hertz, assets were expected to step in and deliver a 30-minute response to that frequency trip.
Andrew D
Is that kind of like a danger threshold on the grid - is that a useful number to bear in mind?
Andrew L
The National Grid are obliged to keep frequency between 50.5 and 49.5 Hertz and the different frequency response services they procure help manage frequency at different bandings. So dynamic containment for example deals with more of the extremes. So when frequency goes below 49.8Hz or above 50.2Hz you actually get very little cycles out of the battery when you're delivering a service like dynamic containment.
Whereas dynamic regulation which is one of the services that grid launched earlier this year. As part of the new suite of dynamic services. Dynamic containment, dynamic moderation and dynamic regulation - that works a lot tighter into the 50 Hertz band so you'll utilise a lot more cycles of the batteries by delivering a service like DR purely because frequency is more often than not around that 50 Hertz mark and then the likes of DC step in when frequency goes a bit further outside of those bands.
But in terms of EFM, that was that was a service that Grid brought to an end in 2019 and in terms of what did we aggregate for that service, it was mainly load drop and manufacturing sites, diesel rotary UPS at data centres and actually we contracted our first batteries to deliver that service in 2018.
That's a kind of brief summary of the kind of different roles of frequency response, but we've you know, I'm sure we'll go in a bit more into detail on the new suite of dynamic services and exactly why they've been brought in and what they're here to provide.
Andrew D
Yeah. So obviously for today and for our purposes, we're going to talk a lot about storage. But it's worth saying that as you mentioned, you work with a range of different ways in which power can be balanced or moved around a little bit.
Could you maybe talk to us about how your business model works and how you would kind of work with a customer or onboard them into this process?
Andrew L
I've kind of put our customer base into two separate camps almost there is what we call front of the meter assets. So these are your grid scale storage and gas peaking plant though they're purely to deliver a kind of a merchant service.
So, with gas peaking plant, we're trading them in wholesale markets and they're active in the balancing mechanism and for grid scale storage we're optimising them across, you know, frequency response, wholesale markets, balancing mechanism and a variety of other services as well.
The other set of customers that we work with are behind the meter assets and these are industrial and commercial customers who historically have provided demand side response services, so load flexibility gas, CHP - historically diesel generators but you know with emissions regulations, diesel generators and unless they derated or are no longer able to participate in in these services.
In terms of the process with customers, I suppose that the first step is really kind of understanding the asset understanding what flexibility it can deliver and then once we've got a good grasp of that, you know, we can determine what flexibility services it can deliver.
We have an outstation that we ship to sites and that allows our virtual power plant from our control room in Edinburgh to communicate with the sites and essentially dispatch the site for services with national grids. And then each energy partner that we work with has an account manager at Flexitricity and that account manager’s role is to speak to those partners about you know market regulation, new services that are coming, performance of the assets, you know whole range of different things that the asset owners would be would be wanting to know about what their asset is doing.
Andrew D
I suppose to maybe flip this around, what would the alternative be if you were not to provide that service? So I'm thinking about, you know, I’ve set up my storage asset. I want to sell power on the market - if I didn't have these services, that's imaginably a little bit more difficult?
Andrew L
Yeah. I mean, you would need to have an energy supplier! Firstly, which would buy and sell power for the asset but obviously in terms of tying back to that kind of original question that you opened with when do you choose to, to charge and discharge an asset? You know that that is our role as an optimizer where we're looking at the optimal times a day to charge and discharge the asset or have it delivering frequency response.
So if organisations like us didn't exist. It would be a lot harder to maximise revenue opportunity. But then again there are, you know some of the larger organisations may well have the capabilities that we can provide in house.
Andrew D
And Caroline is it fair to say that businesses like Flexitricity have kind of evolved alongside the UK market as it's gotten smarter and also more penetration of renewables has come onto the grid?
Caroline
Yeah, I think it's a fair assessment. We've definitely seen working with our clients new entrants to the market in recent years or maybe they were all always there, but definitely more in the forefront now and it's really key for a lot of our clients in terms of making sure that they've got, I suppose, an aggregator partner who is able to be flexible - no pun intended.
But to sort of be flexible and to be thinking ahead and quite quick in how they move because the evolution of the market has moved quite quickly. I would have, I think and I don't know what your view on that Andrew is over the last couple of years how the UK market has changed?
Andrew L
Yeah, to go back to, you know what I was talking about FCDM and the new dynamic suite of services.
FCDM was retired in 2019 and National Grid went through a process which I think began in 2017 called the system needs and product strategy review which was essentially looking at the requirements of a grid that was transitioning from a large fossil plant to more intermittent renewable generation.
One of the big challenges of that was large fossil plant provides inertia, which kind of helps keep frequency relatively stable, whereas renewable energy does not provide inertia. So what you've been seeing happening with frequency over the past few years is that the rate of change of frequency - or ROCOF which is a one of the many acronyms that we like to use in our industry -00:11:18 Dykes
Andrew D
That’s a good one.
Andrew L
So rate of change of frequency is increasing which means you need assets that are capable delivering a much faster response to frequency deviations and that's where the new suite of dynamic services are here to deliver. Whereas FCDM was a static search service, sub two-second delivery, 30-minute response - and yes National Grid did procure dynamic services then as well - the new suite of frequency services are sub-second response and batteries are an ideal asset to deliver these services.
So because of that change in the system transitioning away from large fossil plants to more renewable energy rates, a change of frequency getting faster so the speed of services that grid are having to pick are faster and battery storage assets are primed to be able to take advantage of that.
Andrew D
That we've mentioned dynamic containment and a bit of demand side response. Are there any other markets or services that you provide that can add to those revenue streams for flexibility?
Andrew L
Yes, we provide a whole different range of services with our assets. In fact, I think we delivered 15 different services with battery storage assets since we went live with our first batteries in 2018
I'll pick up on the main ones. Wholesale markets is obviously one of those main markets we look to which is all about trading buying power cheaply overnight and discharging over evening peaks and so on.
In terms of the decision-making process of what markets should we be delivering and when it all starts at the month-ahead stage for batteries, national grids procures a firm Frequency Response month ahead. So we have to submit our tenders so just the beginning of October we were submitting our FFR tenders for November.
We look at what is the opportunity cost in in November for wholesale markets, what's the opportunity cost for the day ahead, frequency services, which are dynamic containment, dynamic moderation, dynamic regulation. We'll find out mid-month whether or not we've secured FFR coverage in any EFER blocks for November.
We might have assets that are delivering 24/7 FFR, we might have assets that haven't secured any FFR coverage. And then it becomes daily decision making and there's different kind of decision points through the day to determine which services your assets should be delivering.
The first one is in in the morning - you've got 9:30 EPEX early auction, 10:00AM and 2X early auction - so you know, what spreads are available to secure in wholesale markets. You move into the afternoon, the spreads that you can determine from wholesale markets will drive your tender strategy for dynamic containment and moderation dynamic regulation at all times, considering the cost of a cycle effectively.
So a wholesale market full charge and discharges is 1 cycle, dynamic containment 0.2/0.3 cycles a day, Dynamic Regulation 2.9 cycles a day - so you need to consider cost of charge and cost of a cycle in your decision making.
Then after the dynamic suite of services tenders in the afternoon, you then got the half-hourly wholesale market in the afternoon where you can further hedge out positions in wholesale markets or if you've secured dynamic containment or something look to buy back out of positions that you've opened up in the morning.
Then you're into in-day optimization where you know Flexitricity we trade on the M7 continuous exchange in-day, national grids balancing mechanism and also importantly DC/DM/DR you can stack wholesale market trading and the balancing mechanism with those services. It's a good way of managing state of charge when you're when you're delivering in those services, so if state of charge gets too low, you can top up your battery while you're delivering that service.
Those are the main services that we would talk of as optimization. There's also the capacity market which all battery storage assets should be participating in. This if you're a new build site you can secure 15-year capacity market agreements which kind of helps underpins some revenue for 15 years.
So we provide a full end-to-end capacity market process from kind of pre-qualification through to delivery of requirements in the delivery year as well. So lots of different revenue streams.
Andrew D
So without pulling too many threads at once, I mean, you you're working with loads of different assets and those are different owners who presumably have their own kind of individual strategies or how they want to go about making their revenue or how they're capable of making that revenue depending on the asset type.
How on Earth do you balance almost competing needs with the services that you've just mentioned there? If there is indeed a simple answer.
Andrew L
I mean it's part of the onboarding process is you know, figuring that out with the asset owner if you bought a new battery or if you'll have a warranty, it'll have, you know, cycle limits that you don't want to be breaching. So it's all about setting, setting parameters at the outset that you can trade within. Although we always like to discuss if there is flexibility in those parameters?
So quite a lot of storage assets that we see have got cycle limits of two cycles per day. I mentioned previously that for DC you're doing 0.2/0.3 cycles a day. So if you were in dynamic containment for five days in a row and you've been doing 0.2/0.3 cycles and an opportunity presented itself in wholesale markets to do 3 cycles a day, is that breaching your two-cycle limit?
Or because you've been doing hardly any cycles over the past five days, is that something you would be comfortable doing? So it's all about ironing out those details when we're onboarding assets and the account management team have regular catch ups with all of our asset owners and constantly reviewing parameters and performance. It's an open dialogue with asset owners in terms of what parameters should we operate within.
Andrew D
I think that's a great place to take a quick break and we'll be right back after this.
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Andrew D
So you mentioned there the forward markets. Andrew, could you maybe give us an idea of how you look at forecasting and what these are going to do and how you then inform a strategy that's you know maybe months years ahead?
Andrew L
Absolutely. Forward markets are very difficult to predict at the moment! We do have models that that they run and look out you know over the longer-term horizons but the volatility that we've seen in the market recently is on its unprecedented
As you know we're seeing £200 of firm swings in gas price in-day, which means depending on when you run the models, you could get quite different outcomes. So that is challenging the longer term forecasts for the FFR which is month-ahead, it's much easier to try and predict what's happening in the short term.
For months ahead FFR, you know, without wishing to show under the bonnet too much, we look at what products are trading in the wholesale market for the month of November - baseload peak products - and run a scalar model to determine what wholesale prices are likely to look like in the month.
National Grid also publish and market information reports which shows the capacity that they're looking to procure and are also in demand so it's a combination of those two, plus assessment of you where everyone else has been pricing at the far end.
In recent months that is how we assess opportunity costs for the month, but also whether or not we're going to be competitive in the stack or whether we want to be competitive in the stack. So you know, we're looking at FS5 and 6 and in particular for November it could be quite a volatile month, there could be quite a lot of wholesale trading opportunity. So do you want to lock yourself out of that opportunity by taking a contract in FFR.
So yes, it's really about quantifying that opportunity costs and the way we do it is use scalar models on products that are actually trading in the wholesale market at any given time.
Caroline
Andrew just in terms of so I think in recent years we've seen obviously dynamic containment come in and how closely do you work with sort of National Grid around sort of potential changes to policy or frequency response services or changes to possible products which these assets can sort of work in? Is that something that you get a lot of view on or is it something that they go: here you, you've got six months?
Andrew L
We're absolutely engaged in that process. So Allister Martin, who founded Flexitricity all those years ago, he's our chief strategy officer. We also employ a dedicated head of regulation, they're heavily involved in engagement with, not just National Grid, but BEIS, Ofgem, the Association of Decentralised Energy, Electricity Storage Network. We're engaged with a variety of different parties both from an industry and regulatory perspective to influence or be part of the conversation in code modifications and new service launches.
Looking at this winter in particular, National Grid is launching a winter demand flexibility service. We took part in the working groups and the consultation response on that service, so we're absolutely engaged in that process and you know part of our role with asset owners is to get a feel for what they are looking for as well and use that to kind of help push the market forward.
Caroline
So you obviously mentioned the latest and winter report and sort of forecasting demand and challenges within that market. Are there concerns about the current market environment, particularly with the government support that's coming in place for retailers et cetera, is that is that something that impacts you or is that something that you are fairly protected from?
Andrew L
Yes, it does impact us in in places. We are an energy supplier, we do supply some industrial commercial sites and we're currently looking into the details of how the price cap is going to be implemented.
Clearly one of the things that this come out in this this winter outlook that the National Grid published about 45 minutes before we started recording was, the potential for gas shortages this winter which clearly could create quite a bit of volatility in the market. So in their worst-case scenario they've modelled what's going to happen if 10GW of CCGT comes off the system and are we going to have to start managing load reduction, which means enforced power cuts - which clearly could create quite a bit of volatility in the market. So yes, there's lots going on at the moment!
I think it is going to be a volatile winter and I think management of risk is certainly going to be something that is going to be crucial because we could see some quite spiky system imbalance prices that you don't want to be on the wrong end of.
Andrew D
On the policy front then, that's the immediate volatility of the next three to six months. We've also been talking briefly on the podcast before about the REMA consultation and wider changes within the UK market - are there areas specifically that Flexitricity are looking to make the most of or that change your business model at all?
Andrew L
We're heavily involved in in the REMA consultation, we are submitting or may have already submitted a consultation response and we hosted a remote event at the House of Lords in the summer with some of our investor customers there as well as a few politicians. So we are absolutely engaged in the process. One of the areas of REMA that I think is causing most concern for some of our asset owners is, locational marginal pricing. At the moment the wholesale market trades GB-wide and this is looking at kind of locational signals in the wholesale market, so you might get a different price in the wholesale market on the outskirts of Edinburgh than you do in the southwest of Cornwall.
We certainly agree with the problem statement with regards to locational marginal pricing that you know there's that there's very high constraint costs to National Grid. However, I think full locational marginal pricing could be quite disruptive to investment, and I think it will also be very complex to implement. So we're coming at it from an angle of perhaps reform to the balancing mechanism or to the transmission constraint licence condition as opposed to you know full LMP, which I think others in the market are more in favour of.
Andrew D
I see the logic in terms of encouraging storage and other assets to go to the right places and to, I suppose, set up in areas where they can respond to those kinds of demands, but there's a little bit moving the goal posts. If you already have these assets on your books, they're suddenly now exposed to markets that they were never necessarily thinking about.
Andrew L
Right. Yeah. And I think that's where a lot of the concern is coming from as well. As deployment of capital into new assets will be involved in the process we’ll continue to listen to feedback from our Energy Partners on this one and participate in the working groups and see where it all goes.
But yeah REMA is a bit of a behemoth of a scope. It's not just LMP that's coming through in that. So yeah it'll be very interesting to see how that will all unfold.
Andrew D
That's probably a great place to look more than the future of the industry as a whole and in aggregation and energy storage and how they interrelate. What is the future of these providers - are we going to see a lot more services being taken in house or do you see more providers such as Flexitricity springing up?
Andrew L
I could certainly see more changes happening in the industry in in in terms of new entrants. It could be challenging coming into this one fresh, we've you know we've got a number of competitors that provide the same services as we do and to kind of get to that level of asset optimization from a standing start could be a challenge, but I could also see some asset owners looking to take optimization in house.
We were acquired by Quinn broke Infrastructure Partners a few years ago, so I could also see some further consolidation in the industry.
Andrew D
We mentioned services being taken more in house by the asset owners and developers. That feels like something we've seen a lot with the wind and solar markets. Is that right, Caroline?
Caroline
Yeah, we have. So I think historically we've seen from an operating maintenance agreements, we've seen wind and solar developers and asset owners starting to think about taking this in house. I suppose looking towards the future, is there a risk that something similar could happen from sort of an aggregator perspective is there a potential for clients to think actually hang on a minute, I could save myself a few a few pennies here and do this myself?
Is there a risk there from for your business, Andrew?
Andrew L
We do see asset owners, asking for causes in in contracts that are some kind of right to terminate if you're acquired by a competing business of ours, as it were. And so I think it is a concern for some investors because where we've seen them asking for these clauses in our contracts and you know it is something you could start to see happening if somebody gets to portfolio sizes of 1-2 gigawatts and they're paying a margin to an external third party when you know they could potentially procure them and take that in-house. It's certainly something I could see happening.
Caroline
There's a lot of focus for a lot of our clients at the moment around sort of particularly in tech and media sector around cyber security and obviously the business is quite heavily remote. In terms of looking at those sorts of challenges from your business, how are you addressing those or what sort of challenges are you seeing?
Andrew L
Yeah absolutely it's a crucial concern and you know when we're submitting tender responses to asset owners have got pipeline of assets that are being built in 2023/24/25, cyber security is something they are they are asking about in their tender response.
Flexitricity is a founding member of the Association of Decentralised Energies Flex assure scheme, which has been set up to put up industry best practice as it were, and there are aspects of that that tie into cyber security and data protection protocols. Incidentally we passed the first of our Flex Assure audits in in October of last year.
So yes it is a concern for asset owners, we are seeing that question asked a lot in tenders. We've got pretty good cyber security processes in place and things like business continuity process and disaster recovery processes and all that kind of stuff - and we're happy if we're under NDA with someone to share all of the different processes that we have in place to manage that challenge.
Andrew D
Do those kinds of risks come into the kinds of audits that you do with your clients, Caroline, it's cyber security, as you mentioned, as a growing concern?
00:31:20 Caroline
Yeah, absolutely. I think it's a, it's a real concern for businesses, not just even, you know, it's for all businesses really, because, you know, GDPR and privacy regulation is so key and you can see businesses just in the newspapers whenever there is a breach, you can see that they're under quite a lot of scrutiny from not just investors but the general public and people who transact with them.
It's a really it's quite a key thing and we're seeing it more and more as a key risk and that boards and investors are focusing on. Something like this and we'd expect to be quite a key focus for them.
Andrew L
Yes, I imagine that you work with a lot of investors that are ESG-focused and this squarely falls into the G of governance.
Caroline
Absolutely the ESG agenda is only getting more and more challenging, so definitely one of the big G’s.
Andrew
So maybe one thing to think about as we draw to a close, you've mentioned REMA, you've mentioned the response from investors
At the moment, obviously we are planning on having even more variable renewable generation on the grid. We're planning on having more batteries and various kinds of storage are the right signals in place to make sure that these all come together. Is the role of aggregators like yourself correctly incentivized and understood in the market?
Andrew L
There was a BEIS report published - I can't remember - it was last summer or the year before that that that talked about the requirement for flexibility in the grid. Clearly with more renewable generation coming online there's going to be more intermittency, you need more flexibility and we are working on a number of different code modifications at the moment that will allow us to onboard different types of flexibility.
P375 was actually a code modification that was that was sponsored by Flexitricity that allows assets to be settled behind the meter - so separate meters on flexible assets at industrial commercial sites for example. Ultimately there's another code modification going through, P415, which is probably 18-24 months away from coming to fruition that would allow us to trade the flexibility of those assets behind the meter in wholesale markets.
So there are things coming. There are code modifications coming through that I think will help develop this industry further and in terms of what assets could that unlock - we're looking at heat pumps, electric vehicles, domestic batteries, small scale industrial, commercial flexibility, and enrolling that type of flexibility into demand side response, I think is absolutely something that that needs to be encouraged and we are all for it.
Andrew D
I think that's a great place to draw discussions to a close, so that brings us to the end of this instalment of the Megawatt Hour.
Thank you once again to my co-host, Caroline Ingham and to Andrew Langland for joining us and to Caroline, our producer.
Thanks also to you for listening.