Flexibility is the defining term for the electricity market of tomorrow: Helen Steiniger describes the way from the inflexible concepts of the past to the dynamic electricity markets of the future.
Traditionally, the so-called merit order was intended to deliver control reserve power to the network at the lowest possible cost. In this paradigm, load was assumed as given and the supply was continuously adjusted to meet the demand. Base load plants, usually large coal/lignite-fired or nuclear units, ran flat and covered the minimum load throughout the year. To meet hourly, daily and seasonal demands, midrange units were dispatched for short periods.
Nowadays, in places like Germany, Denmark, California etc., renewables, especially solar and wind, comprise more than half of the total generation on many days and hours. But they must be utilized when they are available – otherwise the low-cost, carbon-free electricity is wasted.
This article reflects about a radically different operating and dispatching paradigm: Instead of taking load as given, why not assume that demand and supply are flexible and can be adjusted to dance together, rather than forcing one to follow the other?
Flexibility in the Context of Variable Renewable Generation
In Germany, roughly one third of the power generation in 2016 was supplied from renewables with an overwhelming portion of variable wind and solar energy. This leads to several effects in the power grid: Wind generators in the windy North often produce so much electricity that the grid transporting it to the industrial South gets congested. Grid operators have to compensate this by paying thermal or renewable units in the north to switch off – while at the same time paying thermal units in the South to ramp up. The costs for curtailing or switching off renewable plants rose from €43.7 million in 2013 to €82.7 million in 2014.*
The most noticeable impact of so much variable generation on the network is twofold:
- First, it tends to depress overall wholesale prices because renewables displace thermal generation with zero marginal cost while thermal capacity is shut down in a lower pace than renewable capacity is built, leading to overcapacities in the market.
- Second, variability of renewable generation tends to make wholesale prices volatile because large swings in wind and solar generation impact market price spreads.
The first expected impact showed large consequences in Germany, especially for the four German power utilities: Their thermal plants are dispatched less frequently and for fewer hours at low market prices on average while many of them cannot be ramped down to zero, further depressing prices at running on minimum loads. A trend which is likely to get worse: recent studies estimate that up to 230 GW of fossil capacity in Europe will remain unprofitable through 2020. Still, a lot of nuclear and coal/lignite capacities are kept in the market through direct and indirect subsidies – a paradoxical outcome at odds with the EU’s climate goals.
The second expected impact cannot be so easily detected in the German market. The German electricity markets deal very efficiently with the fluctuating nature of wind and solar, so that prices do not necessarily become more volatile. Nonetheless, renewables have immensely altered the price structures of wholesale markets, for example the peak/off-peak paradigm of the old energy world.
Combined, the net effect of these two phenomena – wholesale prices plummeting and peak/off-peak differential eroding – is to:
- make thermal plants with inflexible operational characteristics less profitable
- make the grid operators job more challenging as the task of keeping supply and demand in balance requires new thinking, new tools and new approaches.
VPPs and the role of aggregators
As we can see from the preceding discussion, business as usual is not likely to be sustainable. The up- and down-ramping of thermal plants causes a lot of wear and tear on the units and is hugely inefficient, expensive and polluting.
Obvious solutions to these problems are:
- better manage the variable generation to the extent possible
- foster flexible renewable generation alongside variable renewables; and
- make demand more flexible and price-responsive.
Next Kraftwerke, a German digital utility, is trying to do all of the above and to create a win-win-win-scenario for the grid operators, for consumers with flexible demand and for generators who can adjust their output. The company therefore creates a portfolio of flexible generation and loads by aggregating a large number of participants who are willing and able to respond to price signals of the VPPs control center. The price- and steering signals are submitted wirelessly using a remote control unit called the “Next Box” –learn more in this article.
Ancillary services or control reserves, which are tendered by the transmission system operators (TSOs), stabilize the grid between 49.8 and 50.2 Hz in Europe. While this was quite simple with only a few big thermal power plants in the past the millions of decentral units in the system today create a complex optimization problem. Next Kraftwerke solves this by processing the collected data coming from the Next Boxes: Along with weather and price signals, the validated data are fed into an optimization scheme that determines the optimal output value for each unit. The control system then sends signals back to the Next Boxes at the decentral units which adapt their output accordingly. This system does not only work with producing units, its tried and tested with large commercial and industrial customers with flexible loads as well.
Price signals from day-ahead and intraday markets, automatically submitted via the Next Box, offer incentives for flexible power producers and consumers to shift generation and consumption: for producers to periods with power scarcity and high prices, for consumers to periods of excess supply with low prices. The price signals, delivered through real time M2M communication, adjust consumption and production on a quarter hour basis.
The value of flexibility for producers and consumers
One of Next Kraftwerke’s customers, for example, is an association for coastal management on the northern coast of Germany. Their main task is pumping rainwater over the dike into the sea in order to avoid flooding of the marshland. Once these customers agree to automatically change their pumping schedules, their pumping load is adjusted and their electricity bill is reduced without any adverse impact one the management of water levels. The particular product is called “Best of 96”, because of 96 quarter hours in one day; “best” refers to the cheapest electricity prizes. For customers who do no not have so much flexibility that they can shift in quarter hour periods, Next Kraftwerke offers a tariff with fixed price zones for a whole year in advance called “Take your Time”.
The same principle applies to clients with flexible generation, such as biomass or hydro plants: By receiving price signals from the control center they can ramp up at periods with power scarcity and ramp down at periods of excess supply with low prices. Because not every plant is able to do that without further adjustments, all of the processes involved in the plant’s operation are analyzed by Next Kraftwerke to determine the range of flexibility of each power plant.
What future for variable demand?
Founded in 2009, Next Kraftwerke has enjoyed explosive growth. In 2017 the company has over 4000 decentral units under management; controlled by the highly automated central control system in Cologne, Germany. The control system adjusts the aggregated generation and loads according to current market prices, grid congestion and weather data using its proprietary Next Box System. The rapid rise and success can be traced into two valuable services, increasingly sought after in markets with high renewable penetration:
- Aggregating output of its generators and selling it in various wholesale markets, e.g. EPEX SPOT
- Optimizing flexible capacity of both its customers and producers on various balancing and spot markets (secondary and tertial control reserve, primary control reserve in Belgium and Germany)
Next Kraftwerke’s Co-Founder Hendrik Saemisch envisions that VPPs will enable Germany to reach its ultimate goal of “100% renewable energy at a reasonable price”. He is also convinced that the European electricity market designs tend to converge over the next five years, offering a huge opportunity to sell Next Kraftwerke grid services across the continent. The company’s recent expansions into Austria, Belgium, France, Poland, the Netherlands, Switzerland and Italy show the international ambitions.
What Next Kraftwerke believes is that when nuclear and coal/lignite plants are gradually closed down and market prices will move freely, there will be sufficient market incentives for setting up decentral, green flexibility options of renewable generation and running loads more flexibly to absorb scarcity and excess situations and supply the short-term flexibility in between. According to the company the flexibility principle of the future energy market will be: first shift, then store.
Europe’s electricity markets will gradually converge to form an electricity market in which hydro plants from Norway, Austria and Switzerland and solar farms in the Iberian Peninsula and Italy provide power to central Europe in times of scarcity. At the same time, the flexible capacity of Europe’s electricity consumers will be activated – supply and demand will dance with each other to find a perfect balance.
This complex and delicate dance of millions of decentral units will have to be choreographed by a digital utility in the center. Next Kraftwerke have sought out this role and developed a successful business model around it. It is thrilling to speculate how this vision might unfold and how the concept of variable demand responding to prices might evolve over time.
*Mc Kinsey 2014: „Beyond the storm – value growth in the EU power sector.“
This text is an excerpt from an essay by Helen Steiniger, Next Kraftwerke:
“Virtual Power Plants: Bringing the Flexibility of Decentralized Loads and Generation to Power Markets”
published in: Sioshansi, Fereidoon P. (ed.), “Innovation and Disruption at the Grid’s Edge”, Elsevier Academic Press, Chapter 17, (p. 331-362)