Unlocking the potential of renewable energy

Key insights

  • Decentralised renewable energy generation is challenging the current electricity market structure which is based on a constant balance between demand and production. However, solar energy generation is at its peak during the day, when many consumers are not at home.
  • For the first time, this PhD research applies the existing concept of consumer demand response to the total electricity market.
  • Integrating the concept of demand response into the wholesale energy market could decrease the total cost of running the system, but there is still a lot of debate and unclarity about demand response remuneration.
  • In order to truly integrate renewable energy generation sources into the current electricity system, the wholesale market should be opened up to user participation.

Policy changes and technological developments have caused a significant increase in the installed capacity of renewable energy generation sources, such as wind and solar power. As a result, there has been a steep growth in renewable electricity generation, which is variable and decentralised. Electricity consumers increasingly become prosumers. However, the electricity market structures were not designed to deal with the consequences. What can we do to take advantage of renewable energy? Ariana Ramos’ doctoral thesis provides a qualitative and, most importantly, quantitative analysis of the challenges and possible solutions.

Balance under pressure

Our electricity network has been designed to be in balance at all times, i.e. generation has to equal consumption. This particular requirement is reflected in the way the wholesale electricity markets work (see box). But the emergence of decentralised renewable energy generation sources and smart grid applications puts this system under pressure, as Ariana explains: “With renewable energy sources, availability and demand are not always balanced. Solar energy generation is at its peak during the day, when people are not at home, while in the evening they will want to do the laundry or charge their cars.”

Demand response

“My research aims to integrate demand response into the market design. Demand response means that users are responding to signals of renewable energy availability. They change their consumption patterns according to certain signals. These signals and their responses can be automated, for example a thermostat adjusting the temperature according to the time of day, or they can involve active user participation, for example users doing their laundry late at night when electricity is cheaper.”

Demand response has been studied before, but mostly from the point of view of how to activate users. Ariana’s thesis is one of the first to look at the bigger picture, i.e. the context of the electricity market. “I analysed the issue at two levels, first at the level of the existing wholesale market and second, at the level of possible future local markets.”

Enter the aggregator

How can demand response be integrated into the wholesale day-ahead market and how does it affect the various market participants? “To be organised effectively, demand response could be aggregated, i.e. there could be an intermediary, an aggregator, responsible for pooling flexibility from different consumers and selling it on the day-ahead market,” Ariana says. “But consumers already have contracts with retailers, trading energy on their behalf, based on certain assumptions and forecast. It’s obvious that conflicts may arise. I undertook a quantitative analysis of the effect the aggregator has on the retailer and how consumer or user behaviour is affected.”

Arbitrage effect

She goes on: “As far as pricing is concerned, there has already been a lot of debate about demand response remuneration, whether it should be remunerated as a service, i.e. a flexibility service provided to the market by consumers, and if it’s paid for, how much and whether or not the retailer should receive a transfer payment from the aggregator as a compensation. Different countries have made different choices. I developed a quantitative optimisation model to analyse different remuneration options. And I found that demand response has a high arbitrage effect. As a result, it could be very profitable for the current market participants, like retailers.”

She pauses, and adds: “So, it’s rather surprising that demand response is not yet taken advantage of. Why is that? I can only speculate: Retailers have portfolios of electricity generation as well and it seems they’re favouring these sources of generation instead of trying to buy at the cheapest price. But that’s something that would need to be studied in detail.”  

Congestion as a use case

The local market is still very much uncharted territory. “The questions I tried to answer can be summarised as ‘What is the local demand for flexibility and how can a local market for flexibility be organised?’ There is no consensus yet as to which party should be responsible for contracting local flexibility. Should it be the TSO, the DSO, an independent aggregator or a third party?”

The different options were analysed qualitatively as well as quantitatively. Ariana developed a method and empirical models to analyse the local demand for flexibility. She used congestion of the network as a use case: how can congestion be solved using flexibility? The price and demand criteria were defined from the point of view of the DSO.

The DSO in the driver’s seat

In a first case study she assumes the DSO is the sole operator, procuring flexibility from consumers at cost value in order to avoid network reinforcements. “Traditionally, a DSO would solve congestion by adding extra lines. So, it’s fair to say that a DSO would never pay more to procure flexibility than it would cost to build the extra line. Particularly because when contracting flexibility, there is a risk that the flexibility provider doesn’t deliver, whereas any necessary network reinforcements are entirely under the DSO’s control. The analysis showed that flexibility contracting has a huge cost saving potential: the DSO could reduce investment in grid expansion by more than 60%.”

Local competition for flexibility

In a second case study the DSO and a retailer, in order to solve congestion problems, are made to compete for flexibility resources provided by an aggregator. As the sole provider of flexibility resources, the aggregator sells to the highest bidder. The analysis showed that, if the aggregator is in a position to set a monopoly price, this bilateral contracting for flexibility is less profitable for the DSO than the first scenario. Because its willingness to pay is higher than that of the retailer, the DSO wins the bid most of the time. As a result, the DSO manages to reduce investment costs by less than 20%. The retailer, in turn, can slightly reduce its balancing costs, i.e. the penalties due when contracting flexibility on the balancing market (see sidebar).

General conclusions

What were the overall conclusions and findings?

  • Integrating demand response into the wholesale market could increase social welfare. Having users respond to availability signals and use cheaper resources whenever they are available, would decrease the total cost of running the system. This effect has been amply documented in literature.
  • Demand response is not yet taken advantage of. Given the high arbitrage effect of demand response, possible conflicting interests on the part of retailers merit further investigation.
  • Encouraging demand response in the wholesale market is important at this point in time because there are barriers to entry. To participate in this market, aggregators need a certain scale and delivering flexibility has a cost.
  • In order to truly integrate renewable energy generation sources into the current electricity system, the wholesale market should be opened up to user participation.
  • As far as the local market is concerned, the potential of using flexibility services could be significant, provided there is enough competition on the supply or aggregator side to avoid a monopoly. So, to get the market going, it may be better to start off with a semi-regulated market in which the DSO is the single buyer for flexibility services and as the market evolves, progress to a more open, competitive market.

Wake-up call

Congestion is not a significant problem yet, but it will become one as the number of electrical vehicles, solar panels and smart devices continues to increase. “I’ve made a first attempt at quantifying the issue, but to most DSOs the data I’ve used in my simulations, for example the amount of solar energy stored on their grid by users with solar panels, are big unknowns. They are operating in the dark, which forces them to be reactive rather than proactive. They will need to take up a more active role, working more closely together with the TSO. Coordination among all stakeholders is essential, hence the title of my thesis,” she says smiling.

Listen to the numbers

Whoever shouts loudest, lobbies best, but policy makers would do well reading Ariana’s work. “We are at a critical point in the debate that will shape the future energy landscape. At the end of last year the European Commission released its Clean Energy for All Europeans package that aims to put the consumer at the centre of the energy system. The proposed legislation includes measures to stimulate consumer participation and recommendations for the remuneration of demand response. As expected, it has triggered lots of discussion and lobby groups voicing all kinds of views and opinions. But so far little has been done in the way of truly quantitative analysis. I believe it’s important to add an academic, objective voice to the debate and my thesis aims to do just that.”

And to electricity consumers she says: “It will pay off to get more involved. A little bit of participation in the electricity market goes a long way in terms of impact on the price in the wholesale market.”

How does the wholesale electricity market work?
As indicated above, the electricity network has been designed such that at any moment in time generation has to equal consumption. The final responsibility for maintaining this balance lies with the TSO, i.e. Elia in Belgium. Other participants in the wholesale electricity market are the electricity generators and retailers, such as Electrabel. There are different types of electricity markets, arranged in sequential order:

  • The forward and futures market is a long-term market where parties trade electricity up to three years before actual delivery in order to reduce vulnerability to price fluctuations.
  • On the day-ahead market, which is cleared every hour, electricity is traded one day before actual delivery. This is the most important market and at the end of the day, a detailed plan of generation and consumption (the nominations) are submitted to the TSO.
  • On the delivery day itself, electricity is traded on the intra-day market, which is cleared continuously. This market enables all parties to correct for deviations from their day-ahead nominations. These deviations can be due to unexpected power outages or better wind forecasts etc.
  • Finally, any real-time imbalances between generation and demand are taken care of by the TSO, who will maintain system balance by activating its reserves. Reserves are traded on the balancing market.

Source: ‘Coordination of Flexibility Contracting in Wholesale and Local Electricity Markets’ by Ariana Ramos. Dissertation presented in partial fulfilment of the requirements for the degree of Doctor in Engineering Science at the KU Leuven in 2017. Supervisor: Professor Ronnie Belmans (KU Leuven and Vlerick Business School). The research was supported by VITO - Flemish Institute for Technological Research.

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