Rethinking market mechanisms for flexibility

The integration of variable renewable energy into energy systems requires flexible technologies that can balance their intermittent output and ensure overall grid stability. In today’s episode, we look at flexibility from a market, planning and financial perspective and how we can incentivise greater investment in flexibility that will help accelerate the integration of renewables.

Flexibility, the key to renewable energy integration


In this episode of Rethinking Energy in Southeast Asia, David Kayanan, Financial Analyst at Wärtsilä, speaks with Stuart Thorncraft, Managing Consultant at Intelligent Energy Systems about power system flexibility and how PPA markets in SEA can adapt to reward flexibility before committing to wholesale electricity markets.

Wind and solar PV have advanced so much that today they are one of the most affordable sources of electricity. Governments, and increasingly the private sector and the public, are also taking interest in the environmental benefits of renewables. But to accommodate the intermittent nature of wind and solar, you need flexible technologies that can respond quickly and cover momentary rises and shortfalls.

As Thorncraft explains, ‘‘when we talk about flexibility, I think what's important is firstly, you have a supply-side aspect to flexibility, which is about rapid response of generation to uncertainty and events.” He also brings up that the demand could also respond to the needs of the system, also known as ‘demand response’.

Thorncraft goes further to say there are now a variety of different flexible technologies that can do this, ‘‘One of them is the internal combustion engine (ICE) which is modular and able to respond rapidly to changing conditions. Another technology is obviously energy storage systems, they are also able to respond very rapidly to changing conditions. There is also a number of traditional technologies, for example, pumped storage hydro would be one, and conventional hydro is probably another.

The other comment that I’d make on flexibility, is what's driving it is the change that we're seeing in the technology mix. And part of that change is manifesting essentially as net demand which is posing some challenges.’’

In other words, the effects of having more renewables can be seen on the system level via the net demand, which is what the dispatchable assets must cover. More wind and solar means we need more flexible assets to respond to their intermittency.

Thorncraft goes on to say, ‘‘things that can happen when you don't have enough flexibility is curtailment of renewable energy. Another, is that you could end up with some unmet demand which is obviously very undesirable. That could happen in a situation where you just didn't have enough fast-acting resources to ramp up or manage a wind ramp down for instance.’’

How real-time pricing can demonstrate the benefits of flexibility

Kayanan, points out a very different symptom of lack of flexibility: negative pricing. Negative prices occur when there are instances of oversupply. For example, when solar is abundant but coal-fired generators are unable to ramp down. As coal plants incur significant costs when stopping and starting, and take several hours to do so, they will continue generate energy throughout the negative pricing period.

As Kayanan describes it, ‘‘we have a larger risk of negative prices in wholesale markets. In my mind, that's a clear lack of flexibility. And one of the advantages of having flexible assets like batteries and engines is that you're able to avoid these negative prices. On the other hand, you're also able to dispatch your resources when you expect spikes and prices to come up.’’

Thorncraft agrees, saying, ‘‘in Australia, we'll often have periods of time where there would be a rapid decline in wind generation and there would be a price spike at that time. Well, it's the perfect signal for energy storage or ICEs to be generating. So, in a way, real-time electricity markets are very good at sending the signal to investors that the power system needs flexibility and will reward flexibility by paying high prices at those times.’’ This demonstrates how real-time pricing within an energy system can highlight the value of flexible technologies such as energy storage and balancing ICE power plants.

A mix of PPA markets and electricity markets in SEA

Unfortunately, some countries don’t have this in place yet. While Singapore, Philippines and Vietnam have moved towards real-time pricing and can see the benefit of greater flexibility, Indonesia, Cambodia and Myanmar are still PPA (Power Purchase Agreement)-dominated markets and have no real-time pricing available. PPAs set fixed tariffs such that throughout the day, the real-time conditions of the system are not reflected.

As Kayanan explains, ‘‘on the one hand, in a PPA dominated system, it can be rather static because every megawatt-hour is the same, regardless. Whereas the advantage of having an electricity market is that you have real-time pricing. As renewables bring in much more dynamics into the system, what is happening at a real-time level is what is important to manage all of these new technologies.’’

Thorncraft goes further in saying, ‘‘most PPAs don't have that signal, they don't have that reward for being flexible. So, in my view, as we move forward PPAs may need a redesign or rethink in terms of how to build that incentive into the PPA itself.’’

How PPA markets in SEA can reward flexibility before committing to electricity markets

Thorncraft explains that over the 20-year lifetime of a PPA, conditions can change, the technology mix can change, and the system operator may have different requirements. It would make sense to allow the system operator to negotiate and fine-tune some of the terms and conditions of the PPA from an operational perspective.

An example might be that the PPA can allow for new ancillary services to be developed in the future and have a process where it can be negotiated to be provided by the generator. So, to encourage and enable more flexibility into an energy system, how PPAs can be made more flexible needs to be considered. As Kayanan puts it, ‘‘We need to move from the asset mindset to the system mindset.’’

Kayanan poses the question, ‘‘when you think about a PPA for an asset that is meant to operate in a flexible manner, how can we evaluate the different assets? What is the next thing after the LCOE?’’ Thorncraft suggests, ‘‘I think what you need is a way of valuing the ancillary services, and a way of valuing capacity. It sounds a little bit complicated, but you might have PPAs that have multiple dimensions to the pricing structure.

The way forward

Kayanan concludes, ‘‘flexibility is what is needed to manage variability and uncertainty. And in the world with more and more renewables, variability and uncertainty rises. Flexibility is a dynamic phenomenon, which really puts an emphasis on the real-time conditions of the power system, which is why we point to wholesale markets to have that real-time pricing in order to value flexibility.

However, we need an interim solution to bridge that gap and we have to look into our PPAs and how to go beyond our traditional PPA thinking and try to think of the different services attached to it that will allow us to balance more renewables and also how we price those services.’’

Thorncraft agrees, adding, ‘‘the grid codes are probably the point to begin with. A lot of grid codes you will find in Southeast Asia have their origins in conventional technology mixes, so it would make sense to start thinking about looking at those grid codes and thinking about what they might need in the future, how you design or define some of the ancillary services that might be needed in the future.’’

Episode 2


Rethinking power system flexibility

In Indonesia, the power systems face a wide range of issues that make commitments to lowering carbon emissions and transitioning to renewables challenging. Listen to experts from Wärtsilä and PLN, Indonesia’s state electricity company, discuss why flexibility vital to the power systems.

Watch the video or read the article »

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Presented by

David Kayanan

David Kayanan

Financial Analyst
Wärtsilä Energy

Stuart Thorncraft

Stuart Thorncraft

Managing Consultant
Intelligent Energy Systems

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