Ways to ensure sufficient flexible energy generation for balancing renewable generation

Countries around the world are integrating more renewables into their grids to decarbonise power generation. But renewable energy sources bring new challenges due to their intermittent nature. In order to ensure a stable and cost-effective energy supply, flexible power generation is needed. Here are four ways to help procure and incentivise the flexible generation needed to balance renewables.

Relying more heavily on renewables is the best way for countries to decarbonise power generation. The intermittent nature of renewables requires flexible balancing capacity – but the current market structure in most countries lacks the resources to efficiently manage the imbalances caused by renewables. Stronger incentives and procurement mechanisms are needed to encourage investment in flexible resources for balancing. Below are four ways to help procure and incentivise flexible generation are discussed.

1) Contracts and requests for proposal

Utilities can use administrative tools such as contracts, requests for proposals and internal acquisitions to procure a variety of grid services that support system flexibility.

The first step is planning. Through power system planning and modelling, a utility can determine a cost-effective suite of technologies and services necessary to maintain a balance between generation and demand. Technical neutrality during the planning phase is vital to ensure that utilities choose the best solutions for the requirements at hand.

The second step is procurement. The utility can procure these services through its normal contractual process. Contracts need to focus on the outcomes and not the technologies traditionally needed to achieve them. So rather than focusing on the assumed amount of storage and gas turbines needed, the requests for tenders should focus on the characteristics needed. This means they need to include all the factors relevant to flexible power generation – such as fast start-up, minimum up time and down time, minimum stable load, and plant net efficiency. 

For a real-life example, we can look at the Philippines, where ancillary services – which are key to ensure the stability of the grid – are procured via bilateral agreements. The transmission system operator (TSO) buys these services by using various contracts to secure sufficient supply

2) Flexible power purchase agreements (PPAs)

Countries around the world face challenges related to inflexible market design. Take-or-pay obligations in PPAs between a  utility and independent power producers reduce incentives for thermal units to be flexible and affect the overall efficiency of the system. If a fixed amount of coal-based energy needs to be generated for a fixed amount of time, it reduces the amount of power that available renewables could generate. The end result is curtailment of renewable resources.

Indonesia provides an example of this, where a relatively high level of curtailment (14% per year) is observed in Sumatra during periods of low demand and high solar feed-in due to the contractual inflexibility of PPAs. 

Similarly, the capacity of coal-based independent power producers in Java-Bali is equal to two-thirds of the predicted peak demand in 2025. With the assumption of a 60% guaranteed offtake each year, this significantly reduces the room in the generation mix for renewables. These contractual constraints are a barrier to any new renewable capacity and lead to higher system costs. Removing these constraints by using contract structures with embedded flexibility would free up space for renewables and help to reduce costs and emissions.

3) Procuring flexibility through wholesale power markets 

Power systems governed by partially or wholly restructured power markets procure energy and various grid services through transactions in the wholesale market. These markets help ensure sufficient capacity in the system and examples include intraday markets, ancillary services markets and balancing markets. Let’s look at each of these in turn. 

  • Intraday markets. Wholesale energy markets can encourage flexibility by employing15-minute or even 5-minute time resolution in the intraday market instead of 1 hour. Short dispatch intervals improve flexibility by better aligning changes in renewable generation with load, which allows generators to quickly respond to energy price signals. Additionally, frequent intraday markets can reduce forecasting errors and the associated reserves needed for balancing.

  • Ancillary services markets. The variability and uncertainty of wind and solar can increase the need for ancillary services, with implications for the pricing and scheduling of these services. In addition to the conventional suite of ancillary services, new market products are emerging to directly compensate flexibility, creating a financial incentive for supply and demand-side resources that can provide this service. For example, Australia uses an ancillary service market where freely floating prices incentivise market players to provide the needed capacity.
  • Balancing markets. In this kind of market, the TSO can purchase balancing services from generators and suppliers as needed. For example, the Japanese balancing market, which started in 2021, enables TSOs to procure and operate balancing capacity from the cross-regional market.

4) Capacity and capability markets 

Capacity markets can enhance flexibility by rewarding generators for committing firm capacity (regardless of type) during periods of operational stress. Capacity markets guarantee payment based on the kW of generation capacity, not the amount of electricity generated. An alternative, emerging concept is that of capability markets, which reward both the quality and quantity of the capacity. Capability markets suggest and apply criteria for rewarding different types of capacity (such as contingency reserves, capacity that can ramp quickly and flexible cycling). For power systems without capacity markets, capability markets could take the form of periodic auctions to procure balancing capabilities for new and existing generators.

As an example, the UK and Japan both use capacity markets to ensure supply. The UK procures capacity through competitive auctions, held four years and one year before the delivery period. In Japan, the government announced new capacity auctions for new-build low-carbon technologies. Projects with competitive bids will be contracted for a 20-year capacity payment.

With the right combination of these four methods to match local market conditions, countries can continue to decarbonise power generation by relying on renewables – while still ensuring enough flexible power generation to balance demand and ensure system stability. Beyond intra-country flexibility, adopting flexible markets also opens the door to cross cross-border electricity trading. This increases flexible balancing options and has benefits for both buyers and sellers of power.

    Written by
    Wärtsilä Energy