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Why proper procurement of ancillary services is key to increasing the use of renewable power

Ancillary services – the additional capacity needed to guarantee a secure energy supply – are a vital part of power generation. The need for these services is set to grow as more renewable energy sources are integrated into grids around the world. In this article, we take a closer look at what can be done to ensure that sufficient ancillary service capacity is procured.  

Balancing the supply and demand of electricity has always been a fundamental challenge for the energy industry. Because electricity cannot be stored easily, and demand constantly rises and falls, balancing solutions that can respond quickly to these fluctuations have always been needed. 

Ancillary services, an essential part of the balancing toolkit, represent generating capacity that’s used to guarantee overall system security. The term ancillary services covers aspects of balancing such as frequency control (maintaining frequency within the normal operating band), voltage control (which maintains voltage within acceptable levels) and black start (how to resupply power if there is a blackout). 

Transmission system operators (TSO) are responsible for procuring sufficient ancillary services to ensure the security of the power system. The TSO defines the ancillary services it requires based on how quickly the response is needed. There are several ways to procure these services. Two examples are:

  • Mandatory procurement -  in this kind of system, power generators are obligated to reserve a certain amount of capacity to meet TSO requirements, either for a fixed price (a capacity payment) or for free. Having to provide a service for free obviously does not encourage investment in that service, or provide any incentive to improve its provision.

  • Market-based procurement – in these markets, standardised ancillary services products are sold by power producers. There’s no contract or obligation to offer ancillary services. Instead, power producers can voluntarily participate in the market (for example via a tender, auction or market platform) and receive bids from TSOs. 

The value of ancillary services is increasing  

As more and more low-cost wind and solar power is being integrated into grids, the cost of producing electricity is falling while the need for balancing with shorter response times is increasing.

In some countries, the speed at which renewables can be adopted is being hampered by a lack of ancillary and balancing services. These countries have renewable power potential but can’t integrate it because there is not a reliable enough way to procure the needed balancing capability. The answer to this challenge depends on each country’s specific market. 

How can TSOs ensure availability of ancillary services?    

How ancillary services are procured varies greatly from country to country – there is no standard set of recommendations to follow. Instead, we’ll look at some example countries to see how they can best secure sufficient ancillary services.

  • Vietnam: The National Load Dispatch Center (NLDC) is responsible for calculating the demand for ancillary services, approving ancillary service providers and ensuring that reserves are met. Currently, ancillary services are provided by hydropower plants and thermal plants. But with the increasing share of intermittent renewables in the system, inflexible coal-fired power plants and gas turbines (with their low ramping rates and high minimum uptime and downtime) are proving unsuitable for providing ancillary services – leading to higher system operating costs. Hydropower can also face problems, as shown recently when 11 hydropower plants had to shut down due to water shortages This resulted in power outages in Northern Vietnam.

    Studies by the Danish Energy Agency and USAID about how to ensure system stability and low costs concluded that markets for ancillary services in Vietnam should be implemented as soon as possible. This means there should be mechanisms for the procurement, utilisation and compensation of ancillary services. The remuneration could be based on a capacity payment where providers get a fixed payment per kW. At the same time, penalty arrangements should be created for non-availability of reserves. Putting a price on ancillary services and subjecting them to competitive bidding will increase incentives for generators to make such services available and to invest in flexible technologies. From the perspective of the system operator, this approach will facilitate the integration of more renewables while maintaining system security at a lower overall system cost.  

  • India: A structured methodology for reserve management is evolving. Currently, thermal plants are used to meet reserve requirements. With the installation of more renewable energy capacities (the plan is for 500 GW of non-fossil fuel power by 2030), the need for ancillary services is growing. Ancillary service products are already well defined albeit restricted to the generating stations where the tariff is approved by the commission or in shortfall conditions also other stations where the tariff is discovered by competitive bidding process and the market for secondary reserve ancillary services (SRAS) and tertiary reserve ancillary services (TRAS) is up and running. However, as the share of renewables increases, ancillary services providers will need to respond more quickly to imbalances in the system. Due to the current regulatory limitations, only the old and inefficient thermal plants provide ancillary services. However, due to the technical restrictions, procuring ancillary services from traditional coal or baseload gas plants is no longer a viable option.

    To respond to this need, a well-structured resource adequacy framework is released by the Ministry of Power. The goal is to meet energy demand, satisfy peak requirements, meet reserve requirements and provide flexibility. A policy framework that requires each utility to demonstrate resource adequacy is critical for a reliable and resilient power system. However, the procurement of such resources by individual states alone won’t be an efficient solution. Instead, regional or national-level capacity markets should be set up to avoid the development of over-capacity and support system reliability.

  • Middle East: The electricity sector hasn’t been liberalised in the Middle East, which means there is no power or ancillary services market. For example, both the United Arab Emirates (UAE) and Saudi Arabia operate a single-buyer market model. Currently, ancillary services are mandated but not compensated for in these countries, so neither power producers nor large industrial users are incentivised to stick to their schedules. They can change their production or consumption profile as they wish, knowing that the central dispatcher will fix it. This leads to extra system costs, which are ultimately passed on to end customers and is effectively socialising the cost of balancing. 

    Another issue in the region is that power plants operate long-term power purchasing agreements (PPAs) based on who can provide the lowest-cost baseload power. The plants then also have to provide ancillary services, which they are not designed for, so overall efficiency starts to decrease and we see a corresponding rise in system costs.
    To ensure adequate supply of ancillary services, countries in the Middle East should separate electricity procurement from ancillary services procurement and third-party private companies should be allowed to bid for ancillary services. Shortening day-ahead planning and dispatch (currently hourly) would also improve overall planning and stability due to the high amount of renewables in the grid. Taking a technology-neutral approach and using solutions that best fit requirements (flexibility and fast response) would also help. 

  • Europe: Several ancillary services are available in most European energy markets, but all are reliant on conventional and hydro power plants. As more renewables are integrated into the grid, ensuring intra-day flexibility and adequacy will be two new challenges. New services need to be introduced to ensure the continuous supply of energy and to alleviate power system limitations. 

    The new ancillary services should cover a range of timescales, from long-term and mid-term to shorter daily scales and even minutes to seconds for real-time responses in intra-day services. Increasing flexibility in the energy system should be seen as an opportunity to redesign the entire European energy market, further liberalising its markets and creating new opportunities by introducing new ancillary services that can attract investors and create a new revenue stream for each participant. A new regulatory framework should be introduced in Europe to remove barriers to creating new products and services that can respond quickly to the dynamic behaviour of the system. The new framework should enhance the potential use cases for current technologies, such as standalone energy storage, hydrogen solutions, and pump storage, without prescribing a single approach, in order to encourage innovative strategies that can address local challenges in every European state.

While market conditions vary from country to country, one thing is clear: the need for ancillary services is growing as more renewables are integrated. Capacity fees should be introduced so that providers of ancillary services are incentivised to invest in, and maintain, a system that provides reliable and efficient solutions.

In countries with more liberal, developed electricity markets, proper ancillary service procurement mechanisms should be encouraged. This would allow specialised ancillary service providers using efficient, rapid balancing technologies to compete to provide the best services. 

Engine power plants are ideal for providing ancillary services

As you might expect from services that are necessary to ensure that the energy system remains stable even with the intermittent nature of renewable sources, ancillary services must respond quickly to changes. In many countries, coal and combined cycle gas turbine (CCGT) power plants are used for ancillary services. But due to their low ramping rate and high minimum uptime and downtime, traditional plants aren’t the best choice. In addition, the system operator may need to operate costly plants to meet system requirements, which increases overall system operating costs. Many coal plants also need to operate at a lower utilisation, meaning their heat rates are impacted. 

In contrast to inflexible technologies, engine power plants offer high ramp rates (as little as 30 seconds) and have a wide output range (10–100%). This allows them to quickly start and/or ramp up or down as needed. Engines also don’t suffer from continuous start/stop operations. For these reasons, engine power plants make an ideal solution for providing ancillary services.

    Written by
    Wärtsilä Energy