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Open Networks Project

Commercial Principles for Contracted Flexibility: Promoting Access to Markets for Distributed Energy Resources

16 August 2017

Energy Networks Association

Document Ref: ON-WS1-P4 Commercial Paper

Commercial Principles for contracted flexibility: Promoting access to Markets for Distributed Energy Resources


T +44 (0) 20 7706 5100 W www.energynetworks.org.uk E [email protected]

Document Control Version Control

Version Issue Date Author Comments

0.1 28/07/2017 Workstream 1 Draft issued for comment

0.2 31/07/2017 Open Networks Project Updated with WS3 context and issued to Steering Group for review and approval

0.3 04/08/2017 Open Networks Project Updated following Steering Group discussion

1.0 16/08/2017 Open Networks Project Final version for publication

mailto:[email protected]



T +44 (0) 20 7706 5100 W www.energynetworks.org.uk E [email protected]

Table of Contents

Executive Summary ....................................................................................................................... 1

Purpose of this paper .................................................................................................................... 2

Who is the target audience? .......................................................................................................... 2

Flexibility Markets: Broad assumptions ........................................................................................... 2

Where does this paper fit in with the wider strategic picture? .......................................................... 4

Roadmap to optimising the use of DER ........................................................................................... 5

Key commercial considerations in achieving the roadmap ................................................................ 5

Next steps .................................................................................................................................. 11

Please send your responses to Farina Farrier [email protected]. ........................ 11

Appendix 1: Models for Coordinating Procurement/Dispatch of services from DER .......................... 12

Appendix 2: Glossary................................................................................................................... 24

List of Figures

Figure 1: Wider strategic picture when considering commercial principles for flexibility markets ......... 4 Figure 2: Roadmap to optimising the use of DER. ........................................................................... 5 Figure 3: Current model for DER participation in ancillary services markets ...................................... 8 Figure 4: Potential future model for DER participation in ancillary services markets ........................... 8 Figure 5 – Pricing curtailment ...................................................................................................... 10 Figure 6: Flow of activities for the NETSO procurement of DER services as it exists today ............... 13 Figure 7: Contract relationships and procurement/call-off processes for model 2............................. 15 Figure 8: Contract relationships and procurement/call-off processes for model 3............................. 17 Figure 9: Contract relationships and procurement/call-off processes for model 4............................. 19 Figure 10 - Contract relationships and procurement/call-off processes for model 5 .......................... 21 Figure 11: Contract relationships for model 6 ................................................................................ 22




T +44 (0) 20 7706 5100 W www.energynetworks.org.uk E [email protected] 1

Executive Summary

Decarbonisation and decentralisation have changed the energy system. The end consumer, Distribution Network Operators (DNOs) and Distributed Energy Resources

1 (DER) are no longer

necessarily passive entities; they can be active participants in providing increasing levels of flexibility to the GB system. At the same time, DNOs are taking a more active role in managing their networks and both National Grid, in its role as National Electricity Transmission System Operator (NETSO), and DNOs (hereafter referred to as Distribution System Operators (DSOs) to reflect their more active operational role), are seeking additional sources of flexibility.

The traditional structure of the electricity system and market participants in relation to balancing and flexibility services (procured and provided), payments and funding is no longer fit for purpose in a world where both transmission-connected and distribution-connected parties are active participants.

This paper summarises five considerations which will matter as we move to a world where the NETSO other entities such as DSOs, Suppliers, Aggregators and even consumers increasingly access flexibility services from DER, as envisaged by the recently-published Smart Systems and

Flexibility Plan2. These considerations, together, seek to provide a comprehensive picture of the issues which need to be tackled to ensure DER can provide flexibility services to multiple entities, in a way that enhances coordination of the whole system and brings down system costs. The paper builds on the outcomes of existing trials

3 and initiatives, bringing together the commercial strands of

thinking on how to maximise the use of DER assets, deliver access to markets for all parties, encourage proliferation of new business models, including the use of peer-to-peer trading in future; and maximise the benefits of competition and third-party involvement. The five considerations are:

Consideration #1: What models (procurement and operation) should be used to allow

DER to offer multiple services to multiple entities such as the NETSO and DSOs?

Consideration #2: How can DSOs and the NETSO ensure sufficient visibility and

controllability of DER output for managing transmission and distribution network

constraints?

Consideration #3: How can we ensure the various routes to market for DER can

coexist and compete in a coordinated way?

Consideration #4: How should DER curtailment for transmission constraints be

treated from a commercial perspective? and

Consideration #5: How might distribution congestion management activities develop

alongside the transition from DNO to DSO?

We welcome the industry’s views on the five considerations outlined in this document. The consultation closes on 29

th September 2017, and feedback received will feed into:

The development of frameworks to coordinate transmission and distribution needs as well as

the development of DSO services;

the development of frameworks needed to allow providers to offer multiple services to multiple

market participants; and

The NETSO’s review of its balancing services products through the System Needs and

Product Strategy and the potential synergies between NETSO and DSO products.

1 All parties who are connected to the distribution network and typically includes distributed generation,

distributed demand, Industrial and Commercial customers but could also encompass domestic consumers. 2 https://www.ofgem.gov.uk/publications-and-updates/upgrading-our-energy-system-smart-systems-and-

flexibility-plan 3 Including Regional Development Programmes between the NETSO and UK Power Networks and Western Power

Distribution, Power Potential (TDI 2.0) and Demand Turn Up





Purpose of this paper

Decarbonisation and decentralisation have changed the energy system. The end consumer, Distribution Network Operators (DNOs) and Distributed Energy Resources

4 (DER) are no longer

necessarily passive entities; they can be active participants in providing increasing levels of flexibility to the GB system. At the same time, DNOs are taking a more active role in managing their networks and both National Grid, in its role as National Electricity Transmission System Operator (NETSO), and DNOs (hereafter referred to as Distribution System Operators (DSOs) to reflect their more active operational role), are seeking additional sources of flexibility.

There is uncertainty in relation to the roles and responsibilities of the NETSO and DSOs in this new smart energy world. As services from DER is increasingly used to tackle both network management and energy balancing issues, we need to ensure they can provide multiple services to multiple entities, such as DSOs, the NETSO and Suppliers.

This paper summarises five considerations which will matter as we move to a world where the NETSO and other entities such as DSOs and Suppliers increasingly procure flexibility services from DER. These considerations, together, seek to provide a comprehensive picture of the issues which need to be tackled to ensure DER can provide flexibility services to multiple entities. While the focus of this paper is on maximising the use of flexibility provided by DER, this is in the context of enabling them to participate equally alongside other flexibility and balancing service providers, including conventional and renewable transmission connected assets as well as interconnectors.

This paper is a deliverable of the ENA’s Open Networks project5 which seeks to lay the foundations of

a smart energy grid in the UK by transforming the way our transmission and distribution networks

interact on a ‘whole system6’ basis.

This paper and the models it proposes will act as an input to the work being undertaken as a part of the Open Networks Work Stream 3: DSO Transition. The DER procurement models presented here will be input into the DSO models (which will include market arrangements) that are being developed using the Smart Grid Architecture Model (SGAM) tool in WS3.

This document sits alongside and complements the NETSO’s System Needs & Product Strategy document, which presents transmission system needs over the next five years and consults on the way National Grid should design its balancing services products to meet those needs.

Who is the target audience?

Feedback on this paper is welcomed from all market participants; network operators, independent distribution network operators, aggregators, suppliers, DER, consumers, community energy schemes, new and existing business models and technologies. The paper contains five considerations which are accompanied by associated questions. The answers to the questions will feed into the ENA’s Open Networks Project on coordinating access across Transmission and Distribution networks and the NETSO’s work on standardising and simplifying services; working with participants to find optimal solutions to maximising the use of their assets.

Flexibility Markets: Broad assumptions

It should be noted that DSOs already have a range of contracts with DER for distribution network management purposes. The scope of this paper does not extend to encompass those existing contracts, however it should be noted that their existence will need to be accounted for when considering network interactions and shared procurement/utilisation activities on a whole system basis.

4 All parties who are connected to the distribution network and typically includes distributed generation,

distributed demand, Industrial and Commercial customers but could also encompass domestic consumers. 5 http://www.energynetworks.org/electricity/futures/open-networks-project/open-networks-project-overview/

6 This means transmission and distribution networks acting in a coordinated way to obtain the most efficient

outcome for the whole system to the benefit of consumers





There are a number of assumptions which underpin our thinking and which effectively define the scope of the paper.

From the perspective of DER and based on feedback received to date:

They should be able to offer multiple services to multiple market participants, be they for

energy balancing or network management purposes;

They are looking for simplicity in how those multiple revenue streams can be accessed, with

any complexity managed by those parties procuring the flexibility;

Transmission and Distribution coordination will be required to facilitate service provision from

DER to the NETSO/DSO/Suppliers etc;

DER and/or Aggregators and Suppliers would be responsible for demonstrating service

delivery, managing balancing responsibility7 and providing all relevant data to enable

contractual settlement;

The way services are procured and used should, wherever possible, be market based and

transparent; and

Any scheme or structure implemented should deliver a cost efficient outcome for the end

consumer.

From a network perspective:

The NETSO requires the ability to instruct changes in MW output (hereafter referred to as

controllability) of DER - either directly or indirectly - as well as visibility of planned and actual

output8 to manage transmission issues and to procure balancing services;

DSOs will increasingly require access to DER (again, either directly or indirectly), as well as

visibility of the services they provide, to manage distribution issues;

Transmission Owners (TOs) will require visibility of DER and forecast running arrangements,

to enable them to continue to plan their networks appropriately;

Transmission and distribution issues need to be considered on a ‘whole system’ basis to

ensure efficient decision making;

The NETSO’s balancing services products will be simplified and standardised as part of their

simplification of products work;

The NETSO and DSOs will work together to define products suitable for shared procurement

and coordinated utilisation;

DSOs will further define products to manage distribution issues, as required in a coordinated

manner with the needs of other parties;

Network operators and the NETSO will maximise synergies as and when they arise;

While there are no assumptions made regarding future DSO models, the paper provides

insights on what future DSO models need to consider, such as the need for explicit

recognition of DSOs’ responsibility for ensuring safe operation of their network when DER is

being procured and used;

We are assuming that the level of distribution constraints will increase over time but there is a

limit to the level of distribution constraints which is economically viable. The cost of markets

not being able to function is likely to be higher than the cost of investing in the networks;

The NETSO and DSOs are responsible for establishing the commercial framework and

incentives to encourage new DER to invest in the capabilities needed to deliver system

services; and to participate accordingly; and

Arrangements will need to be compatible with relevant European legislation. Co-ordination

between distribution and transmission needs to be built into the developing European

7 Suppliers are currently responsible for imbalances. New Balancing Responsibilities are being considered as part

of the TERRE project and in investigating wider access to the BM. 8 DER providing flexibility and balancing services





Balancing Products (TERRE9 and MARI10), which require access to DER including the ability

of aggregators/customers to directly offer Replacement Reserves and other EU products to

the NETSO.

We are also assuming that in a world of increased levels of DER, there will be much more opportunity for peer to peer trading between parties.

Where does this paper fit in with the wider strategic picture?

The roles and responsibilities of all industry parties (the NETSO, DSOs, Suppliers, Aggregators, Generators) are changing as Great Britain moves to a smarter energy future.

TOs, DSOs and the NETSO are committed to enabling access to markets for both existing and new parties, technologies and business models. The smarter electricity system also brings opportunities to develop new markets.

Figure 1: Wider strategic picture when considering commercial principles for flexibility markets

There are a number of activities which influence and impact on DER being able to offer multiple services to multiple market participants. This paper focuses on models (procurement and operations) for optimising use of DER as well as defining solutions for tackling constraint management. It is recognised that compensation is not currently provided for distribution constraint management, with arrangements instead focusing on efficient connections. As highlighted in Figure 1:

A review of distribution charging and access rights is a necessary enabler to a fuller

participation of DER in markets. Appropriate levels of visibility and controllability of DER will

be needed to ensure networks can continue to be operated within the required technical and

commercial parameters;

Transmission and distribution network charges will need to be reviewed alongside access

rights to ensure they provide the correct signals; and

Wider access to the Balancing Mechanism (BM), including ensuring the recovery of

operational costs creates a level playing field for all parties. BSC modification P35511

9 TERRE is setting up and operating a multi-TSO platform that can gather all bids for Replacement Reserves (RR)

and can optimise the allocation of RR across the systems of the different TSOs 10

MARI-19 European TSOs agreeing to look at how to implement a European platform for the exchange of

balancing energy from Frequency Restoration Reserves with manual activation (mFRR platform). MARI stands for Manually Activated Reserves Initiative. 11

https://www.elexon.co.uk/mod-proposal/p355/ The original P355 proposed solution covers smaller generators,

Workgroup members have asked for further work to be done to consider if P355 could be extended to cover demand side response (DSR).


https://www.elexon.co.uk/mod-proposal/p355/




(‘Introduction of a BM Lite Balancing Mechanism’) has been raised to address DER access to

the BM, citing the difficulty smaller parties have competing directly with larger generators for

the provision of energy to the NETSO for balancing purposes. This will be progressed

alongside Project TERRE (P344) which is also looking at wider access to the BM for

aggregators as a medium through which parties can offer European Replacement Reserves.

The various changes to the landscape of flexibility markets outlined above are intended to foster

greater competition in contracted flexibility and balancing service provision, subsequently lowering the

costs to the end consumer.

Roadmap to optimising the use of DER

Figure 2 provides a potential roadmap to optimising the use of DER, including the activities which need to be undertaken. This is closely aligned and builds on the ENA DSO roadmap. There are a number of trials underway (Regional Development Programmes, Power Potential Project, Demand Turn Up, Project Entire) which are designing and trialling a set of new commercial models in the short-term.

Figure 2: Roadmap to optimising the use of DER12

.

This paper builds on current market structures and trials to inform the solutions which can be implemented to optimise the use of DER in the short to medium term.

Key commercial considerations in achieving the roadmap

In order to achieve this roadmap, there are a number of considerations which need to be worked through. The rest of this paper looks at five considerations in more detail and seeks industry views on associated questions:

1) Consideration #1 – What models (procurement and operation) should be used to allow

DER to offer multiple services to multiple entities?

The number of revenue streams for DER is increasing particularly as DER are used to manage network constraints; there are a number of models (procurement and operation) that can allow DER to offer multiple services to multiple entities

13. We seek feedback on those models – Appendix 1.

12

ED1 and ED2 refer to the regulatory period within which the DSOs are incentivised. The ED1 period lasts 8

years from 2015 to 2023. 13

This paper focuses on DSO and NETSO but the models could potentially also be extended to include Suppliers

and other market participants.





There are various routes to market available to market participants. The capacity mechanism, network charging signals (e.g. red DUoS zone or TRIAD) and balancing services are established ways through which DER can respond to price signals and participate in markets. As noted earlier, the delivery of wider access to the BM is currently being considered by industry. In addition, network services markets are being set up by DSOs (e.g. UK Power Networks’ Flexibility tender).

Distribution and Transmission network owners are encouraged by the regulator to consider alternative approaches, including market-based mechanisms, to traditional network reinforcement. DER can provide services directly to the DSOs - this is already being done (e.g. flexibility tenders, demand turn up or turn down and bilateral contracts with the DSOs etc.) and is expected to continue; however the

potential for conflict14 between distribution and transmission services needs to be understood and managed in a sustainable way – including via co-optimisation of services and realisation of synergies across transmission and distribution, where appropriate.

The NETSO currently accesses flexibility through a number of routes. DSOs have some access to flexibility from DER through sending signals via network charges, agreeing access rights/use of ANM in connection terms, and in some cases actively procuring flexibility under bilateral arrangements.

Appendix 1 examines a number of models which can be used to coordinate the procurement and dispatch of services from connected DER to DSOs, the NETSO and Suppliers on an active, close-to-real-time basis. Some of these models already co-exist. The pros and cons of each model are considered by assessing them against a number of criteria:

Whether it promotes competition in the provision of services to DSO, the NETSO and

Suppliers;

Whether the model allows procurement from DER by multiple parties;

The extent to which procurement of services by the NETSO could impact distribution

networks in a detrimental way;

Its ability to maximise the opportunity for synergies15;

How it allows for the management of conflicts; and

Its ability to deliver opportunities for third parties.

Some include the NETSO procuring on behalf of other parties such as DSOs while others examine the possibility of DSOs coordinating to meet the needs of the NETSO, as well as their own.

Some of the models outlined may be better suited to more regional system needs (such as constraint management at transmission or distribution or the delivery of reactive power). Coordination is needed at both procurement and utilisation timescales to ensure more optimised use of DER.

Q1: What are your views on the models outlined in Appendix 1, and how they rate against the Assessment Criteria?

Q2: To what extent do you think it will be possible/desirable to move between different models over time? Please list barriers to implementation where possible.

Q3: What steps should NETSO and DSOs take to remove complexity when providers are providing multiple services to multiple market participants (both at procurement and operational stage)?

Q4: What is the role of aggregators and suppliers in helping to remove this complexity?

2) Consideration #2: How can DSOs and the NETSO ensure sufficient visibility and

controllability of DER output for managing transmission and distribution network

constraints?

14

Conflicts may arise when the SO requires a party to turn up but the DSO requires a party to turn down. The

frequency and potential for conflicts needs to be further understood. 15

If the needs of the System Operator and the DNOs are aligned, then, one instruction may deliver benefits to

both parties.





The NETSO needs visibility of DER actions and the ability to instruct changes in DER output and consumption to manage congestion issues on the transmission network and to deliver other balancing services.

DSOs need the ability to change DER output to manage distribution issues - and in the future could also procure some services on behalf of the NETSO. Whilst individual projects have created bi-lateral contracts for network management services between DSOs and DER, there is currently no agreed and consistent route by which a DSO may procure network management services for the purposes of active management of their distribution networks.

To meet these needs of the NETSO and DSOs, visibility and controllability of DER output is required, so that they can become part of the pool of available providers for those services.

The Open Networks Project seeks to produce ‘best practice’ terms and conditions for commercial and technical network access to drive consistency across DSOs. The outcome of this consultation will feed into the various Open Networks Project work streams particularly new processes and future commercial and technical agreements between the NETSO and the DSOs

Through their Regional Development Programme, National Grid and UKPN are progressing a very deep application of ‘Connect and Manage’

16 principles to new DER connections in the South East

coast region, such that the impact of DER connections on the transmission network can be managed, in lieu of wider works being completed. Through the deeper application of connect and manage, DER output is both visible and controllable to the NETSO. DER can therefore contribute to the collective pool of services used to manage transmission constraints. To achieve this, it has been necessary to clearly specify the need for visibility and controllability in the Bilateral Connection Agreement between Transmission and Distribution, so that it can be taken account of for new DER connections.

This approach does not seek to be overly-prescriptive regarding the way in which visibility and controllability are delivered; the idea being to allow a range of potential solutions to be adopted – recognising that there are various ways in which visibility and controllability of DER can be achieved. ANM schemes might provide cost-effective visibility and controllability of DER output for the NETSO and DSOs – especially where they are already required for managing distribution network connection capacity. Supplier/Aggregators and Independent Aggregators may have their own proprietary solutions.

In addition to enabling a broader pool of services used to manage transmission and distribution constraints, provisions that enable visibility and controllability of DER output unlock the potential for DER to participate in a broader range of markets for provision of services to the NETSO and DSOs (as operational capabilities develop and the need for services arises).

Q5: What are the implications for your business of the need for visibility and controllability of DER output?

3) Consideration #3: How can we ensure the various routes to market for DER can coexist

and compete in a coordinated way?

In addition to bilateral arrangements, DER should be able to bid into relevant markets (whether run by DSOs, the NETSO or jointly) either directly or via an aggregator of their choice.

There are 19 organisations listed on the National Grid website as offering aggregation services to smaller sites to allow them to offer Balancing Services. Some of these organisations are licensed

16

The System Operator can offer a connection under this regime, provided a number of technical requirements

are met and there are diverse constraint management options available to operate the system until wider works are completed; on the proviso this doesn’t incur excessive costs. Furthermore, any actions to make the network fully compliant with SQSS shall occur as soon as possible after the connection date if not possible to do beforehand. In this South Coast example, NOA2 has already determined that constrained operation of the network is economic for the 4 FES scenarios studied.





Suppliers17

, whereas others operate independently from Supply activities. Figure 3 provides an overview of the current relationships

18 between parties who contribute to the provision of Balancing

Services to the NETSO:

Figure 3: Current model for DER participation in ancillary services markets

Currently, DSOs have no formal role in the NETSO’s procurement or dispatch of ancillary services from DER. Whilst previously this may not have been an issue, the scale of DER connections and scope for future ancillary services provision to both transmission and distribution mean that DSOs will have an increasing role to play. The models outlined in Appendix 1 include those where DSOs are leading or sharing the tendering and procurement of services with the NETSO as well as using enhanced DER control to meet their own network management needs. Figure 4 provides an example of how relationships may evolve over time:

Figure 4: Potential future model for DER participation in ancillary services markets

In the future, there will be opportunities for DER to contract to provide services to a range of different entities, DSOs, for example, may increasingly procure services from DER to manage their networks. Further, DSOs will increasingly need to understand the impact of DER service provision to other

17

Some aggregators are both Suppliers and Aggregators while others only operate as aggregators. The latter,

we have called Independent Aggregators. 18

Currently Suppliers are the only party responsible for imbalances. Aggregators are responsible for notifying

Suppliers of any change of output which occurs as a result of their instructed actions. The grey box relates to the various duties carried out by suppliers (e.g., standard processes associated with energy contract notification and settlement etc.)





entities to ensure that their networks remain within limits. Any conflicts that undo the intent of an instruction to DER to provide a service are likely to require additional services to be instructed to manage the consequences, resulting in additional cost. Ways of managing such conflicts will be essential to ensure efficient outcomes, and are currently being progressed through the Regional Development Programmes as well as the ENA’s Open Networks project.

Ideally, markets would be designed to minimise the risk of conflicts between services provided to the transmission and distribution networks, while at the same time maximising on potential synergies, such as where a DSO and the NETSO can address multiple operational needs simultaneously. Additionally, we believe it is important that the following principles be preserved to ensure effective competition:

DER should be able to bid directly into markets, or via an aggregator of their choice;

Existing and new sources of aggregated DER output need to be able to coexist and compete

(recognising a natural advantage for unconstrained DER over constrained DER);

Aggregated DER output could be represented as Virtual Power Plants (VPPs), either on a per-

Grid Supply Point (GSP) basis, or on a non-locational basis. Such VPPs would need to be

configured in a way which allows them to take part in competitive procurement of services to drive

efficiency;

An operational security interface between DER, aggregators, the NETSO and DSOs needs to be

defined, or designed into relevant market mechanisms, so that the increasing effect on distribution

networks of aggregation and control of DER output can be managed in a sustainable way (for

example, this could be in the form of increased data flows to support enhanced visibility of whole-

system issues in Control Rooms) ;

DSOs will need to be aware of relevant DER contracted services with the NETSO, and vice-

versa;

DER locational impacts will need to be accounted for when contracting to resolve local and

regional constraints in order to ensure efficient outcomes. Further, it will be necessary to consider

how best to manage the network impact of non-locational VPPs;

Any approach would need to align with ongoing work to manage the risk of conflict between

distribution network capability and NETSO service needs; and

The impact of DSOs and Virtual Private Networks making more active use of DER to manage

their own networks needs to be understood.

Q6: What are your views on the principles outlined here to ensure the various routes to market for DER can coexist and compete in a coordinated way?

Q7: What else needs to be done to ensure distribution network security is maintained for all DER contracted services while at the same time allowing DER the freedom to contract in different markets?

4) Consideration #4: How should DER curtailment for transmission constraints be treated

from a commercial perspective?

There is a possibility to use DER to manage and alleviate transmission constraints in the immediate term in a transparent way using market based approaches. The impact on distribution networks is an essential consideration and it would be expected that market structures will promote efficient and co-ordinated management of distribution and transmission constraints. The following principles examine how the curtailment of DER could be priced to alleviate transmission network congestion.

Basic principles that should be applied to DER curtailment pricing for transmission constraint management:

A. Pricing structures should be as simple as possible;

B. Parties should be able to competitively bid in their proposed prices alongside other parties

such as transmission connected assets;





C. Costs associated with services provided to the NETSO should be captured through standard

transmission processes (BSUoS, etc.) and form part of incentivised balancing costs; and

D. The imbalance impact of adjusting DER output needs to be appropriately considered (in the

context of ensuring Balance Responsibility);

Figure 5 – Pricing curtailment

Figure 5 provides an overview of the various ways in which curtailment prices could be sought to meet transmission constraint management needs. Transmission curtailment can be priced in longer time frames (e.g. via tender) or shorter time frames (e.g. via the Balancing Mechanism).

Transmission curtailment services procured through competitive tenders could be static (fixed price per MWh) or dynamic (price changes by time of day). A back-stop curtailment price could be provided as part of the DER connection process - this would not exclude tender or auction participation in the future.

Static pricing means that the cost to the NETSO only varies by the volume of service required. DER would tender in a fixed price for a time period (e.g. maximum of 1 year). A more dynamic pricing mechanism would vary by time of day and situation of the constraint – the more significant the constraint at a time of day, the higher the value of the service; which could be reflected in price submissions. A dynamic pricing approach should allow parties to revise prices in response to different drivers (e.g. utilised volumes at any given point in time). By extending the availability of priced DER curtailment options, service procurement efficiency should increase. The use of either static or dynamic pricing of curtailment would contribute a further signal to be accounted for when comparing operational constraint management costs with a case for additional network investment.

Q8: What are your views on the principles outlined in this section?

Q9: What are your thoughts on pricing curtailment? Are there other mechanisms that should be taken into consideration?

5) Consideration #5: How might distribution congestion management activities develop

alongside the transition from DNO to DSO?

Congestion management at distribution is currently managed in a different way to transmission. Parties are currently not directly paid for curtailment to manage distribution constraints, instead receiving lower-cost connections with an expectation of curtailment under certain conditions.

Processes for offering connections do not currently consider the economic cost of curtailment vs investment in assets; instead providing signals to connect away from congested areas. Alternative approaches, such as the use of Active Network Management schemes, are used to facilitate connections with curtailment occurring to ensure network capabilities are not exceeded.

The connection of more DER and increasing use of DER to manage transmission network issues or to balance the system could be expected to have an increasing impact on distribution networks. This raises the question of how new distribution constraint management approaches should be created, as well as how synergies with transmission might be pursued, for example through shared procurement.





Moving to a more active approach to the management of distribution constraints would require development of access rights and network charging for distribution networks, to ensure clear rights, obligations and pricing signals, which are unlikely to be completed in the short-term.

However, there are principles which could be used in the short to medium term to manage distribution constraints after a connection agreement has been agreed, which could be developed through regional trials. We summarise one potential approach below.

Of the number of options to manage distribution constraints in the future, in the short to medium term, distribution connection agreements could play a central role in the management of increasing levels of distribution constraints. An example of this could be allowing DER to trade their curtailment obligations with each other.

Once parties are connected, a market could be created around distribution network access in a manner that minimises complexity for parties, as they would have one contract with the DSO covering both connections and distribution constraint management. In the short to medium term, this could involve:

The use of network heat maps to provide signposts to parties in relation to locational needs

(e.g. reactive power, transmission constraint management);

The creation of a mechanism to allow parties to trade distribution curtailment obligations with

each other, in advance of more enduring charging and access rights being developed, or the

emergence of more local markets; Incentives, such as a penalty for non-provision of an agreed service, to encourage delivery

against obligations;

The use of price signals that come out of such arrangements to feed into CBAs to determine

the most efficient mix of operability and asset solutions to manage distribution constraints;

and

The application of market models which allow the DSO to lead the delivery of distribution

constraint management services and support collectively-agreed network outcomes with the

NETSO. This would significantly firm up the role of DSOs as being at the heart of the delivery

of services to the NETSO by proactively managing distribution network conditions in real time.

In the future, local markets and peer to peer trading could be a significant part of the smart energy system, enabling DSOs to manage their networks and reduce the level of energy balancing which needs to be carried out by the NETSO.

Q11: What are your views on how distribution constraints could be managed in the future? We have identified one option above. What other options are available?

Q12: What are your thoughts on the transition from the current approach to managing distribution constraints to a more active one that is co-ordinated with transmission constraint management?

Next steps

The consultation closes on 29th September 2017. Feedback received will feed into:

The development of frameworks to coordinate transmission and distribution needs as well as

the development of DSO services;

the development of frameworks needed to allow providers to offer multiple services to multiple

market participants through the Open Networks Project; and

The NETSO’s review of its balancing services products through the System Needs and

Product Strategy and the potential synergies between NETSO and DSO products.

Please send your responses to Farina Farrier [email protected].






Appendix 1: Models for Coordinating Procurement/Dispatch of services from DER

The following pages contain five commercial models for enabling DER participation in the provision of services to the NETSO, DSOs, Suppliers, etc. These models allow both for direct procurement from DER, or for procurement via an aggregator. Some of these models are already in use, whereas others represent potential options for accessing DER, in advance of more fundamental market developments such as the delivery of changes to distribution network charging and access rights. It should be noted that these models can, and in some instances already do, coexist.

With the exception of Model 1 (the status quo), each of these models can promote co-ordination and greater efficiency within the wider procurement of all services, either at transmission or distribution levels, or both.

Table 1: Comparison of models for accessing services from DER; and how they fit in to the broader picture

Applies to procurement for

Where it fits in

Model 1 – Status Quo

Transmission only

Being the status quo, model 1 is widely used by the NETSO in the procurement of balancing services such as Short-Term Operating Reserve and Frequency Response services, where DER services are procured alongside other transmission-connected generation and demand-side services.

Model 1 is not sustainable unless the DER remains in an unconstrained area.

Model 2 – Manage D network impact

Transmission only

Model 2 would represent an enhancement over model 1 in that, whilst it still relates to procurement by the NETSO, it takes explicit account of the impact of DER service provision on distribution networks. If deployed, DER services would be procured under this model alongside other transmission-connected generation and demand-side services.

Model 3 – NETSO coordinates

Transmission and Distribution

Models 3 and 4 build on model 2 by explicitly procuring to meet both NETSO and DSO requirements. They are two sides of the same coin - model 3 has the NETSO leading on procurement and call-off of services from DER, whilst model 4 has the DSO leading on the same. However, the merits of each model are assessed separately. We recognise that there may be variances in those models where both parties may carry out procurement activities. In this case, we are only examining instances where either the NETSO or the DSO solely procure and dispatch services.

Both models 3 and 4 would coexist alongside the NETSO carrying out direct procurement of services from transmission-connected generation and demand-side services.

Model 4 – DSO coordinates


Model 5 – Joint procurement and/or dispatch


Model 5 focuses on the NETSO or DSO (or potentially a third party under the right circumstances) leading the dispatch of DER as per the Power Potential Project. In this instance, the NETSO and the DSO can procure for the same service jointly. However, any dispatch of DER is carried out by one party. This is the Power Potential model where DER providing reactive power services is dispatched by UK Power Networks. In this instance, UK Power Networks procures on behalf of the NETSO but if parties were to directly contract with the NETSO, they would still be dispatched through the Power Potential technology. the NETSO then assesses the stack of DER provided alongside other providers such as transmission connected assets.

Model 6 – Parallel DER routes to market


Model 6 features a DSO-led approach to procuring DER services on behalf of the NETSO, alongside DERs and aggregators offering services directly to the NETSO. The DSO also meets its own service needs, ensuring synergies can be taken advantage of. The model also includes the DSO acting as a commercial aggregator to offer aggregated DER output to the NETSO.





Model 1: The Status Quo

Applicable to: existing DER connected to distribution networks on an unconstrained basis

Model 1 represents the market model for accessing DER as it exists today. DER connects to a distribution network on an unconstrained basis (i.e. without contractual restrictions on availability or being part of an Active Network Management scheme). the NETSO can enter into a service contract either directly with the DER, or the DER can choose to have its output aggregated with others to deliver increased MW volumes to the NETSO. the NETSO instructs service call-off, either directly or via the aggregator, who in turn instructs a volume of DER necessary to comply with the instruction. DSOs have no formal role in this arrangement, which makes it difficult for them to understand the implications of DER service provision on their networks. Figure 6 shows the high-level flow of activities for model 1.

Figure 6: Flow of activities for the NETSO procurement of DER services as it exists today

Model 1 tends to be non-locational in nature and hence used for energy balancing purposes.

Assessment Criteria: RAG Notes

1) promotes competition in the provision of services to DSO, the NETSO, Suppliers

Allows DER to compete to provide services

Can be readily deployed

Allows DER to contract directly, or via their choice of aggregator

DER seeking aggregation services should encourage





competition among third parties to provide such services

2) allows procurement from DER by multiple parties

Exclusivity provisions in the NETSO service contracts are likely to exclude service provision to multiple parties at the moment, although developments are in train to change this through the product strategy work.

3) extent to which procurement of services by the NETSO is not done in a detrimental way to distribution networks

Does not include DSOs in the process, so no direct link to ensuring distribution network security is maintained

4) maximise the opportunity for synergies

the NETSO acts as sole procurer. DSO has no formal role, and no opportunity exists for synergies in distribution constraint management

5) allows for the management of conflict between service delivery requirements and network capabilities

Does not include DSOs in the process, so the impact of Active Network Management schemes or other distribution network management issues is not directly accounted for, either to procurement or call-off processes

6) Delivers opportunities for third parties

Some opportunities for third parties in delivering the infrastructure/platforms to allow DER to access various national balancing services, particularly once exclusivity of service provision in contracts has been reviewed where appropriate. New business opportunities have already been created with this model (e.g. aggregator model)

Model 2: Managing Distribution Network Impact

Applicable to: all DER

Model 2 is the same as model 1 but with the addition of a direct link to the DSO so that the impact on the distribution network of the tendered service from DER to the NETSO can be understood, and risks to distribution network operation can be mitigated. For example, the network conditions could influence the operating profiles of the various DER entities and hence the value of service provision to the NETSO. Note that the NETSO would not be procuring to manage distribution constraints under this model.

In procurement timescales, technical information on network conditions and DER capability is requested from the DSO to the NETSO. the NETSO takes account

19 of this information when

assessing tenders, before making decisions on which tenders to accept. DER or, where required, aggregators, would have a commercial relationship with the NETSO, who would maintain an operational interface with DSOs that allowed an understanding of any impact that distribution network conditions would have on individual or aggregated DER service provision to the NETSO.

The DSO would be expected to have other agreements with DER to manage its own network issues, for example through ANM schemes (recognising many DSOs are working towards extensive ANM coverage by 2020/21).

19

Note that, in general, greater efficiency would result from a model where DNO network impacts were costed in

some way, rather than being subject to a qualitative assessment.





Figure 7: Contract relationships and procurement/call-off processes for model 2




Can be readily deployed


DER seeking aggregation services should encourage competition among third parties to provide such services






Exclusivity provisions in the NETSO service contracts are likely to exclude service provision to multiple parties at the moment, although developments are in train to change this


Explicitly includes DSOs in the process, providing a direct link to ensuring distribution network security is maintained

Allows existing direct DSO-DER constraint management relationships to be accounted for


Does not explicitly incorporate DSO distribution constraint management services in the procurement process, but could be adapted to do so over time.


Explicitly includes DSOs in the process, so the impact of Active Network Management schemes or other distribution network management issues can be explicitly accounted for in both procurement and call-off processes through exchange of relevant information

The additional operational interfaces and processes required to support this could become burdensome if not efficiently designed


Third party opportunities in the transfer of data between NETSO/DSO/DER, providing tools or services which would allow DER or aggregated DER to determine how to optimise their commercial operations taking account of network conditions. Opportunities may also arise in delivering suitable interfaces between the DSO and the DER.

Model 3: NETSO coordinates


Model 3 involves the NETSO procuring flexibility for the NETSO and the DSO. The NETSO has a central role in coordinating how the DER is used by the system as a whole. The NETSO has the commercial relationship directly with the DER, with independent aggregators and/or supplier/aggregators. The DSO has a commercial relationship with the NETSO; and the NETSO is procuring on behalf of the DSO.

To ensure any potential synergies can be realised, the NETSO liaises with the DSO prior to calling off the service for transmission constraint management, so that the impact on the distribution network, including any distribution constraints that might be solved by the same call-off, can be identified.

Note that this model does not prevent unrelated procurement activities to occur by the DSO (e.g. distribution constraint management).






the NETSO can procure services directly from DER

DSO can procure DER services indirectly via the NETSO



Also allows existing direct DSO-DER constraint management relationships to be accounted for


Allows for synergies between T and D requirements to be identified through coordinated procurement processes, avoiding the risk of inefficiency through separate procurement of the same service from the same DER, or from different DER where that DER could have solved both issues.

Allows for synergies between T and D requirements to be met by coordinated call-off of DER to meet concurrent T and D requirements


Explicitly includes DSOs in the process, so the impact of Active Network Management schemes or other distribution network management issues can be explicitly accounted for in both procurement and call-off processes through exchange of relevant information

The additional operational interfaces and processes required to support this could become burdensome if not efficiently designed


Offering tools or services which would allow DER or aggregated DER to determine how to optimise their commercial operations taking account of network conditions. Opportunities may also arise in delivering suitable interfaces between the DSO and the DER and the DSO and the NETSO.

This model also has the advantage of being able to make use of the NETSO’s existing procurement, call-off and settlement systems and processes, in lieu of wider developments for distribution, which may help with initial roll-out of such arrangements.

Model 4: DSO coordinates


Model 4 involves the DSO procuring flexibility for DSO and the NETSO. The DSO has a central role in coordinating how the DER is used by the system as a whole. The DSO has the commercial relationship with DER, independent aggregators and supplier/aggregators. The NETSO has a commercial relationship with the DSO; and the DSO is procuring on behalf of the NETSO.

To ensure any potential synergies can be realised, the DSO liaises with the NETSO prior to calling off the service for such services as transmission constraint management, so that the impact on the transmission network, including any transmission constraints or other issues that might be solved by the same call-off, can be identified.






the NETSO can procure DER services indirectly via DSO

DSOs can procure services directly from DER


DSOs lead the process, providing a direct means of ensuring distribution network security is maintained; and that DERs’ ability to meet transmission requirements is understood



Allows for synergies between T and D requirements to be identified through coordinated procurement processes,


Complexity around changing requirements may add complexity to NETSO-DSO interactions, which could impact the DSO’s ability to efficiently procure on behalf of the NETSO.


DSOs lead the process, so the impact of Active Network Management schemes or other distribution network management issues can be explicitly accounted for in both procurement and call-off processes through exchange of relevant information


Offering tools or services which would allow DER or aggregated DER to determine how to optimise their commercial operations taking account of network conditions. Opportunities may also arise in delivering suitable interfaces between the DSO and the DER.

Models 5: Joint procurement and/or dispatch


Model 5 seeks to coordinate parallel DER routes to market and establish a central role for a dispatch platform.

This is the model currently being trialled through the Power Potential Project where the DSO is procuring the service on behalf of the NETSO. The NETSO could also procure the same service separately. All parties are, however, then dispatched through a central platform, run by the DSO in Power potential’s case. The dispatch system could theoretically be run by the DSO, the NETSO or even a third party under the right circumstances.





Figure 10 - Contract relationships and procurement/call-off processes for model 5






2) allows procurement from DER by the NETSO can procure DER services directly or





multiple parties indirectly via DSO

DSOs can procure services directly from DER


Whether the DSO leads the process or the NETSO leads the process, the dispatch is carried out through one entity whether the DSO or the NETSO or third party. Distribution network security is maintained.



Allows for synergies between T and D requirements to be identified through coordinated procurement and joint dispatch processes,



All dispatch carried out through one platform. Conflicts could be more easily managed. However, this process could be more opaque for DERs.


Opportunity for third parties to be a central coordinator role through operating the dispatch solution. Potential for development of sophisticated solutions for dispatch.

Model 6: Parallel DER Routes to Market


Model 6 seeks to coordinate parallel DER routes to market, and establishes the DSO in a central role, both in terms of procuring services to manage distribution issues, acting as a commercial aggregator for services to the NETSO and also acting as technical gatekeeper, providing information on distribution network conditions to the NETSO to inform its decisions on the service models which are available from DER.

Figure 11: Contract relationships for model 6









DER can provide services directly, through commercial aggregators or through the DSO acting as an aggregator.

Additional information exchange between DSO and the NETSO may involve information not available to the competitive aggregator market, so DSO aggregation could potentially have a negative impact on that market (to mitigate against this risk, such information exchange could potentially be regulated to avoid market distortion, or the link removed via judicious service design).


the NETSO can procure services directly from DER, via aggregators, or via the DSO

DSOs can procure services directly from DER or via aggregators



Also allows existing direct DSO-DER constraint management relationships to be accounted for


Provides an opportunity for synergies between T and D requirements to be identified through DSO’s procurement processes, to the extent that they may be available to the NETSO once distribution requirements are met. However, would not enable broader procurement synergies to be realised where the NETSO procures directly from DER or via independent aggregators.

Provides an opportunity for synergies between T and D requirements to be met by coordinated call-off of DER to meet concurrent T and D requirements, however there is a risk that, where offering services as a commercial aggregator, a DSO may not be able to fully maximise call-off synergies across the full range of DER services available to others, such as the NETSO.


Explicitly includes DSOs in the process, so the impact of Active Network Management schemes or other distribution network management issues can be explicitly accounted for in both procurement and call-off processes through exchange of relevant information.

DSOs can procure services that meet their needs and offer further capability to the NETSO via VPPs whist mitigating any adverse network impact

The additional operational interfaces and processes required to support this could become burdensome if not





efficiently designed


Platforms may emerge which allow for the complex interactions between the NETSO, DSOs, DER and potential aggregators/suppliers. Tools may also be created allowing DERs to take more optimal commercial and operational decisions.

Appendix 2: Glossary

The following terms are used throughout this document:

NETSO: National Grid, in its role as the National Electricity Transmission System Operator for England, Wales, Scotland and offshore;

DSOs: Distribution Network Operators, to recognise the variety of system operation activities that are increasingly undertaken on distribution networks;

Aggregation: The activity of taking individual DER output and amalgamating it with other DER output to form larger blocks of capacity;

Aggregators: Entities who perform aggregation of DER output; and participate in procurement

events to offer that aggregated output (e.g. for ancillary services);

Virtual Power Plants: A means by which aggregated DER capability could be represented at

transmission – e.g. on a ‘per GSP’ basis, with multiple VPPs to allow for competition in service provision;

Constraints: Restrictions on the ability of a network to transport energy, for example due to thermal

or voltage limitations;

Curtailment: A reduction in output, for example of an embedded generator, to manage a network

thermal constraint.


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