The upcoming UK capacity market is supposed to support the integration of renewables into the grid. But will it do that or will it primarily serve to bring new baseload capacity online? UK Power Reserve, an independent developer and operator of small, flexible generators, wonders whether the UK’s plans will squeeze existing providers of flexible capacity or stimulate investment. CEO Tim Emrich tells Energy Post how he has been making money by “helping” National Grid and organising demand response – without a capacity market at all. “We consider ourselves the smartest generator in the country”.
At the end of July, the EU approved UK plans for a capacity market. The Department of Energy and Climate Change (DECC) was besieged by criticism: the scheme would keep old coal plants up and running. Just a few weeks later, DECC proposed amendments and launched a fresh consultation apparently with the aim of excluding old coal plants. It is trying to do this by tightening up the definition of “new”; only new plants could bid for 15-year capacity contracts. Some suspect DECC has been asked by Brussels to make the change; the full text of the EU decision has yet to be made public.
Do these events reassure earlier critics? In part. Environmentalists still worry that plants may count funds used for mandatory air quality improvements towards their refurbishment spend and – since this spend determines whether they can win 3- or 1-year capacity contracts – illegally extend the life of coal plants. (EU state aid rules only allow subsidies for investments that go beyond legal requirements.) Gas plant owners are reportedly dismayed that all the hoo-hah over coal risks closing off 15-year capacity contracts for them too. And existing players in the capacity game, such as UK Power Reserve, fear that they may be hurt by the new plans.
Energy Post spoke to UK Power Reserve’s CEO Tim Emrich, to understand how the UK balancing market is already helping integrate renewables into the system, how companies like his make money without a capacity market, and what difference the new plans might make.
Q: What is the role of UK Power Reserve in the UK energy system?
A: We started back in 2010 so we’ve been around for about five years now. In that time, we’ve gone from zero power plants, zero megawatt hours and zero staff to 14 power plants, nearly 200 megawatts of generation and a 40-strong team.
What created us was seeing an opportunity to support the renewables revolution here in the UK and participate in the balancing market. The carbon commitments of the UK (and EU) and plans for renewables generation are fantastic, but there is a complementary need for a balancing infrastructure and grid management [because renewables are variable]. This will increase in future.
We do not operate baseload generation. Our generation is all in reserve. If there’s a fire (in a metaphorical sense) we’re dispatched to put it out. Fires can be major failures, unplanned maintenance, mistaken wind forecasts, etc. If there’s a problem, we step in and help National Grid [the UK’s grid operator].
We developed and built the first purpose-built STOR [Short Term Operating Reserve*] plant in the UK. We continue to partner with National Grid through various balancing services it procures. And we’ve done all that in the absence of a capacity market.
Q: How do you compete with the “Big Six”, the UK’s biggest energy companies?
A: We consider ourselves to be the best smart, flexible capacity provider in the country. We’re innovative 1) on the cost side – we keep costs low 2) in our contracting strategy – nobody studies and responds to the market like we do, and 3) in our relationship with National Grid which is predicted on our always being available to them.
We’re going head to head with the largest generators in the country, but we were attracted to this space. The UK welcomes independent generation. Something like 85% of power is still generated by the “Big Six” but we’re headed in the direction of more competition.
As you know, we have recently completed acquisitions from Scottish Power and have transacted with two other members of the Big Six previously on similar deals. They’re not best placed to operate 10 and 20MW power plants. We’re better placed to focus and specialise on operating smaller plants, which are plugged into the distribution, not transmission grid. When aggregated at a local, embedded level this type of capacity can provide high quality MWh’s at utility scale and make the energy sector more efficient at an overall lower cost to the end consumer. This is the key strength of embedded generation and of UK Power Reserve.
Q: How much of a local/regional vs. national problem is ensuring a reliable power supply?
A: It’s typically a fairly good mix of requirements. National Grid distinguishes between different plants and between local and national problems. We offer services in fairly small chunks. It takes less than ten minutes to fire up one of our plants. This is the power of embedded generation, localised power. If you were designing a system of reserve power and you needed 1000MW, you’d rather have 50 plants of 20MW than one plant of 1000MW.
It’s also important to note that embedded generation like ours reduces national demand on the national transmission network as power is produced and consumed in the local network. This is the crux of demand side management – we have the ability to manage both sides of the curve i.e. demand and generation.
Q: You’ve done all this without a capacity market. Does the UK need one now?
A: This is a tricky question. We’ve made investment decisions based on a market that includes independent generation and rewards competitive prices. We’re priced lower than our competitors. We have a low-cost model that offers superior services.
We can operate with or without a capacity market. A capacity market does provide certainty for investment and so provides a good platform for UK Power Reserve’s growth that would otherwise take longer if reliant upon the current market signal for investing in the right capacity to support a renewable future.
Our fear is that a capacity market could create a less friendly environment for independents in the generation mix. Our hope is that there will be room for small independents and a big opportunity for embedded generation – this would spread security of supply risk across the country. If the capacity market goes ahead – and on some levels, I can see the rationale for it – it could instead take the form of a strategic reserve, as others have called for.
National Grid does a good job of managing [generation] gaps now. We as a country haven’t suffered a lack of generation capacity to date. National Grid can flex those programmes that already exist. I would be happy to continue as we have until now – it would be nice if balancing services were relied upon more. But I can also understand that the UK government worries about a cliff edge in 2018, when many coal plants are expected to come off the grid. Their clear concern is that the margin for error will be fatally low with a lack of new baseload capacity planned and fears that a strategic reserve would be undersized.
Q: What changes would you advocate to the UK’s plans for a fully-fledged capacity market (rather than a strategic reserve)?
A: Fifteen-year [capacity] contracts should only be awarded to new generation rather than refurbished generation. It’s important that these long-term contracts encourage generation to be built that would not otherwise have come online during the relevant time period of 2018-33.
Q: How do you see the role of demand response in the capacity market?
A: We are demand response. There are three kinds: 1) emergency demand response [involuntary demand adjustments] 2) economic demand response [shaving peaks in return for payment] and 3) ancillary services demand response – this is primarily what we do – we produce active power, reserve power to help balance the grid.
We also reduce national demand that is traditionally served by large power stations – historically National Grid could only control the generation side of the equation but our flexibility gives it control of the other half of the equation, meaning more robust, more efficient, management of security of supply.
The demand response, or rather demand side management industry has serious issues with the capacity market. The market is about ensuring there is a stable and consistent wholesale power market. The demand response sector cannot bid for 15-year contracts: how do we convince a large industrial player to commit demand for 15 years from 2018? It’s problematic. The government would listen more if big industries were raising these concerns with them. But for now, it is primarily aggregators [pooling demand] doing so.
The future is not generation but smart metering however. We need to empower consumers and smart metering will play a big role in that. UK Power Reserve has sought to educate and empower consumers of all sizes with our smart grid app called iGrid. We released the Apple version of the app and have continued to improve it such that it even includes solar and wind generation data. The Android version will be out in October 2014.
Embedded generation and demand-side management will play important roles. Aggregators are in discussion with industrial partners, telling them they should change their behaviour radically. But this isn’t an easy discussion in the absence of long-term incentives.
Q: Maria van der Hoeven from the IEA said recently that balancing markets “remain underdeveloped and fragmented” across the EU. Do you see scope for balancing markets to do more?
A: We only participate in the UK balancing market for the moment. It’s very real-time oriented in how it is procured and utilised, and is widely considered to be transparent and competitive with high levels of demand side response and innovation. It’s leaps and bounds ahead of any other European balancing markets and a lot of the UK market could be adopted in EU balancing markets. The UK balancing market has benefited from National Grid being regulated under an incentive scheme that mandates competition and drives lower costs. As a result, innovation in procurement practice has unlocked a diverse range of capacity providers.
Q: Are you looking to expand beyond the UK?
A: We are watching how other markets are developing and there are several that offer opportunities such as the US, Germany, Italy and Ireland. If the right commercial/regulatory frameworks are adopted then the UK Power Reserve business model is easily transferable to other European and international markets.
Q: How do you make money, in the absence of a capacity market?
A: By providing fast-acting reliable reserves to market participants such as National Grid, suppliers and large generators who need to balance their core businesses.
The way the STOR programme worked, National Grid paid us a capacity payment (for availability) and a utilisation payment (for use). National Grid then drove down availability payments to nearly nothing so we have ended up in a utilisation only payment system. We’re only paid when our power is used. But we still turn a profit just from utilisation income. Will we soon pay National Grid to participate [in the market]?!
In the UK capacity market we would be eligible for 15-year contracts as well as 1-year deals. The government has said it will seek to procure about 50GW of reserve capacity. A significant portion of this will be 1-year deals and the industry and analysts are widely speculating about what proportion of that 50GW might include 15-year deals.
Q: What do you see as the real purpose of the capacity market?
A: To ensure a baseline of generation in the future. Significant baseload plants are coming offline and the government fears a mismatch between power availability and demand. It’s less about reserve power and more about ensuring actual baseload generation. The balancing market is more expensive than the wholesale market and shouldn’t be a tool you would use all day. The purpose of the capacity market is to secure a significant wholesale supply of electricity, not balance the grid.
*Short Term Operating Reserve (STOR) is a service for the provision of additional active power from generation and/or demand reduction. The UK’s grid operator National Grid needs it when actual demand is greater than forecast and/or certain generators are unavailable.