Last week my colleagues at the Renewable Energy Foundation drew attention to the substantial constraint payments being made to the new Viking Energy wind farm in Shetland - https://www.ref.org.uk/ref-blog/382-newly-opened-viking-wind-farm-taking-nearly-three-times-its-cfd-price-in-august-2024
No, the system doesn't work as you describe. Generators, suppliers, etc trade bilaterally with each other. There is no central clearing by the ESO. Hence, Viking Energy can enter into a contract to supply company ABC which may located in London. At or before what is called gate closure Viking and ABC report final physical notifications (FPNs) consisting of statements that Viking will supply 100 MW and ABC will buy 100 MW. At that point the ESO software notices that the capacity on the line from Caithness is overcommitted and invites bids (a) to reduce supplies entering the line, and (b) to increase production fill the shortfall either at the end of the line or anywhere else in the system which can supply London with any congestion.
The whole point is that the determination of supplies and purchases is entirely decentralised. All (!) the ESO has to do is to aggregate net flows and identify where, if any, there are congestion constraints on the transmission lines. This is the process of balancing which is why the buying/selling units are call Balancing Market Units (BMUs). I have simplified the process because after gate closure BMUs may discover that they can't fulfil their contracts - e.g. wind output is less than Viking expected - so the ESO has to call on other generators to fill the gap by producing some more in, say, Oxford.
A centralised system such as what you describe is the way that US ESOs work with nodal pricing. Rather than bilateral trades being reported to it, the ESO receives bids to supply or buy power at different locations and prices. It determines the market clearing nodal prices and the implied power flows. You can read detailed descriptions provided by the system operators such as PJM or ERCOT. [Note that ERCOT has a security firewall that blocks connections from outside the US, but you can bypass that by using a VPN with an endpoint in the US.]
Thanks but aren’t the ESO looking at bid/offer prices of all generators in Caithness for example and selecting the least cost solution to remove the constraint? Ie Viking was bidding a low negative price for the settlement periods affected compared to other windmills who are probably on lucrative ROC contracts so are going to want a whole lot more.
The system certainly needs an overhaul although whether REMA is the answer I’m not sure but am pretty sure Millibrain believes renewables are cheaper so will want a solution that delivers that.
Oh thanks for insight on ERCOT wondered why I could never look at their site.
I am not sure whether we are referring to the same prices. Balancing bids to reduce or increase output in response to constraints are entirely separate from regular trading whose results are notified via FPNs. The ESO has no information about regular trading other than the quantities reported in the FPNs. It runs a completely separate auction for balancing adjustments including to deal with constraints.
Ofgem regulations state that bids to reduce output must be based on the relevant loss of revenue adjusted for any additional costs. Interpreting this is complicated because any sale contract is treated as having been honoured, so the loss of revenue is either (a) the value of ROCs that would have been earned (based on physical deliveries) or (b) the LCCC payment of the difference between the CfD strike price and the market reference price (ditto). For thermal generators & hydro the bids to reduce output should be negative because they save money on fuel or water by being told to reduce output. However, there is another overlay. Embedded generators can't participate in the balancing market, so that rules out most hydro.
In reality, some generators play games by submitting much larger bids than warranted on this basis until they are penalised, because they know that the ESO faces very few alternatives to deal with constraints. The Peterhead plant used to do that until Ofgem started to pay attention. It is possible that Beatrice and Moray East have done the same more recently. Their reported revenues look very odd.
Viking may well have been submitting relatively low offers to reduce output. Since its CfD contract has not started, it will earn the market price even if constrained and the constraint payments are pure gain from its point of view. All it needs to do is to undercut offers from CfD generators like Beatrice, Strathy North and Stronelairg. Even so this is a cost that falls on customers throughout the UK (via the average balancing charge) which is a form of double-dipping created by SSE's decisions to build generation capacity before the capacity of its transmission network has expand to accommodate it.
That is certainly correct. Decentralised market system for electricity trading are hugely complex. They may be more transparent in principle. However, because only a few insiders know what is going on, they can easily degenerate into convenient conspiracies to exploit customers. These persist not only due to the complexity of the system, but also because the regulator's responsibilities are in direct conflict - i.e. the duty to protect customers and to promote green objectives
There is an alternative market which is simpler in, I would claim, much better. It is the old centralised system except that there is competition for building and operating new power stations against a long two contract.
This is known as the single buyer system and is used in various countries. It is very likely that we will finish up with something very similar since offering guaranteed prices, CfD contracts, etc is no different from centralised procurement.
However, doing so means that people will have to relearn all of the reasons centralised procurement was abandoned in the past. Most notably that the contractual process becomes incredibly politicised - coal plants are given contracts to maintain coal mines, nuclear plants to promote domestic R&D, wind or solar because renewables are virtuous, etc.
You are not running a power system on its own merits but to serve all kinds of political and social objectives. It is simply naive to believe that centralised procurement will be managed in large countries in any other way. The result is high costs, bad investment decisions with extended investment periods, and often a serious risk of outages.
Experience tells us all of that, but if the lesson has to be re-learned, then so be it. In large part, the experience of decentralisation was a by-product of the opportunity provided by gas CCGTs - low investment costs, short construction periods, flexible operating regimes and (relatively) cheap generation. Since many countries are determined to throw that option away we are trapped with far worse alternatives.
You use the example of Viking submitting lower offers than the likes of Beatrice/Stronelairg to make sure its offers are accepted in the BM. But presumably some curtailment must be based purely on physical grid constraints (rather than price-based). Do you know any of way of finding out exactly which units Viking would be competing with in this situation? e.g. is it split by DNO area/ is it a specific boundary
Gordon excellent blog and really shines a spotlight on the constraints mess. This has OFGEM sticky paws all over it from the daft connect and manage policy to the endless prevarication over the Eastern Links.
Correct me if I’m wrong but each generator BMU has to make bid/offer prices each half hour and thus the ESO select the least cost generators to deal with transmission constraints and the latest assets tend to be more cost effective so can afford to pitch a lower price and get selected. Viking just happened to be lowest surely? The other problem currently is the Scottish transmission system is running way below nominal capacity presumably due to summer mtce or project work so on high wind days more has to be constrained off. Of course SSE will know the details as no Chinese Walls so has potential to game the system.
As you say this is going to get worse until Eastern links are commissioned although by them more windmills would have been added so won’t fully alleviate the issue. I suppose we can at least be content that no Scotwind offshore asset got an AR6 contract perhaps the rate wasn’t high enough.
No, the system doesn't work as you describe. Generators, suppliers, etc trade bilaterally with each other. There is no central clearing by the ESO. Hence, Viking Energy can enter into a contract to supply company ABC which may located in London. At or before what is called gate closure Viking and ABC report final physical notifications (FPNs) consisting of statements that Viking will supply 100 MW and ABC will buy 100 MW. At that point the ESO software notices that the capacity on the line from Caithness is overcommitted and invites bids (a) to reduce supplies entering the line, and (b) to increase production fill the shortfall either at the end of the line or anywhere else in the system which can supply London with any congestion.
The whole point is that the determination of supplies and purchases is entirely decentralised. All (!) the ESO has to do is to aggregate net flows and identify where, if any, there are congestion constraints on the transmission lines. This is the process of balancing which is why the buying/selling units are call Balancing Market Units (BMUs). I have simplified the process because after gate closure BMUs may discover that they can't fulfil their contracts - e.g. wind output is less than Viking expected - so the ESO has to call on other generators to fill the gap by producing some more in, say, Oxford.
A centralised system such as what you describe is the way that US ESOs work with nodal pricing. Rather than bilateral trades being reported to it, the ESO receives bids to supply or buy power at different locations and prices. It determines the market clearing nodal prices and the implied power flows. You can read detailed descriptions provided by the system operators such as PJM or ERCOT. [Note that ERCOT has a security firewall that blocks connections from outside the US, but you can bypass that by using a VPN with an endpoint in the US.]
Thanks but aren’t the ESO looking at bid/offer prices of all generators in Caithness for example and selecting the least cost solution to remove the constraint? Ie Viking was bidding a low negative price for the settlement periods affected compared to other windmills who are probably on lucrative ROC contracts so are going to want a whole lot more.
The system certainly needs an overhaul although whether REMA is the answer I’m not sure but am pretty sure Millibrain believes renewables are cheaper so will want a solution that delivers that.
Oh thanks for insight on ERCOT wondered why I could never look at their site.
I am not sure whether we are referring to the same prices. Balancing bids to reduce or increase output in response to constraints are entirely separate from regular trading whose results are notified via FPNs. The ESO has no information about regular trading other than the quantities reported in the FPNs. It runs a completely separate auction for balancing adjustments including to deal with constraints.
Ofgem regulations state that bids to reduce output must be based on the relevant loss of revenue adjusted for any additional costs. Interpreting this is complicated because any sale contract is treated as having been honoured, so the loss of revenue is either (a) the value of ROCs that would have been earned (based on physical deliveries) or (b) the LCCC payment of the difference between the CfD strike price and the market reference price (ditto). For thermal generators & hydro the bids to reduce output should be negative because they save money on fuel or water by being told to reduce output. However, there is another overlay. Embedded generators can't participate in the balancing market, so that rules out most hydro.
In reality, some generators play games by submitting much larger bids than warranted on this basis until they are penalised, because they know that the ESO faces very few alternatives to deal with constraints. The Peterhead plant used to do that until Ofgem started to pay attention. It is possible that Beatrice and Moray East have done the same more recently. Their reported revenues look very odd.
Viking may well have been submitting relatively low offers to reduce output. Since its CfD contract has not started, it will earn the market price even if constrained and the constraint payments are pure gain from its point of view. All it needs to do is to undercut offers from CfD generators like Beatrice, Strathy North and Stronelairg. Even so this is a cost that falls on customers throughout the UK (via the average balancing charge) which is a form of double-dipping created by SSE's decisions to build generation capacity before the capacity of its transmission network has expand to accommodate it.
Thanks for further taking time to reply. I have concluded that it’s a highly complex system full of holes that can be exploited.
That is certainly correct. Decentralised market system for electricity trading are hugely complex. They may be more transparent in principle. However, because only a few insiders know what is going on, they can easily degenerate into convenient conspiracies to exploit customers. These persist not only due to the complexity of the system, but also because the regulator's responsibilities are in direct conflict - i.e. the duty to protect customers and to promote green objectives
There is an alternative market which is simpler in, I would claim, much better. It is the old centralised system except that there is competition for building and operating new power stations against a long two contract.
https://www.thegwpf.org/publications/power-systems-expert-calls-for-a-new-electricity-market/
This is known as the single buyer system and is used in various countries. It is very likely that we will finish up with something very similar since offering guaranteed prices, CfD contracts, etc is no different from centralised procurement.
However, doing so means that people will have to relearn all of the reasons centralised procurement was abandoned in the past. Most notably that the contractual process becomes incredibly politicised - coal plants are given contracts to maintain coal mines, nuclear plants to promote domestic R&D, wind or solar because renewables are virtuous, etc.
You are not running a power system on its own merits but to serve all kinds of political and social objectives. It is simply naive to believe that centralised procurement will be managed in large countries in any other way. The result is high costs, bad investment decisions with extended investment periods, and often a serious risk of outages.
Experience tells us all of that, but if the lesson has to be re-learned, then so be it. In large part, the experience of decentralisation was a by-product of the opportunity provided by gas CCGTs - low investment costs, short construction periods, flexible operating regimes and (relatively) cheap generation. Since many countries are determined to throw that option away we are trapped with far worse alternatives.
You use the example of Viking submitting lower offers than the likes of Beatrice/Stronelairg to make sure its offers are accepted in the BM. But presumably some curtailment must be based purely on physical grid constraints (rather than price-based). Do you know any of way of finding out exactly which units Viking would be competing with in this situation? e.g. is it split by DNO area/ is it a specific boundary
Gordon excellent blog and really shines a spotlight on the constraints mess. This has OFGEM sticky paws all over it from the daft connect and manage policy to the endless prevarication over the Eastern Links.
Correct me if I’m wrong but each generator BMU has to make bid/offer prices each half hour and thus the ESO select the least cost generators to deal with transmission constraints and the latest assets tend to be more cost effective so can afford to pitch a lower price and get selected. Viking just happened to be lowest surely? The other problem currently is the Scottish transmission system is running way below nominal capacity presumably due to summer mtce or project work so on high wind days more has to be constrained off. Of course SSE will know the details as no Chinese Walls so has potential to game the system.
As you say this is going to get worse until Eastern links are commissioned although by them more windmills would have been added so won’t fully alleviate the issue. I suppose we can at least be content that no Scotwind offshore asset got an AR6 contract perhaps the rate wasn’t high enough.