Flexibility of power systems can be enhanced by thermostat-based demand response, aggregators and small energy storage. However, high transaction costs - relative to the size of resource - prevent these emerging small resources from participating directly in electricity markets, the Oxford Institute of Energy Studies (OIES) finds. Remunerating different kinds of flexibility – MW, MW/min and emission performance – would facilitate a more balanced competition.
Analysts have evaluated how the provision of flexibility, as a multi-dimensional commodity, should be best incentivised to reduce system risk at times of unforeseen variations in generation and demand. There is no question about the need to better incentivise flexibility to reign in grid instability which grows with the rise of intermittent supply from renewable energy sources.
Capacity, ramp rate, duration, and lead time are among the many elements that describe flexibility. Because of this, different flexibility-enabling resources possess differing levels of efficiency, implying that flexibility is not a homogenous commodity.
Aggregating flexibility services
Supply-side resources like power plants have technical constraints to supply flexibility, yet they will typically try to maximise profit. Hence plant operators of assets that participate in a demand response program can be assumed to react in a relatively uniform way – yet their cost of provision may vary.
Flexibility has so far not been traded as a distinct commodity. OIES analysts suggest that bilateral [capacity] contracts can help incentivise supply flexibility. Yet, due to high transaction costs relative, small providers cannot participate directly in an organised market and compete against each other. In such situations, aggregation provides an opportunity for small generation and demand response to offer their flexibility in existing electricity wholesale market.
In this this emerging business model, retailers or third parties act as intermediaries between providers and buyers of flexibility.
Residential demand-response
The Nest Learning Thermostat, which partners with utilities to provide residential demand response, has been highlighted by OIES analyst as a “good real-world example” of how bilateral contracts for flexibility services can be utilised in the integration of renewable resources.
Under the so-called “Rush hour scheme”, an attribute of the contracted consumer’s consumption (e.g. air conditioner temperature) is adjusted automatically by a utility company to manage fluctuations of demand and supply. Consumers are offered a menu of contracts with different lead times (e.g. from on-demand to 24-hour notice in advance), duration of adjustments in consumption (e.g. 30 minutes to 4 hours) and payments.
As different consumer groups experience different disutilities for the various dimensions of flexibility they provide, the contracts should ideally be designed in a way to allow the participant self-select the parameters – yet this is difficult to facilitate. OIES analysts hence recommend multi-dimensional bilateral contracts – as well as remunerating schemes for different kinds of flexibility, notably MW, MW/min and emission performance.