Reserve Review Pre Consultation Document

8/8/2019 Reserve Review Pre Consultation Document

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Reserve Review

Procuring Reserve for the next decade andbeyond

Pre-Consultation Document

July 2010


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Table of Contents

Introduction ............................................................................................................. 6Background ............................................................................................................. 6

Reserve: An Overview......................................................................................... 6Market Provided Services................................................................................... 82020 Targets......................................................................................................... 9Impact of the LCPD Directive............................................................................ 10Interaction with the ARORA Project................................................................. 12

Objective of the Project ........................................................................................ 14Project Structure ................................................................................................... 14Workstream 1: Near-Term Reserve Developments......................................... 15

Workstream 2: Longer-Term Reserve Developments..................................... 16Detailed Project Aims ........................................................................................... 17

Scope.................................................................................................................. 17Workstream 1: Near-Term Challenges:............................................................ 17

Workstream 1A: STOR Review...................................................................... 17Workstream 1B: BM Start-Up Review ........................................................... 20Workstream 1C: Downward Regulation / Negative Reserve Review .......... 21

Workstream 1D: Reserve Costs and Imbalance Pricing.............................. 22

Workstream 2: Longer Term Challenges......................................................... 25Reserve Requirements to 2020 and beyond................................................. 25Drivers of Operational and Market Behaviour in 2020................................. 26Potential New Reserve Technologies........................................................... 26Impact of UK and EU Regulatory changes upon the GB Reserve Market.. 27

Project Timetable .................................................................................................. 30Appendix A: STOR Tender Round Calendar 2010/11 ......................................... 32


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Executive Summary

National Grids recent Operating the Transmission Networks in 2020 consultations and therecently published Future Balancing Services Requirement Statements show that there areclear upward drivers behind the volumes of balancing services, predominantly reserve andresponse, likely to be required by National Grid as we move forward to 2020 and beyond. Ata high level these drivers are:

Increasing volumes of variable generation connecting to the transmission system,predominantly wind-powered generation

Increasingly larger generating units connecting to the transmission system, resulting

in the level of normal infeed loss risk rising from 1000MW to 1320MW and theinfrequent infeed loss risk rising from 1320MW to 1800MW1.

Alongside the above view of increasing Short Term Operating Reserve Requirements, theeffect of the Large Combustion Plant Directive will see some generators that currently providereserve close. On the assumption that the Open Cycle Gas Turbines (OCGTs) at thosepower stations that currently provide STOR also close, this would result in a proportion(approximately 16%) of the existing portfolio of contracted STOR being lost by 31

stDecember

2015. Any reserve capability provided through the main unit at those stations will also be lost,

although this may be replaced by other main units as running regimes alter as the marketfurther evolves.

Against this backdrop, the objective of the Reserve Review will be two-fold;

1. In the short to medium term to further develop and enhance the existing reserveproducts and the associated systems, through incremental improvements to contractand service forms where there is a clear and significant benefit to existing providers,potential providers and National Grid.

2. In the longer term, explore options to meet the challenges posed to the reservemarket by the anticipated major changes to the generation types connected to thetransmission and distribution systems.

Engagement with the wider energy industry is crucial at this time of significant change and assuch the Reserve Review is intended to be structured around a programme of formalconsultation and discussions within industry working groups. The views of existing andpotential future reserve providers will be sought and will be crucial in ensuring that the reserveneeds of the next decade and beyond can be efficiently met and economically procured.

Two external Workstreams are therefore planned. The first, Workstream 1, shall look at theshort to medium term challenges; the second, Workstream 2, shall look at the longer termchallenges.

Workstream 1: Short to Medium Term Challenges:

This workstream will essentially look at the existing reserve products and systems and will


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Workstream 1D: Review of Reserve Costs in Imbalance Pricing

Workstream 2: Future Reserve

Workstream 2 will be focussed on the longer term reserve issues and will likely start with aholistic view of the reserve service before focussing on the products and systems necessaryto deliver reserve services (in whichever form they are required) in the long-term.

It is envisaged that this workstream will initially establish the likely state of the reserve market.This will be through marrying the existing work being undertaken to identify reserve

requirements to 2020 and beyond with an analysis of the likely plant mix connected to thesystem, the likely sources of reserve and the issues that this will present with regard toprocuring sufficient reserve.

Building upon this the workstream will then need to perhaps examine who is best placed tomanage the requirements for system reserves and whether the current split of roles andresponsibilities between National Grid and the wider energy market is appropriate movingforward. Following on from this, the review will need to establish whether the responsibilitiesthat may remain with National Grid may either be best served by the existing fragmentedapproach to reserve (which is built upon the numerous existing services) or may be betterserved by a new consolidated, perhaps even universal, reserve product that will seek tomanage National Grids and potentially the markets reserve obligations in the long-term.

Initial Project Milestones

June 2010: Project Launch

The project was launched via a presentation at the June Operational Forum hosted byNational Grid. A copy of the presentation given at the forum may be found by following theattached link.

http://www.nationalgrid.com/NR/rdonlyres/01799A3E-EB04-4FA0-B899-36195B7E08E5/41761/Reserve_review_Jun10_OpsForum.pdf

July 2010: Pre-Consultation Issued

This pre-consultation marks the first stage of industry engagement through the ReserveReview. Its high level aim is to present National Grids initial thoughts on the areas of reserve

sourcing and procurement that we feel need to be examined initially. The aim is for industryparties to give their views, both on National Grids initial thoughts and also on any other areasconnected with the evolution of the market that might impact on National Grids reserveprocurement strategies or methods.

The closing date for responses to this consultation is 10 September 2010


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Autumn 2010 onwards

Following the close of this pre-consultation and the initial Industry Reserve Workshop,National Grid will set out the views of industry parties and itself and propose a more detailedview of how the next steps of the Reserve Review will take shape. It is envisaged at this timethat those issues that the industry has given highest priority to will be taken forward throughexisting reserve product annual reviews (e.g. the STOR service review) or will be the subjectof a secondary development review over longer timescales where more complex or detailedproposals need to be considered over longer timeframes.


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Section 1Introduction and Rationale for the Project

Introduction

The Gone Green scenario communicated by National Grid at industry forums and through anumber of consultations gives a view of the future operating environment for the GBTransmission System that sees the targeted reductions in CO2 emissions being met. Giventhis view, a requirement to study the impact of this environment on the procurement ofreserve has emerged. This pre-consultation paper aims to initiate a review that studies thekey impacts of the changes envisaged within that Gone Green scenario on the reserve

marketplace and to propose solutions to the issues that are anticipated to become furtherdefined as a result of this review.

This document aims to act as the key point from which the overall structure of the ReserveReview can be developed. It seeks the views of the industry on National Grids initialthoughts and also to gain views on any subject areas related to reserve procurement thatNational Grid has not yet considered. Respondents are also invited to give their views of therespective priorities that should be given to each area of review work identified.

Background

Reserve: An Overview

Great Britains nominal operating frequency is 50Hz. In order to maintain the frequency withinthe statutory limits of 49.5 to 50.5, National Grid has to balance generation with demand on asecond by second basis. Too much generation on the system will cause the frequency to riseand too much demand will cause the frequency to fall.

National Grid takes a number of different actions to ensure that the system frequency ismaintained within the statutory and operational limits. The different actions are takendepending on the different timescales required for managing the system.

Figure 4 shows the four main actions taken to respond to system frequency fluctuations;margin and Short Term Operating Reserve (STOR), energy balancing, fast reserve andfrequency response. The timescales in which each action would be taken ahead of time isdescribed in Figure 4.

Figure 1: Actions taken in different timescales to manage system frequency

onse

Reserve Services


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The following sections describe each balancing services action in detail.

Operating Margin

The operating reserve requirement, also known as Short Time Operating ReserveRequirement (STORR) is calculated so that the probability of demand not being met is only atotal of one day in every 365 days. Where the difference between the sum of the

synchronised generation capacity and the forecast demand is less than the operating marginrequirement, action must be taken to increase the operating margin. If the shortfall ofoperational margin is lower than a specified threshold, National Grid issues a Notification ofInsufficient System Margin (NISM). Generally the market responds to the issued NISM bysupplying more synchronised generation to meet the operating margin requirement.

Setting the operating margin is a balance between reducing the risk of demand disconnectionand reducing the costs associated with operating margin actions.

Operating margin is made up of contingency reserve and operating reserve, as shown inFigure 2.

Figure 2: The Main Components of Operating Margin

Operating Margin

ContingencyReserve

OperatingReserve

Short TermOperatingReserve

ScheduledReserve

Contingency reserve represents a margin of plant that is maintained in a state capable ofsynchronising in sufficient time to achieve full output in specified timescales. This contingencyreserve requirement progressively decreases from the day ahead margin analysis process to


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b) Short Term Operating Reserve (STOR): capacity capable of generating (normallyfrom standstill) or reducing demand within a defined period. STOR is made up ofcontracted generation or demand that can be called upon to reach full output within240 minutes and be able to provide this level of output for at least two hours.

BM Start Up

The BM Start-up Service gives National Grid on-the-day access to additional generatingBMUs that would not otherwise have run, and could not be made available in BM timescalesdue to their technical characteristics and associated lead-times.

BM start up costs relates to the actions that National Grid has to take to ensure that BMUsare ready for use within BM timescales; this includes the process of BMUs warming up,during which the BMU is being prepared to generate if and when an offer is issued byNational Grid. Once a BMU has reached critical operating temperatures, additional fees maybe incurred to hold the unit at readiness to synchronise this is known as hot standby.

Negative Reserve / Footroom

Negative reserve, also known as downward regulation, refers to the capability that there is toreduce the amount of generation output on the system. It is necessary to control the level ofnegative reserve held on the system to ensure that the frequency can be kept within itsstatutory limits and does not rise out of control due to an excess of generation.

In circumstances where demand is low and the majority of generation is operating inflexibly ator near its minimum stable output (i.e. the level at which it can not operate below), there maybe insufficient available MW reduction capability (footroom) to allow the required level ofnegative reserve to be delivered. Actions have to be taken to exchange this inflexiblegeneration with flexible generation this is achieved by the desynchronising of some of theBMUs, allowing the output of other BMUs to be increased above their minimum stable output.Taking such footroom actions increase the negative reserve capability and gives NationalGrid more flexibility to respond to changes in the frequency either automatically via frequencyresponse or by instruction. All actions taken to increase the level of negative reserve on thesystem are classified in BSIS as footroom costs.

The volume of footroom actions required is significantly impacted by the availability and therunning regime of generation, in particular wind turbines and inflexible plant types like nuclearpower stations. High levels of wind turbine and nuclear output during periods of low demandresults in other more flexible generation reducing output, moving towards their minimumstable output, leaving little ability for National Grid to further reduce generation output. Thistherefore results in an increased volume of footroom actions being required so that NationalGrid can further reduce output on synchronised machines


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PGBTs Pre Gate BMU Transactions (PGBTs) can be used to providereserve on units that are not synchronised by agreeing in advanceof BM timescales a PGBT to synchronise the unit. Then theheadroom on this unit can be utilised in BM Timescales to provideadditional reserve should it be necessary. The additional energybrought onto the system by the synchronisation can also then bepulled back on other units creating further headroom which againcan be utilised for reserve if required in BM timescales.

BMU Specific Trades A tool similar to a PGBT, but executed through a differentcommercial mechanism and timescaleLong BalancingMechanism Markets

If the market delivers an energy long position at Gate closure,National Grid can resolve this by pulling back synchronised unitsto a part-loaded position. This then has the benefit of creatingheadroom that can be utilised as reserve energy if needed as aby product of the long market

Free Headroom Free headroom is where a unit has part-loaded itself in abalanced market, effectively providing National Grid reserve forfree

Footroom Footroom is the difference between the generation output and aunits Stable Export Limit (SEL). Effectively it is the opposite ofHeadroom and is used for negative reserve i.e. reserve to caterfor unexpected demand losses, or over generation. It is usuallymade freely available by fully loaded units, or over periods of lowdemand needs to be created by desynchronising units operatingat SEL and replacing the lost energy by increasing the loading onother units above SEL.

2020 Targets

The recent Operating the Electricity Transmission Networks in 2020 consultationpublished by National Grid highlighted a number of messages on the subject of reserve as weoperate the transmission system into the future. Key among these was the likelihood that theoverall reserve requirements would increase substantially moving forward. This is due to twoupward drivers:

1. Increasing volumes of variable renewable generators connecting to the system:Wind generation output is more difficult to forecast accurately than conventionalgeneration. Hence the reserve requirement increases each year as more windgeneration connects to the system in order to cover the uncertainty in wind output. Inaddition, the range of wind output increases, and therefore the range of STORRincreases; and

2 Larger individual generating units may connect: Increasing the largest infrequent


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Figure 3: Forecast Short Term Operating Reserve Requirements to 2025/6

Clearly according to all of our presented data, there is a definite requirement to increase ourreserve holding. This could be through

increasing the levels of existing sources of reserve through existing services

developing new services to access new sources of previously inaccessible reserveenergy or capacity

Impact of the Large Combustion Plant Directive

The Large Combustion Plant Directive (LCPD) will compel all units that have opted out of it(i.e. large industrial sites that emit sulphur and nitrous oxides in excess of certain thresholds)

to close after they have used up 20,000 hours of running, or by 31

st

December 2015,whichever is sooner.

ELEXON publishes the most up to date data on actual running hours. Based upon thesefigures, the position as of 2

ndJune 2010 and indicative potential closing dates for each of the

Power Stations that are opted out of the LCPD is shown below. The indicative dates havemade the assumption that historic levels of running in the period 1

stJanuary 2008 to 2

ndJune

st

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

2009/10

2010/11

2011/12

2012/13

2013/14

2014/15

2015/16

2016/17

2017/18

2018/19

2019/20

2020/21

2021/22

2022/23

2023/24

2024/25

2025/26

STORR(MW)

Average

Min

Max

High Wind

Low Wind

Forecast year of increaseof Largest Infrequent LossRisk


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Large Combustion Plant Derogations In Effect

Name Lead Party IDMaximum

Hours

CumulativeHours (to

01-Apr-10)

RemainingHours

PotentialClose

Grain POWERGEN 10000 1177 8823 31-Dec-15

Ironbridge POWERGEN 20000 5029 14971 31-Dec-15

Kingsnorth POWERGEN 20000 9349 10651 2-Oct-12

Didcot A INNOGY01 20000 7537 12463 31-Dec-13

Fawley INNOGY01 10000 755 9245 31-Dec-15

Littlebrook INNOGY01 10000 1213 8787 31-Dec-15

Tilbury LCP 1 Boilers 7 & 8 INNOGY01 20000 9572 10428 19-Aug-12

Tilbury LCP 2 Boilers 9 & 10 INNOGY01 20000 9821 10179 4-Jul-12

Ferrybridge C Unit 1 & 2 KGL 20000 5726 14274 31-Dec-15

Cockenzie LCP 1 Units 1 & 2 SPGEN01 20000 11564 8436 7-Oct-11

Cockenzie LCP 2 Units 3 & 4 SPGEN01 20000 10788 9212 24-Jan-12

These units are all mid to low-merit Coal or Oil units and so provide significant sources ofreserve to National Grid. This is predominantly in the form of Contingency and RegulatingReserve from the main generating units at each site and Short Term Operating Reserve(STOR) from the Open Cycle Gas Turbines (OCGTs) installed at most sites.

It could be anticipated that as the units close down and other new power stations open, otherunits that have opted into the LCPD and that remain open past 31

stDecember 2015 will move

in the merit order to become low-merit units and so the position for Contingency and

Regulating Reserves should adjust minimising the operational impact to National Grid. TheSTOR provided by OCGTs at the stations earmarked for closure will almost certainly be lostas the main units close, and the following chart gives an indication of the impact this will haveon the currently contracted levels of STOR.

Figure 4: Breakdown of STOR by Site Type


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Interaction with the ARORA Project (A Review Of Reserve Actions)

Background to the ARORA Project

In late 2004, National Grid launched its second review (the first being NETA) of its reserveprocurement framework, in particular products, procurement mechanisms and reserveinformation provision to assess whether the suite of arrangements continued to be the mostappropriate.

The high level objectives of this project were;

to ensure that National Grid has an appropriate suite of Balancing Services which itcan use to meet its operational reserve requirements;

to ensure these Services are procured in an efficient and economic manner, viamarket based mechanisms where competition exists;

to ensure parties are given equal opportunity to participate;

to ensure that these Services are procured and used in a way which compliments the

energy market; and to ensure Market Participants understand when and how these Services will be

required, procured and used.

ARORA Proposals

The initial proposals were to establish reserve procurement mechanisms within threeprocurement timescales:

1. Season ahead (similar to the then Standing Reserve and Supplemental StandingReserve services)2. Within season (no explicit procurement mechanism)3. Within day (similar to the then Warming service, developed into BM Start-Up)

Following consultation the industry agreed on progressing developments with 1 and 3 butpushed back on the development of 2, as it was viewed that the System Operator (SO)procuring in these timescales would not add any new capacity to the system and wouldtherefore be undermining the market and its ability to balance itself. The main driver fromNational Grids perspective was to establish an open and transparent mechanism formanaging our Wider Reserve Obligations (i.e. the SOs confidence of being able to meet ourreserve requirements) on the one or two difficult days per year.

Ofgem supported the industrys view on proposal 2 as at the time there were a number ofconcerns with this proposal over:


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ARORA Implementation

In respect of proposal 1 (Season Ahead) the Short Term Operating Service was launched toreplace the previous commercial frameworks of Standing Reserve and SupplementalStanding Reserve with the key changes being;

Response time increased from 20 minutes to 240 minutes.

Three tender rounds per year (seasonal rolling basis) as opposed to 1 tender

round per year. Tenders could be submitted for up to 2 years of service provision as opposed to

only a one year proposal.

Standardised contractual framework as opposed to individual contractualframework.

In respect of proposal 3 the existing within day reserve procurement mechanism was throughWarming and Hot Standby contracts. This was reviewed and evolved into the BM Start-UpService. The key deliverable was to create an improved contract structure with firm payment

structures to better facilitate all generation types unable to start up on the day within the BM.The key changes are highlighted below;

Firm Warming Fees (reflective pricing of elements of service offered regardless ofsynchronisation) as previously warming element was not specifically paid for)

Firm Energy Utilisation Fees (Fixed rather than variable)

Improved reporting of Information in the System Operator Reporting andNotification (SONAR) system relating to use of BM Start Up and Hot-Standbyterms

Inclusion of service fees in the calculation of energy imbalance prices

Overall improvements were also implemented relating to the information provision ofOperating Planning Margin Requirement (OPMR) and its constituent components. Theintention was to assist Market Participants in having a fuller understanding of the underlyingvariables affecting the market surplus (SPLD) figure as defined and available on theBalancing Mechanism Reporting System (BMRS).

In addition to the information described above, the amount of generation declared available

via the processes described in Operating Code 2 (OC2) of the Grid Code but alreadycontracted by National Grid to meet its short term operating reserve requirement was alsopublished.


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Section 2Objective of the Project and Structure

The aim of this section is to set out the overall aims of the project and to describe in moredetail the anticipated project structure.

Objective of the Project

The objective of the project is to examine the existing reserve market and reserve productsthat are available and then through a review examine whether they are likely to be able tomeet the needs of all parties in both the short term. The review will examine the near termdrivers for change and refinement in the existing reserve products. It will also put in place aprogramme of work to ensure that in the longer term, the reserve market is able to functioneffectively. That is to say that it will continue to economically and efficiently facilitate theappropriate levels of security and quality of supply in the context of a rapidly evolving energymarketplace.

The project will seek to meet the following objectives:

1. To undertake a review of each of the existing contracted reserve services with theprinciple aim to establish whether they are fit for purpose for the period running up to2015/16

2. Where they are not to formulate incremental developments to those services with theaim of implementing them no later than the start of the 2011/12 financial year.

3. To actively engage the wider industry, both the generation and demand side, toa. gauge their views on the existing contracted reserve services;

b. gather their input into any proposals to further develop the existing contractedreserve services;

c. identify any barriers to entry that the existing services pose to new entrantsinto the existing reserve market

4. To assess the impact any developments to the existing contracted services mighthave on existing IS systems including the SONAR System utilised by NationalGrid and the service providers

5. Looking beyond 2015/16 and taking National Grids published best view futurereserve requirements, to examine the sources of reserve that might emerge to meet

the requirement, engaging the industry throughout this analysis6. Given the potential sources for reserve to examine whether the existing contracted

reserve services are able to facilitate delivery of the reserve requirement and if not toidentify a revised service that will be able to; again thought will need to be given tothe IS systems that would be necessary to deliver any revised service.

Project Structure


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Workstream 1: Near-Term Reserve Developments

National Grid intends to focus efforts in this area around four key service areas:

1. Development of the existing STOR service2. Development of the existing BM Start-Up Service3. Examination of the existing techniques for managing negative reserve requirements,

leading to the possible development of new negative reserve products4. The impact upon imbalance prices of National Grids reserve actions

Each of the initiatives will be taken forward through separate working groups as each of theservices tend to be of greatest relevance to a particular group of Users.

STOR

The development of the STOR service will be heavily interactive with the existing STORAnnual Review process. National Grid envisages that there will be an overarching WorkingGroup under the Reserve Review that will take on the role of the longer term development ofthe STOR service. When appropriate, the initiatives that have been developed through theReserve Review will drop into the formal governance of the STOR Annual Review forimplementation.

Reserve Review Working Group - Ongoing Development of STOR Initiatives

STOR Annual Review 2010 STOR Annual Review 2011

1st April2011

1st April2012

2010 2011 2012

BM Start-Up

As BM Start-Up is a commercial service, BM Start-Up initiatives are planned to be takenforward under the Reserve Review structure only, i.e. there is no formal governancemechanism that also needs to be involved. Should initiatives be identified and all partiescurrently signed up to commercial agreements for BM Start-Up agree, then we would look toimplement simultaneous amendments to those agreements to implement any agreedchanges. This work is to be taken forward later in 2010/11 with a view to implementingcontractual changes for 1

stApril 2011 where possible.


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Reserve Costs and Imbalance Pricing

The review of reserve costs feeding into imbalance pricing will be initially be undertaken aspart of the reserve review. Any proposed implementation of initiatives relating to this areawould be taken forward through consultation on changes to National Grids Licence ConditionC16 Statements or through amendments to the Balancing and Settlement Code (BSC).Decisions on whether any such changes are warranted will be made as part of thediscussions under this reserve review workstream.

Workstream 2: Longer-Term Reserve Developments

Workstream 2 will have a less formal structure, allowing it to adapt and focus its effortsflexibly and in response to the challenges that become apparent for the longer term. Initially itwill rely principally on consultation to establish the key drivers and areas of focus that NationalGrid and the energy industry collectively believe are the key drivers of reserve and behavioursin the longer-term. Such consultations will then be enhanced with working groups being setup where appropriate and the use of existing industry forums as appropriate.


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Section 3Detailed Project Aims

Detailed Project Aims

This section aims to set out in detail the key aims for the Reserve Review Project togetherwith an outline programme of work for each of the presently envisaged workstreams.

Scope

The scope of the project is two-fold. The first area for which there is a requirement toinvestigate is how the existing contracted reserve services may be utilised fully between nowand 2015/16. The financial year 2015/16 is selected as the breakpoint as the LCPD runs until31 December 2015 and as of 1 April 2016 all units that have opted out of the LCPD will haveto close (unless they have done so already having exhausted their permitted operating hoursunder their opt out). A significant proportion of the existing contracted reserve services aresourced through units at these LCPD opted out stations and as such this is the point at whichsome of the existing reserve services may reach the end of their useful working lives.

The second area of the project is therefore to examine the likely generation background andpotential for demand side participation beyond 2015/16 and onwards to 2020 and beyond.Here the scope of the project will be to take the analysis already performed of the likelyrequirements for reserve services beyond 2015/16 and to establish the likely sources of suchreserve. Given these likely sources the existing contracted services will then be appraised tosee if they can facilitate the provision of reserve through the likely sources, either in theirexisting form or through minor modification. The project will also be tasked with identifyingand developing alternative contracted reserve services should the existing services bedeemed incapable of meeting the identified challenges to reserve provision moving forward.

Two external Workstreams are planned. The first, Workstream 1, shall look at the short tomedium term challenges; the second, Workstream 2, shall look at the longer term challenges.Both will be facilitated at the highest level through consultations and workshops. Their keyobjectives will be as follows:

Workstream 1: Near-Term Challenges:

This workstream will essentially look at the existing reserve products and systems and willlook to evolve them such that a greater pool of existing providers may participate in their

provision.

The Workstream will be consisted of several product orientated sub-groups:

1. Workstream 1A: Development of the existing STOR service2. Workstream 1B: Development of the existing BM Start-Up Service3 W k t 1C E i ti f th i ti t h i f i ti


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At a high level a party can tender to provide a STOR service should it meet the followingcriteria:

Offer a minimum of 3MW or more of generation or steady demand reduction (this canbe from more than one site);

Deliver full MW within 240 minutes or less from receiving instructions from NationalGrid;

Provide full MW for at least 2 hours when instructed;

Have a Recovery Period after provision of Reserve of not more than 1200 minutes(20 hours);

Be able to provide STOR at least 3 times a week.

At the highest level the purpose of the STOR Review workstream of the Reserve Review willbe to thoroughly examine the existing contract form and highlight any unnecessarycomplexities that have the potential to discourage potential providers from the STOR service.It is clear that this process will interact greatly with the ongoing annual STOR review processand so a number of the detailed level objectives as set out below will feed into this formal

mechanism as a means by which they may be implemented. It is likely then that certainhigher priority activities will feed into the 2010/11 STOR review, with other lower priority ormore complex issues being developed outside of this formal process through the ReserveReview and then feeding into future years STOR Review processes.

Therefore to facilitate this, the detailed level objectives shall be (for the STOR Review):

1. To develop amendments to the Standard Contract Terms to better facilitate long-termSTOR tenders

The potential for Users to tender in up to 15 years ahead has recently beenintroduced into the STOR contract form. However as a consequence of recentdiscussions with providers looking to tender in over these longer timescales a numberof incremental improvements to the Standard Contract Terms specifically tailored tothe unique challenges and issues faced by long-term tenders have come to light. It isNational Grids intention to work with the industry in developing a set of StandardContract Terms that can look to accommodate long-term tenders more appropriately.

2. To develop a contractual framework better suited to the needs of aggregators

Aggregators are taking an increasingly active role in the STOR market, however asthey look to develop services the STOR Standard Contract Terms have to evolve inever more innovative ways on a case by case basis. To manage this process moreappropriately it would seem sensible to focus effort on the development of a standardset of terms for aggregators building in the terms that aggregators specifically require


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5. To review the existing Availability Window Structure of STOR, in particular theWorking Day / Non-Working Day contract structure. Currently Saturday is classed asa Working Day meaning that industrial sites that operate Monday-Friday only are notable to participate in the service. Another potential avenue is to develop contractualand systems solutions that would permit users to tender in availability over specifieddays only (e.g. Mon-Fri) and then paying availability fees only for those days tenderedwhere they overlap with the pre-defined availability windows.

6. To examine whether permitting BM providers to offer STOR on a flexible basis isappropriate. In theory this could open up the possibility for low merit large generating

units to offer a STOR service at the week ahead stage where they are not planning tooperate in the energy market, though the benefits of this need to be quantified moresubstantially.

The STOR Service is and will remain the main focus of efforts for procuring reserve forNational Grid. STOR offers the most robust way for National Grid to firmly contract for anappropriate proportion of its Short Term Operating Reserve Requirement ahead of time,allowing the rest to be procured on the day or through alternative mechanisms. For thisreason STOR will remain the focus of bulk reserve procurement and will continue to be where

the majority of revenues will be paid for reserve contracts.

However National Grid is aware that there may well be other providers that can offer a usefulreserve service to National Grid, albeit that such a service would be of a lesser standard thanthe existing STOR service potentially a service that has greater restrictions around itsavailability or utilisation. National Grid therefore proposes to examine the feasibility ofintroducing an optional reserve service that would complement the STOR service at times,but which would always be supplemental to the main STOR service.

All aspects of the existing STOR service could be examined to see where there is scope toreview some of the key contract parameters, albeit this will have to be assessed against theprobability that this will reduce (possibly quite substantially) the value of ay reserve product toNational Grid. The key balance will therefore to balance the increasing flexibility with themaintenance of a service that is still of some benefit operationally and financially.

Potential areas that are likely to be worth examining are:

Time of provision of service (for instance examine the practicality of a Weekdays only

service or a working hours (8am-6pm) only service?) Minimum MW (vary from current de-minimis level of 3MW)

Sustainability of delivery (vary from the current minimum requirement of 2 hours?)

Utilisation limits (examine the current weekly and seasonal utilisation limits with aview to moving to a maximum number of hours limit)

To reiterate the key challenge for this workstream will be to examine whether it is possible to


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Workstream 1B: BM Start-Up Review

The BM Start-Up service was introduced approximately 3 years ago and provides a methodfor National Grid to access unsynchronised generation within the Balancing Mechanismwhere its submitted dynamic parameters do not normally allow for this to occur.Predominantly the contract form is utilised to pay a generator an hourly rate to bring a unitwith a long (>=90mins) Notice to Deviate from Zero (NDZ) to a position where its NDZ is


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Events of Default

Whether there are further enhancements / modifications to the Events of Default that wouldenable the contract form to function more effectively. The main focus here would be toamend the wording around deemed ceases within the contract, which currently introducesuncertainty within the contract form. This is because should a generator not follow certainaspects of the contract a deemed cease forms part of the contract; the intention of which isto cease any payment for the BM Start-Up contract. However in practice no cease is issuedby Control which can leave operational staff both at National Grid and the Power Station

unsure whether the unit should continue to follow the issued BM Start-Up instruction or standdown. In such circumstances it would seem sensible to allow National Grid operational staffto decide whether to stand down the unit following contract breach rather than have adeemed cease also there may well be scope to continue payment should any breach betransient and corrected by the station prior to it adversely affecting the BM Start-Upinstruction;

Changes to the NDZ Parameter

To examine whether changes to the NDZ parameter within the Grid Code would allow it to beused more appropriately under the BM Start-Up contract. One suggestion is to examinewhether to replace the current spot NDZ parameter with a time-varying NDZ parameter,meaning that the NDZ parameter would behave like other dynamic parameters and have aMW level and associated from and to times. In this way a NDZ could ramp betweenlevels over time as part of the BM Start-Up contract indicating more accurately the levels ofwarmth within the unit and hence its ability to synchronise.

Identification and Removal of any Barriers to Entry

Finally to examine whether any barriers to entry exist and can be withdrawn via theamendment of the BM Start-Up contract form.

Principal among these is the current requirement to have a 4 hour maximum hot standbyperiod as part of the contract form. If this could be lowered, or perhaps removed altogether itwould permit certain coal and gas fired stations that do not currently have a BM Start-Upcontract to potentially sign up to the service.

Q3: BM Start-Up(a) Do you believe that those areas identified above are the correct ones to

focus on in the near term?(b) Are there any other areas related to BM Start-Up that you feel should be

investigated?(c) Do you agree with the suggested priorities for the work outlined above?


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Looking forward there may be increasing levels of must run generation; that is to saygeneration that must maintain an output due to technical or commercial reasons. This couldhave the potential to make the management of negative reserve more complex. Converselythe potential for demands to increase (e.g. through the more widespread adoption of electricvehicles) could potentially simplify the management of negative reserve issues.

It is proposed in the shorter term to undertake a review of the negative reserve requirementsand tools used currently to manage them in order to examine whether any improvements canbe made. Primarily this might be through the extension of the generation curtailment service,

but further potential options may exist and will need to be identified and examined.Incorporating additional demand side services into the management of negative reserves willalso need to be appraised.

Moving into the medium term an appraisal of the potential generation and demand positionsacross the year will need to be established, together with an appraisal of whether the existingtools are sufficient to meet any identified challenges with meeting the negative reserverequirements.

This could include the development and assessment of a variety of options which couldinclude:

The evolution of the contract form for the Generation Curtailment service, which allowsNational Grid to desynchronise non-BM units at a pre-agreed price. Such a contract formcould be developed to permit the desynchronisation of both BM and non-BM units.

A day ahead tender process for downward regulation actions in which National Grid signsframework agreements with a number of parties who wish to participate, then following a

day ahead publication of the requirement for actions (max and min number and MW ofSEL needed to be desynchronised), counterparties may then tender their price to be de-synchronised over the required period. National Grid could then select tenders at thisstage, or potentially utilise the Balancing Mechanism if that was assessed as being thelikely best option.

Due to the fact that the management of negative reserves is essentially a summer issue it isproposed to leave any further development of services to manage negative reserve until thestart of 2011.

Q4: Negative Reserve(a) Do you believe that those areas identified above are the correct ones to

focus on in the near term?(b) Are there any other areas related to Negative Reserve that you feel should

be investigated?(c) Do you agree with the suggested priorities for the work outlined above?


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The utilisation costs of STOR from the Bid-Offer acceptances accepted to despatch any BMSTOR provider also feed into the calculation of imbalance prices. However there is nocurrent mechanism through which the costs of non-BM utilisation can feed into the imbalanceprice.

BM Start-Up

The costs of BM Start-Up instructions are similarly fed through into imbalance prices through

the Buy Price Adjuster. Here a /MWh figure is derived by dividing the total cost of the BMStart-Up contract by the MWh capacity it delivered (or could have delivered had it not beencancelled). This is then further divided by the number of hours National Grid determines thatthe BM Start-Up instruction would have been delivering that capacity. The fee is then appliedequally to each settlement period in the period that National Grid has determined the BMStart-Up instruction was delivering capacity.

Period BM Unit

receives BM Start-Up fees

Period over which BPA is

implemented (as determined byNational Grid)

Negative Reserve / Downward Regulation

Although contract fees are not commonly payable by National Grid for the purposes ofmaintaining adequate Negative Reserve / Downward Regulation, should they be then they willfeed into the calculation of imbalance prices in a similar manner to the STOR availability fees,with the exception that they would be applied to the Sell Price Adjuster (SPA), rather than theBuy Price Adjuster. At the present time negative reserves are normally made available andutilised through the BM and so can potentially feed into imbalance prices through the Bid-Offer acceptances issued.

Potential Areas for Review


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Under current imbalance pricing rules, the Buy Price Adjuster and Sell Price Adjusteronly impact upon the main imbalance price

5. They do not impact upon the reverse

imbalance price which is set according to a market reference price. Therefore in along market items such as STOR availability payments and BM Start-Up fees will notimpact upon the imbalance price and in a short market neither will any negativereserve option fees. It could be argued that system reserves are a vital component ofmaintaining the energy balance in either a short or a long market and as such thecosts of providing them should be reflected upon users who are out of balanceregardless of the market length.

The incorporation of the utilisation payments of non-BM STOR into the imbalanceprice calculationAs these costs are currently not included within the imbalance price calculations sothe intention would be to develop and implement a suitable methodology for doing so.

Q5: Reserve Costs and Imbalance Pricing(a) Do you believe that those areas identified above are the correct ones to

focus on in the near term?

(b) Are there any other areas related to reserve costs and imbalance pricingthat you feel should be investigated?

(c) Do you agree with the suggested priorities for the work outlined above?


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Workstream 2: Longer Term Challenges

Workstream 2 will look at the long term provision of reserve services and, working withexisting and future industry participants, plant and equipment suppliers and other interestedparties, will aim to establish the likely sources of reserve beyond 2015/16 to beyond 2020. Itwill also aim to identify any issues with the current reserve procurement mechanisms thatpotentially frustrate the likely sources of future reserve. It will identify the challenges thatthese issues present when viewed against the current methods of procuring reserve and it willhave the overall aim to develop a procurement strategy and the tools to execute that strategy

to meet our future reserve requirements. It has already been established that theserequirements are likely to rise given the developments that are already known (e.g. newnuclear units (>1320MW), increased volumes of wind generation connected to the NationalElectricity Transmission System).

The key areas for workstream 2 to address are seen as:

Potentially to further develop the analysis of likely levels of reserve that will berequired throughout the period to 2025

To examine the likely drivers of operational and market behaviours in 2020 To assess the potential sources of reserve in 2020

Look to structure reserve product(s) to best meet the challenges envisaged

To examine the issues raised by the recent consultations released by Ofgem(Project Discovery) and DECC (Energy Market Assessment) and their potentialimpacts upon reserve procurement

To examine the impacts of European legislation upon the reserve market in GreatBritain

Q6: Do you agree with National Grids views that these areas should be the priorityareas for the initial focus of Workstream 2 of the Reserve Review suggestedpriorities for the work outlined above?

A more detailed appraisal of each of these areas is now set out below:

Reserve Requirements to 2020 and beyond

A key basis upon which the work under workstream 2 will be taken forward is the reserve

requirements curves out to 2020 and beyond, already published by National Grid earlier in theyear

6. Within this document we have published our current best forecast of the annual

average 4-hour ahead of real-time requirement for reserve given the likely generation mixproposed by the National Grid Gone Green scenario. Also included within the documents isNational Grids best forecast of the seasonal and diurnal shapes of the reserve requirement.


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Drivers of Operational and Market Behaviour in 2020

The energy market itself is likely to undergo a significant transformation especially as itseeks to cope with the growth of variable renewable generation connected to the total system.Greater volumes of balancing actions are likely to be needed from both the energy marketahead of gate closure and by National Grid before and after gate closure.

However the balancing tools available to both the energy market and National Grid overlap toa significant extent and so the interplay between National Grids reserve contracting strategy

and that of the wider market will be crucial. It would be imprudent for National Grid to eitherunder- or over-contract reserve services; to under contract (based on an assumption of asignificant amount of market corrections up to gate closure) could lead to an erosion ofsecurity of supply, whereas to over-contract (assuming too little action from the market) couldlead to inefficient actions on both sides, as the market has to procure its actions at higherprices, while National Grid has access to a source of comparatively cheap reserve thatremains underused.

It is crucial then that all parties within the industry can develop a clear understanding of the

roles and incentives on each party with regard to procuring and maintaining reserves. Onceparties are comfortable with the expected actions of each other then the most efficientoutcome can be achieved. The communication of parties intentions might become evenmore crucial in the future as greater volumes of reserves are required and utilised by allparties. A key future consideration in this area might be the best way in which to facilitatesuch communications and make the information accessible to all parties.

Potential New Reserve Technologies

Another key strand in workstream 2 will be to examine the new technologies that have thepotential to provide reserve by 2020. As part of this work the fundamental capabilities of eachtechnology and any restrictions on its ability to provide reserve will be examined.

The core technologies that might be anticipated to come on-line over the period to 2020 are:

A greater role for demand side services potentially adapting the models of demandside reserve procurement used in other countries

SMART grids and meteringo Electric Vehicles through control of their charging cycles / use of stored

electricity within batteries when parkedo Pumped Heat Storage large scale control of domestic schemes

Batteries and other forms of large scale electrical storage


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Should a particular technology mean that it is not able to fulfil the requirements of the existingreserve product then an examination of any technical constraints around it will need to becarried out with a view to perhaps adapting the current services to enable a useable reserveservice to be contracted.

Q8: Please give your views on emerging or existing technologies for which furtherconsideration of their usefulness as a reserve service is warranted and whatpriority would you give to each technology regarding such furtherconsideration?

Impact of UK and EU Regulatory changes upon the GB Reserve Market

As previously noted there are a number of key pieces of regulatory work that are currentlyongoing that have the potential to significantly impact upon the GB Reserve Market. Both EUlegislation and the DECC / UK Treasury Energy Market Assessment have the potential toinfluence the wider energy market and hence the reserve market, however the programme ofwork most likely to directly influence the reserve market is Ofgems Project Discovery.

Project Discovery

Workstream 2 will also be heavily influenced by the work that Ofgem has commenced throughProject Discovery. Within the project document, Ofgem has set out its ideas as fivepackages, with each package potentially introducing more significant proposals when viewedagainst the status quo and when viewed against the previous option.

Figure 3: Ofgem Packages under Project Discovery


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Package A Targeted Reforms:

Ofgem has floated the idea of a daily reserve tender to be initiated by National Grid. Thiswould notionally see National Grid publish its day-ahead reserve requirement and seektenders for the provision of this reserve. The theory is that the price paid for that reservewould more accurately reflect the real-time system and market conditions. Ofgem alsotheorise that should this price then be fed into the imbalance settlement prices, reserve costscan more accurately be part of imbalance prices and so provide an enhanced signal to marketparticipants.

Package B Enhanced Obligations:

In this package, Ofgem puts forward the notion that the System Operator (SO) should havean enhanced obligation to forecast future reserve needs and to then procure this in the formof sufficient back-up and flexible generation. The parallel with obligations on the Swedish andFinnish System Operators is drawn. In Sweden, the SO has been granted powers bylegislation to acquire peak load reserves via tender in the period 2003 - 2011. Recently theSwedish regulator has recommended a profile of gradually reducing reserve requirements out

to 2020 be procured, with one eye on the potential for greater demand side responsecapabilities in the run up to 2020.

Ofgem has also put forward as part of this package the idea of a centralised renewablesmarket, with a potential design as highlighted below


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Package C Enhanced Obligations with Renewables Tenders

This package effectively adds to the above Package C a reform to the existing RenewablesObligation in order to enhance further the existing incentives on developers to constructrenewable capacity. In itself it does not appear to impact upon reserve procurement anydifferently to those packages.

Package D and Package E

Both of these packages foresee the ability to pre-ordain the suitable mix of future generationand then seek to have this constructed through the auctioning of technology specific capacityfor generators. Close to real time it would seem that these options pose little significantimpact on reserve procurement, however they could be useful to ensure that margins for thesystem peak as a whole remain resilient in the long term.

Q9: Do you agree that the above regulatory developments are the key

developments to consider in the context of this reserve review?

Q10: Are there any other developments that you are aware of that have the potentialto significantly impact the provision of reserves into the future?


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Section 4Timetable and Next Steps

Project Timetable

The proposed timetable for the project throughout 2010 is as follows:

Friday 23rd

July 2010 Pre-Consultation Issued

Friday 6th

August 2010 Reserve Review First Industry Seminar to be held

Friday 10th

September 2010 Closing Date for Pre-Consultation responses

Thursday 30th

September 2010 STOR Review 2010 initial review to be published

September December 2010 Further Reserve Review Workshops

October 2010 Publication of Reserve Review Next Stepsdocument

Consultation Responses and Summary of Questions

The closing date for responses to this consultation is 5pm on Friday 10th

September 2010

Consultation responses may be emailed to: [email protected]

Or posted to: Mark DuffieldNetwork OperationsNational Grid House

Warwick Technology ParkGallows HillWarwickCV34 6DA

Unless marked as confidential it is the intention of National Grid to publish on our website allresponses received.

Should parties not be able to attend the industry workshop or wish to discuss issues on abilateral basis, National Grid will also be happy to arrange bilateral meetings with interestedparties as part of or following this consultation. Should interested parties wish to do so, theyshould contact Mark Duffield ([email protected], 01926 654971) in the firstinstance.

A summary of questions asked in this consultation is as follows:

S i 4


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Section 4Timetable and Next Steps

Q3: BM Start-Up(a) Do you believe that those areas identified above are the correct ones to

focus on in the near term?(b) Are there any other areas related to BM Start-Up that you feel should be

investigated?(c) Do you agree with the suggested priorities for the work outlined above?

Q4: Negative Reserve

(a) Do you believe that those areas identified above are the correct ones tofocus on in the near term?

(b) Are there any other areas related to Negative Reserve that you feel shouldbe investigated?


Q5: Reserve Costs and Imbalance Pricing(a) Do you believe that those areas identified above are the correct ones to

focus on in the near term?

(b) Are there any other areas related to reserve costs and imbalance pricingthat you feel should be investigated?


Q6: Do you agree with National Grids views that these areas should be the priorityareas for the initial focus of Workstream 2 of the Reserve Review suggestedpriorities for the work outlined above?

Q7: Do you believe that there is further information regarding the future reserverequirements that National Grid could usefully look to model and provide?

Q8: Please give your views on emerging or existing technologies for which furtherconsideration of their usefulness as a reserve service is warranted and whatpriority would you give to each technology regarding such furtherconsideration?

Q9: Do you agree that the above regulatory developments are the key

developments to consider in the context of this reserve review?

Q10: Are there any other developments that you are aware of that have the potentialto significantly impact the provision of reserves into the future?

S ti 5


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Page 32 of 32

Section 5Appendices

Appendix A: STOR Tender Round Calendar 2010/11

3

Documents

Reserve Review Pre Consultation Document