The recently published RIIO-ED2 Sector Specific Methodology Consultation has set the stage for Ofgem’s initial thoughts. After a first glance, below highlights some of the key take-aways from what has been proposed:
1. Do not wait
UK DSO flexibility markets have developed over RIIO-1, which runs from 2015 - 2023, and Ofgem have made it clear that they expect this progress to continue. A new license condition will be implemented by the end of the year reinforcing this expectation and ensuring the UK is compliant with the EU Clean Energy Package. The impact the Clean Energy Package is having on DSO flexibility markets is encouraging, as the license condition will include requirements for:
A5.42 “DNOs to procure and use flexibility services where it is efficient to do so, implement standardised products and services, and to have non-discriminatory procurement processes.”
2. Use flexibility (sometimes)
To incentivise flexibility during RIIO-ED2 it will be key for there to be strong underlying principles and delivery frameworks. The DSO roles and principles proposed by Ofgem provide further clarity on their expectations for flexibility use:
A5.10 “DNOs to have in place transparent and robust processes for identifying and assessing options to resolve network needs, and using competition where cost effective… Options must be fairly compared against one another, with flexibility used where it is economic and efficient over the long term compared to investing in traditional reinforcement or technological solutions.”
Annex 2 “Keeping bills low for consumers”, 7.43 “In assessing a DNO’s proposal, we propose to compare the costs and benefits of traditional network based solutions with those offered by flexible network solutions, on a like-for-like basis.”
3. Value third parties
Third parties, such as independent marketplaces, have helped grow and facilitate DSO flexibility markets. It is encouraging that the consultation recognises the value and efficiencies third parties can provide. The baseline expectations for the proposed DSO principles include the following:
Principle 2.2: “Operate an economic and efficient distribution system”, A5.18 The DNOs shall facilitate secondary trading of DSO ancillary services and curtailment obligations (pending the outcome of the Access SCR). In this context, facilitate means provide the relevant operational data, ensure the DNO has processes in place to collect the relevant data about the trade, and make the operational parameters clear (and justified in the context of network reliability and efficiency). Facilitating does not mean communicating bids and offers about these trades to enable commercial agreement, make decisions about matching bids and offers, or dispatching these trades – third parties skilled in this area should be better placed to more efficiently deliver this.”
Principle 3.2: “Simple, fair and transparent rules and processes for procuring DSO ancillary services”, A5.27 “Market support services, such as pre-qualification, credit-checking and settlement must enable simple and cost-efficient participation in markets. DNOs should enable, and never prevent, the opportunity for third parties to provide these services where they could do so more efficiently.”
4. Enable secondary markets
Even with longer-lived markets such as ESO product Short Term Operating Reserve (STOR), it is uncommon for flex providers to trade their contracted requirements to other suitable flex providers. The lack of a marketplace for secondary trades is in part due to the lack of facilities for searching, bidding, contracts or payments. Under proposed DSO principles 2.2. and 3.2 secondary trading is included as a baseline expectation:
Principle 2.2, A5.18 “The DNOs shall facilitate secondary trading of DSO ancillary services and curtailment obligations (pending the outcome of the Access SCR)”
Principle 3.2, A5.27 “DNOs should enable secondary trading, for example capacity and other peer-to-peer trading”
Competitive secondary markets would open up opportunities for a wider set of flex providers to participate in flexibility markets. Piclo is taking part in the BEIS FleX Exchange project aiming to facilitate secondary trading of flexibility obligations, focusing on STOR first. By using the learnings from FleX Exchange, Piclo will enable flex providers to have visibility of and be able to participate in primary and secondary flexibility markets, using Piclo Flex as a single interface. Renewable generators could also benefit from these markets through the secondary trading of curtailment obligations. Piclo is trialling curtailment trading as part of Project LEO.
5. Coordinate, coordinate, coordinate
Coordination is a theme running throughout the consultation in a number of areas:
Flexibility market coordination (to be achieved by the end of RIIO-ED1): 6.18 “Coordinated flexibility markets that efficiently value flexibility, provide transparency of prices and utilisation, and enable flexibility providers to stack value across markets, wherever technically possible”
ESO-DSO coordination: 6.6 “DNOs must coordinate the development of these markets, their procurement and the dispatch of flexibility with the ESO to ensure efficient whole systems outcomes.”
DSO-third party coordination: A5.27 “Third party platform providers can add value to flexibility providers in offering new routes to market. DNOs must not prevent the emergence of this sector, but should promote coordination of DSO ancillary services and interoperability across these platforms in order to avoid market fragmentation”
Coordination will be integral to flexibility market development, particularly for “market synthesis” ideas to be possible. This concept was also excitingly explored in Ofgem’s RIIO-ED2 consultation:
A5.26 “Synergies in procurement with other markets (ie where one flexibility action can meet two system needs at the same time) should be harnessed”
There is a huge amount of detail to unpack from the consultation and its annexes, but it is critical that RIIO-ED2 is not a missed opportunity for developing flexibility markets further.
Piclo will be responding in full to the RIIO-2 consultations and welcome comments from our stakeholders as we build our response.