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The world of electricity generation and distribution is a complex web of interconnected systems and markets. At the heart of this intricate network lies the procurement of ancillary services (AS), which are indispensable for ensuring the stability and reliability of power supply.

In our last “What is…?” article we explained what Ancillary Services are.

In this article, we will explore the economic aspects of AS procurement, the various market mechanisms at play, and the evolving landscape of the energy sector. 

Energy Markets: Where Power Takes Shape 

Electricity is not just a commodity; it’s a dynamic force that can be traded on different markets, each serving a distinct purpose. There are two primary mechanisms for trading power, depending on the time of operation and delivery. 

  • Forward Markets: In these markets, commitments are made to supply a predetermined amount of power at a specified time in the future. It’s a proactive approach that ensures power supply meets anticipated demand. 
  • Real-Time Markets: These markets come into play when the predefined power supply in the forward market falls short of actual demand. Real-time markets provide the necessary support to meet immediate energy requirements. 

While energy, in the form of electricity, is typically traded on forward markets, AS finds its place in both forward and real-time markets. This distinction ensures the electricity supply chain remains robust and adaptable to changing circumstances. 

The energy sector encompasses a diverse range of power sources, including renewables, nuclear, gas turbines, and coal power plants. The choice of power source is driven by capacity, cost, technology, and fuel considerations. Renewable energy sources, such as wind and solar, are lauded for their low marginal production costs. Still, their scalability and consistency compared to conventional sources present challenges. The integration of renewables into the power grid can lead to reduced wholesale electricity prices, which is a boon for consumers. However, it can also introduce economic and technical challenges, a phenomenon known as the “merit order effect.” 

In Europe, electricity trading takes place on a centralized market known as the European Energy Exchange. Here, transmission system operators (TSOs) coordinate grid operations, manage balancing markets, and instruct lower-level system operators like distribution system operators (DSOs). In contrast, Israel has a single, independent system operator (NOGA) that oversees the power grid, production units, and AS. However, the increasing presence of distributed renewable generation is changing the landscape by enabling localized dispatch without NOGA’s direct involvement. 

Ancillary Services Markets: The Backbone of Grid Stability 

Ancillary services are the unsung heroes of the power sector, ensuring that our lights stay on and our devices keep running. In the realm of AS markets, the players and mechanisms are carefully orchestrated to maintain fairness and transparency. 

Conventional AS markets are primarily orchestrated by TSOs, who not only operate these markets but are also the primary buyers of AS products. Sellers own power generation systems that meet predefined qualifications, while large demand response entities, consumers, and aggregators all play integral roles. AS offers are typically made on an annual basis, with available capacity being offered daily. 

Balancing the intricate dance of power supply and demand involves scheduling, dispatching, and self-operating processes. In this symphony of AS procurement, all elements must work in harmony to keep the grid stable and responsive. 

The increasing presence of distributed generation (DG) systems underscores the importance of coordination between TSOs and DSOs. The procurement of AS in this evolving landscape is characterized by five distinct models: 

  • Centralized AS Market Model: In this model, the TSO operates a common market for AS and is the sole buyer of AS products at both the distribution and transmission levels. 
  • Local AS Market Model: In the local market model, the DSO operates the market and is the sole buyer. The priority is given to locally generated products to address congestion, with any remaining bids offered to the TSO’s market. 
  • Shared Balancing Responsibility Model: This model operates on two levels, with the TSO handling products connected to the transmission system, and the DSO managing products connected to the distribution system. Products cannot be transferred from the distribution market to the transmission market. 
  • Common TSO-DSO Market Model: This model presents a common AS market operated by both the TSO and DSO, who serve as the buyers of services. Products are allocated to the system operator with the highest need. 
  • Integrated Flexibility Market Model: In this model, a common market accommodates flexible resources connected to both transmission and distribution systems. This market is open to system operators and non-system operator entities and requires the involvement of a neutral market operator. 

Frequency Control and the Balancing Act 

Frequency control is a pivotal aspect of AS procurement, focusing on maintaining the balance of power demand and supply. In Europe, balancing is carried out in five synchronous areas due to the continent’s geographic constraints. These balancing markets define various types of frequency reserves, activation processes, reserve sizing, structures, and actors. The TSOs are the primary buyers of balancing services, while balancing service providers include reserve-providing units’ owners and groups. Remuneration schemes vary by country, considering factors such as urgency, contract periods, activation duration, and other elements. 

In Europe, price signals are communicated between different synchronous areas, allowing for effective coordination. The concept of flexibility as a product is becoming increasingly prominent. It plays a pivotal role in addressing local grid congestion, and it can be offered on market platforms or aggregator platforms. These flexibility services are essential for maintaining the grid’s stability on a local level, requiring the system operator to have information on local flexibility services and asset owners. 

Voltage support services are another integral part of AS procurement. They function similarly to frequency control, with settlement processes involving pay-as-bid, marginal pricing, or regulated prices models. These services can be divided into mandatory and additional voltage regulation support. While mandatory voltage support is required in most European countries, not all countries remunerate voltage support. 

The economic aspects of AS procurement are multifaceted, involving different market mechanisms, models, and pricing schemes. With the growth of distributing generators systems and the integration of renewable energy sources, coordination between TSOs and DSOs has become vital for ensuring a resilient and reliable power supply. Ancillary services remain at the core of this effort, acting as the linchpin that keeps the grid stable and responsive to the ever-changing landscape of the energy sector. 

We hope that we could give you an understanding of the markets of Ancillary Services. If you have any questions, please don’t hesitate to contact Evyatar Littwitz.

Do you have any wishes regarding future articles in the “What is…?” series? Then let us know in the comments and we’ll do our best to cover the topic.

Your Es-geht! Team