Andrea Larsen Torjussen: Market-based redispatch in the distribution grid

A market will be crucial in giving flexibility sources a value and help the system operators to solve their congestions in the most cost-efficient way, writes Andrea Larsen Torjussen, Business Development & Regulatory Affairs Manager at NODES AS in this blog.

In recent years network congestions have been increasing at both transmission and distribution level. This is especially driven by the replacement of fossil fuel production with renewable and decentralised energy sources, and delays in network expansion. The system operators, which traditionally have relied on centralised and large production units like coal and nuclear to manage their grids are now facing a new set of challenges. This is especially relevant at the distribution level where much of the new production and decentralised energy sources are being connected. With Europe moving towards net-zero by 2050, the way the electricity system is managed needs to change and system operators must have the tools available to facilitate the transition.  

To manage grid congestions the system operators can curtail renewable energy sources, use redispatch or invest in grid expansion. Curtailment was initially planned to be a last resort measure but is now a part of everyday operation for many system operators. Redispatch is the main measure to shift generation or consumption to fix a congestion. Redispatch means that the system operator asks the market participants to adjust consumption or production at each side of a congestion, simultaneously and in or shortly before real-time in return for a financial compensation. Grid investments will be necessary to facilitate the shift to a renewable power system, however relying only on this measure to resolve congestions, will take too long and be far too expensive. It is therefore necessary to put in place effective congestion management solutions to help facilitate the transition to a greener power system.  

Markets for redispatch will be key:
How redispatch is facilitated can be divided into two categories: a market- based approach or a regulated approach with mandatory participation (often only production). The regulated approach is argued to be restrictive to the participation of all flexibility sources and not reflecting the true value of these resources. The market-based approach would allow for the entire potential of flexible sources (production, demand, and storage) to be available for redispatch. The argument, also at the European level, most recently through the Clean Energy Package (CEP), is that this will increase competition and encourage innovation. By opening for demand side participation in a market-based manner a better utilisation of existing flexibility resources can be achieved. A market would also be crucial in giving these flexibility sources a value and help the system operators to solve their congestions in the most cost-efficient way. However, there are valid concerns around introducing markets for flexibility to resolve congestions. These concerns need to be addressed, and solved, to ensure that the full potential of all flexibility resources can be utilised.  

The fear of gaming must be addressed: 
First, in the very beginning of setting up a market for redispatch (often referred to as a flexibility market) the liquidity will be low, this could encourage market participants to exercise market power and elevate prices. Second, it is argued that the setup of a market to solve congestions would invite market participants to engage in strategic bidding in specific cases with structural congestion (often referred to as Increase-decrease gaming, we use the term Inc-dec bidding). Shortly explained, Inc-dec bidding describes the behaviour of a market participant in two consecutive markets, e.g., a zonal market followed by a regional/local market, who considers the opportunities in the second market when bidding in the first and aiming to increase his financial gain. The market participant creates congestions in the first market with an aim of being paid to solve these congestions in the market for redispatch. For the successful implementation of an Inc-dec bidding strategy a key factor is the ability to forecast congestions, and the theoretical examples of such behaviour have largely been based on structural congestion in the transmission grid.  

Looking at the distribution grid, the picture is more nuanced. Through the paper “Market-based redispatch in the distribution grid – why it works!” written by DNV GL, and sponsored by NODES, we highlight these nuances, in addition to possible mitigation measures that can be implemented to reduce the risk of gaming when introducing market-based redispatch. In summary, for the distribution network the key assumptions for a successful Inc-dec bidding strategy used for the transmission network is not directly applicable. This is in large part because the key factor for success in Inc-dec bidding, the ability to forecast congestions, will be more difficult at the distribution level. Congestions will be local and more difficult to predict, thus the Inc-dec strategy needs to be tailored to the specific network. It is also questionable how profitable such a gaming strategy would be under local conditions, where the size of individual congestions most likely would be smaller than at the transmission level. Further, effective mitigation measures exist. A list of them can be found in the aforementioned DNV-GL paper. From a market operator’s point of view market monitoring and routines can be implemented to ensure that contracts and behaviour rules are followed. These rules can be defined by the DSO in conjunction with the market operator as there is currently no such formal regulation in place for flexibility markets. When talking about mitigation measures it is always a balance to be struck between ensuring a high level of security to prevent gaming, but at the same time not making the regime so strict that the business case for flexibility service providers disappears.  

In conclusion, and not surprisingly, NODES is arguing for a market-based approach for redispatch especially in the distribution grid. While the risks of gaming should be acknowledged and addressed, we believe that the benefits of flexibility markets for local congestion management is too large to ignore. By implementing flexibility markets to solve local congestions the DSOs can operate their grids more efficiently, make use of all flexibility resources available in a cost-efficient manner and be able to adapt to the new renewable electricity system that Europe is aiming for. Ultimately market-based approach will help to accelerate the successful transition from fossil to renewable energy and reduce the costs of decarbonisation, hence essentially contribute to the goals of the CEPwhilst providing greater social welfare for EU constituents.