Source: DS3 System Services Scalar Design
A key element of the framework is the ‘Performance’ Scalar. Service providers are incentivised to provide services that meet the standards set by system operators on a consistent basis. Ensuring consistent delivery of services will be essential to ensure maximum returns.
Service providers can ensure maximum returns by providing best in class delivery, consistently, when renewable generation is high.
Openings for New Technologies:
New technologies will play a significant role in the transition to a power system with high penetrations of renewable generation. The system operators will issue auctions for up to 300 MW of capacity for new technologies with the first auction taking place in February for 100 MW of capacity. This auction will offer a 6 year contract for the provision of 5 services. Under the framework, successful parties will receive a steady income stream in return for offering certainty of service provision.
The auction is expected to generate interest from developers of new technologies such as battery storage and similar devices. Experience from the UK and Australia, provides a promising outlook for battery storage in providing services similar to those outlined in DS3. The auctions are expected to be highly competitive so developers will need to carefully consider the commercial arrangements when making offers.
Other revenue streams may offset some of the upfront investment allowing for a more competitive submission to the auction. Arrangements have been developed for the treatment of storage devices and demand response in future capacity auctions. The opening up of capacity and DS3 System Services auctions provides significant opportunities for utilities to make investments in new technologies. There are also now attractive signals for large energy users to harness the flexibility within their own consumption to provide services and generate revenues to offset energy costs.
1Source: DS3 System Services Volume Capped Competitive Procurement
Source: DS3 System Services Fixed Contracts Procurement Arrangements
Putting the pieces together DS3 and I-SEM
The introduction of the DS3 System Services framework at a time when wider market reforms are being driven by ISEM is a significant change for participants. We consider 6 opportunities for success under the new market arrangements.
1. Understanding Opportunity Cost:
Creating trading strategies that optimise returns across the different markets will be essential. One such area that participants will need to consider is making trade-offs in trading in the Ex-Ante or balancing markets versus being available for providing services. Effectively assessing the opportunity cost in these situations will form part of the overall trading strategy.
2. Optimising Performance:
A key element of the DS3 System Services framework is to incentivise best in class delivery and reliability in performance. To ensure maximum revenues, generators will need to ensure that their asset can deliver the highest level of service possible, on a consistent basis. Monitoring performance and ensuring reliable delivery will be critical to success.
3. Striking when the iron is hot:
Scalars incentivise providing services when the system operators need them most. This makes the provision of services at these times significantly more lucrative than in more benign conditions. Being able to offer services at these times will be an essential cornerstone in maximising revenues. Accurate forecasting of when wind generation will be high will be a key differentiator in enabling effective trading.
4. Preparing for the changing landscape:
New technologies could threaten revenues from traditional assets. An effective strategy to seize the new opportunity whilst also managing threats to existing operating models will be key. The auctions for new technologies will attract interest in the short term but it will be important to consider all revenue streams from DS3, Capacity and the energy markets when making investment decisions and market entry strategies over the medium to longer term.
5. Understanding the risks:
The DS3 Scalars offer significant upside potential but there is also some downside risk. Different assets are suited to providing different services so understanding your asset and what services it can provide will be important in determining the revenues that can be achieved. Scalars incentivise provision at times of high renewable generation, therefore the revenues achieved from year to year will vary depending on the amount of renewables available over the year. Similar to revenue forecasts for wind farm projects, new DS3 revenues will need to be assessed on different scenarios and expectations.
6. Harnessing Flexibility:
The new arrangements under ISEM and DS3 create opportunities for large energy users on the island. DS3 offers a route for customers to harness flexible consumption to provide services and generate revenues to offset energy costs. Engaging with your supplier and with a demand aggregator can provide a route for large energy users to best use their assets and reduce overall costs.
ISEM is leading to a transformation in the wholesale energy markets on the island of Ireland. DS3 System Services will form another piece of the puzzle that utilities must consider when re-defining their approach. Those that fit the pieces together to form a coherent strategy will stand to benefit most. Utilities will need to put system services provision at the centre of their trading strategy and not consider it as just an ancillary activity.