A new trend has emerged in the Dynamic Regulation markets: using a looped High / Low bidding strategy to effectively create negative bid prices in the Dynamic Regulation High service. This increases the chances of a provider getting accepted into the now highly popular (and oversubscribed) service. In this article, we break down how it works and who is using it.
Spoiler alert! Here’s the strategy...
- Bid zero price into the Dynamic Regulation High service because the battery gets free import.
- Link it with a smaller bid volume in the undersubscribed Dynamic Regulation Low service, also priced at a very low or zero price.
- Because the two bids are ‘looped’ together, the unit would only be accepted for both or neither services.
- The Dynamic Regulation Low service has a ‘cost’ to provide. So, by bidding below this level, it means you are effectively willing to pay to secure a Dynamic Regulation High contract.
- Essentially, this is a way for battery units to price their Dynamic Regulation High bid negatively, even whilst the auction does not allow them to!
- Note - this strategy only works for Balancing Mechanism because they get ABSVD. Non-Balancing Mechanism units do not get ABSVD. As a result, it is likely that Dynamic Regulation will become a no-go market for non-Balancing Mechanism units.
Let’s look at the details
The Dynamic Regulation High (or ‘DR High’) service is popular with battery energy storage. This is because batteries can essentially charge for free (or near free) as a result of ABSVD. However Dynamic Regulation Low (or ‘DR Low’) has a very high cost for batteries. This is the reason why it remains relatively unpopular as a service. You can read more on these services and ABSVD in our explainer here.
When DR High prices fell to zero back in the summer, we highlighted how the prices, if allowed, could well have turned negative. Fast forward to today. We are in a world where prices are falling in other markets that suit battery energy storage, like Dynamic Containment. And the popularity of the Dynamic Regulation High service is increasing again.
Bid volumes in the DR High service hit a maximum of 266 MW on January 21st, well above the 100 MW cap. Mostly everyone bids at zero price, so there’s no way to distinguish between the bids. This means that acceptance into the DR High service can essentially be random - unless you can distinguish your bid as a looped bid.
Wait a minute, what’s a looped bid?
Looped bids are two separate bids that are linked in the Dynamic frequency auctions. They include the ‘C88’ designator when bidding to show they are linked. Assets submitting linked bids will only be accepted for both bids or neither bid (but not one or the other).
Importantly, bids can be linked between High and Low services which are otherwise procured independently of each other across the Dynamic frequency suite. This could be used to link bids to trading strategy. For example, consider linking a Dynamic Containment High bid overnight to Dynamic Containment Low over peak. Acceptance of either of these bids alone would prevent a wholesale trade across the same timescales, so would introduce risk into the bidding for these services. However, linked together this risk can be eliminated - either both contracts are accepted or neither.
However, looped bids also create an opportunity for battery units to offer National Grid ESO an attractive proposition. Units essentially offer to perform a service that no one really wants to do (DR Low), if they also get accepted in the service everyone wants to do (DR High).
So, what is the Dynamic Regulation High / Low strategy?
The Dynamic Regulation Low service is chronically undersubscribed. This gives National Grid ESO an incentive to select the ‘looped’ Dynamic Regulation High bid over a separate ‘un-looped’ bid - even if both of those High bids are at the same price of zero.
To the battery operator, this essentially creates a way to provide a negative price to National Grid ESO, as they are losing money on the DR Low service in order to secure the much more valuable DR High.
By bidding asymmetric volumes (i.e. just 1 MW in DR Low, but 10 MW in DR High), this provides a way to minimize this cost. This practice first emerged in the summer, but has re-emerged with the Dynamic Regulation High service more popular than ever.
Who is using this strategy?
This DR High / Low strategy was started by Tesla last summer, when the market first saturated. But looking more widely at looped bids, it’s clear that the market has now caught up, with eight different providers using the strategy at some point.
Key takeaways
- Saturation in Dynamic frequency response markets is forcing providers to get creative.
- Different bidding strategies using the tools available are a way to increase the chance of getting contracts.
- Therefore it is vital for providers to understand how these markets and auctions work.
- Nothing lasts forever! This is all likely to change with National Grid ESO’s ‘enduring auction capability’ - expected later in 2023. We’ll share more details as soon as we know them.