Back in April 2021, National Grid Electricity System Operator (NG ESO) announced changes to how Dynamic Containment (DC) would be procured. After consultation, webinars and the go-ahead from Ofgem, these changes were implemented and we went live with DC 2.0.

Delivery under the new auction rules commenced on 16 September 2021, but what’s been happening? In this article, we’ll take a look:

A recap of National Grid ESO’s changes to DC.

Prices and volumes under the new auction rules.

Some anomalies concerning rejected bids.

A first look at merchant-ancillary hybrid strategies.

A recap of the changes

The changes to DC procurement are summarised in Table 1 (below).

But what do these changes really mean for DC providers, let’s explore them in a bit more detail:

Automated assessment - If everything goes according to plan, the market won’t notice anything has changed at all. This improvement mostly serves to improve user experience and reduce operational risk for NG ESO.

EFA block contracts - This is arguably the biggest change to DC in the updated procurement rules - its impact is twofold. Firstly, providers will have additional flexibility to move in and out of DC on a more granular level - more on that later. The second impact (and arguably the more important one) is that the ESO will be able to fine-tune its DC requirement across the day. Instead of procuring to cover its maximum DC requirement over a 24-hour window, it can now reduce requirements when the need for DC is low. Exactly how volume requirements are going to change is a big question right now - for more information check out our article “How much DC does the ESO actually need?”.

For more information on how the EFA day works, check out our handy video explainer below:

Pay-as-clear pricing - Given we’ve seen consistent pricing of £17/MW/h from all DC participants since launch, DC may as well have been pay-as-clear from the start. That being said, the move to pay-as-clear could see the return of ‘penny bids’ (bids priced very low, intended to secure volume by any means and take the market clearing price) as we saw in phase 2 of the weekly FFR auctions.

Product linking - Product linking is primarily been introduced to allow for bidding for both DC-high and low products simultaneously. As such, this will not impact DC procurement until the high service is launched (expected October 2021). Product linking also supports creating ‘families’ of bids linked across different EFA blocks - again this is only likely to impact procurement whence the market reaches saturation.

Now we’ve had a look at what exactly the changes are (and how impactful they might be) let’s take a look at what’s actually been happening over the first week of DC 2.0.

Prices

Prior to the changes, DC prices had stayed consistent at £17/MW/h, but what’s happened since? Figure 1 (below) shows the market clearing price, in addition to all accepted bid prices since 16 September.

The big takeaway here is that £17/MW/h pricing has stuck around, with undersaturation and the ESO price cap continuing to drive prices.

While the market has consistently cleared at £17/MW/h, we’ve seen a range of bid prices (some as low as 50p/MW/h). On all occasions, at least 1 site has bid into DC (and been accepted) at £17/MW/h, setting the clearing price for the rest of the market.

Interestingly, over the first 2 days of auctions, we saw several bids rejected at the clearing price - we’ll get into that in a bit more detail below.

Volumes

Whilst some DC providers were concerned about steep drops in procurement targets, the volume requirements for DC have remained high, with a minimum September requirement of 1100MW - more info here. Figure 2 (below) shows accepted and rejected volumes in DC over the first week.

With the move to EFA block DC procurement, we’ve seen the first glimpse of intra-day variation in procurement levels. Most notably on 20 September where we saw highs of 719 MW (EFA 1-2) and lows of 390 MW (EFA 5) - a daily variation of 329 MW.

Procurement volumes over the first week have been consistently lower than the peak of 929 MW on 15 August 2021. However, the reduced volumes are reflective of more lucrative opportunities in wholesale power markets as opposed to the new auction rules.

Mysterious rejections

In the first 2 days of DC auctions, we witnessed something interesting: bids were rejected despite not exceeding the ESO’s price or volume cap - the first time this has ever happened in DC!

To explore this a little more, let’s take a look at Figure 3 (below), which shows the supply stack for EFA block 4 on 17 September 2021.

Let’s talk through the graph above and explain what’s going on:

All bids, priced (strictly) less than £17/MW/h, were accepted by the ESO.

11 bids (with a combined volume of 71 MW) were posted into the DC auction at £17/MW/h. Since these bids didn’t exceed either the ESO price cap or volume cap, they should have been accepted...

...however, all but one bid was rejected, with 61 MW missing out on DC contracts.

And this wasn’t an isolated incident, as can be seen above in Figure 2, there were 9 EFA blocks in which bids were rejected despite not exceeding ESO price caps. The exact cause of these rejections is still unclear, but it may have been caused by teething problems with the new automated assessment process. Either way, since 18 September this phenomenon has stopped and we’ve only seen rejections coming from bids priced above the ESO price cap.

Hybrid strategies

Pulling out of DC?

The changes to DC have been somewhat overshadowed by the record-high wholesale prices that have been observed since the start of September. But how have these impacted the DC market? Figure 4 (below) shows the cleared volume since 16 September in addition to the maximum day-ahead power price (per EFA block).

Periods of especially low DC procurement have coincided with periods of high wholesale power prices. With high power prices, providers are happy to forgo DC revenues in favour of lucrative arbitrage opportunities in merchant markets.

Most notably on the first day of the new auction format, when DC volume fell as low as 218 MW (in EFA block 6) as power prices climbed as high as £1500/MWh in the NordPool DA market (for delivery over 1800h-2000h).

Flexible operation

In our recap, we touched on how shorter DC contracts can give providers additional flexibility to move between markets. Figure 5 (below) shows this in action - here we take a look at an example operational profile from Gresham House’s, Bloxwich BESS (41 MW - operated by Arenko) on 16 September 2021.

Let’s talk through this graphic:

Arenko secured a DC contract for EFA blocks 1-4, with the market clearing at the familiar £17/MW/h.

During this period we saw both physical notifications (PNs) and bid-offer acceptances (BOAs) taken to manage state of charge.

During EFA blocks 5 and 6, we saw Bloxwich drop out of DC, posting a PN to sell power back to the grid between 1800h and 2000h.

This dispatch coincided with high power prices in the day-ahead market at prices of £1500/MWh.

Arenko then bought power at 2200h to rebalance state of charge before entering into DC at 2300h.

This is really exciting(!) and a great example of the increased flexibility afforded to DC providers under the new procurement rules. In this 24 hour period, a BESS site stacked frequency response with BM activity, exited DC to capture wholesale prices in excess of £1500/MWh and rebalanced its SoC to continue to deliver frequency response.

Before these changes, this sort of merchant-ancillary hybrid strategy wouldn’t have been possible in DC. Without EFA block procurement, the only way to capture the wholesale price spread would’ve been to take a full day out of DC. Instead, BESS can secure both with DC being used as a ‘top-up’ to arbitrage revenues.

The revenues associated with this day of operation represent some of the highest earnings for BESS ever recorded. Combining export during some of the highest prices observed in the power market, in addition to revenues from one of the most lucrative revenue streams, DC.

Key takeaways

The changes to DC are a great marker for how far the industry has evolved since October 2020. Closer to real-time procurement, more flexible contracts and a fully automated auction environment all represent positive changes towards the low-cost, low-carbon operation of the GB system.

While many of the market dynamics we’ve observed are unrelated to the recent changes, we have seen some interesting quirks in both bidding strategy and auction results. But, perhaps most excitingly, we’re already beginning to see how DC providers can exploit these new rules to maximise BESS returns.

The biggest changes we’re likely to see under the new DC rules are still yet to come. The launch of DC-high is due in October, and we will see increasing levels of competition when the market reaches saturation.

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