National Grid ESO is proposing changes to frequency response services in October 2023, as part of the ‘Enduring Auction Capability’. This is National Grid ESO’s new, in-house platform for ancillary services auctions.

National Grid ESO is consulting with stakeholders on these changes, and the consultation is open until 14th July - so there’s still time to submit a response if you want to. But what are these proposed changes? And what would they mean for battery energy storage?

It is worth reading this piece for a refresher on how the new auction process will work and how multiple services can be “stacked” in the Enduring Auction Capability.

• Frequency response services will allow negatively-priced bids - so providers can pay National Grid ESO to deliver a service.
• Penalties for non-delivery and poor performance will change.
• The introduction of “rejection codes” - so participants know why they haven’t won a contract.

Negative frequency response prices are coming

Since August 2022, prices in frequency response services have regularly hit £0/MW/h. This has happened most in high-frequency services (in which batteries use the imported energy to charge), and especially in high-frequency Dynamic Regulation. (Read more about this here.)

Currently, £0/MW/h is the lowest price providers can bid (and the ESO can charge) for frequency response.

When multiple providers bid into the service at this price, and the overall bid volume exceeds the ESO needs, there is no way of choosing between providers using the current auction clearing algorithm (EPEXSPOT’s HELENA). By allowing negatively-priced bids, the ESO can clear the market more efficiently - and at less cost to the end consumer.

It also means that batteries can price more competitively

With negative prices, participants can put a more accurate value on energy in frequency response services. Negative prices will allow providers to price competitively - to avoid charging up elsewhere (e.g., in the usually more expensive wholesale market).

Performance penalties will change to deter non-delivery

At the moment, when the market clears at close to zero, performance penalties (for non-delivery) are very low. For assets already receiving a low price, there isn’t a massive incentive to ensure they deliver the service. Additionally, if negative prices are introduced, non-delivery would actually result in a payment from National Grid ESO.

National Grid ESO have proposed to change how penalties are calculated. This is the design in the consultation document:

• If a service clears between £-1/MW/h and £1/MW/h, a provider would pay a maximum penalty for non-delivery of £1/MW/h. This introduces a floor to penalties, which currently can fall to zero.

For positive bids above £1/MW/h:

• The maximum penalties would remain directly proportional to positive bids.
• So, if National Grid ESO pays a provider £10/MW/h for a service, the maximum penalty for non-delivery would be £10/MW/h. The provider essentially gives back its earnings.

For negative bids below £-1/MW/h:

• The proposed maximum penalty for a negative bid would still be proportional to the size of the bid.
• But if you pay £10/MW/h to National Grid ESO to provide a service (so a bid price of £-10/MW/h), the maximum penalty for non-delivery would be £10/MW/h.
• Therefore, you could essentially end up paying double for non-delivery of a negatively-priced contract.

This could lead to increased bid prices

If providers believe these penalty charges could materially impact revenues, they might offset this risk by increasing their bid prices. Additionally, the proposed penalties for negative prices seem likely to deter participants from pricing too low.

Alternatively, if providers are confident their assets can fully perform these contracts (and avoid penalties), they could start to undercut the rest of the market.

“Rejection codes” should provide more transparency

In the dynamic frequency auctions, the ESO simply tells participants they have been “Accepted” or “Rejected”. In most cases, the reasons are clear. The cheapest bids, which allow the ESO to get closest to its volume requirements, are most likely to win contracts.

However, with the proposals for co-optimized auctions and stacking across different services, this will get much more confusing. Now, “rejection codes” will explain why bidders don’t win contracts.

Will “rejection codes” provide all the answers?

In theory, this sounds like a positive development - but it will depend on how it works in practice. The Balancing Mechanism has a similar system in place - and many argue that those codes aren’t particularly transparent.

So, what next for the Enduring Auction Capability?

• The consultation covering stacking capability, performance monitoring changes, and more will close on 14th July - so there’s still time to respond if you want to.
• National Grid ESO will respond later in the Summer before submitting a final proposal to Ofgem in September.
• In the meantime, mock auction trials using the new platform are due to be undertaken this summer. Anyone wishing to participate should contact box.futureofbalancingservices@nationalgrideso.com before the end of Friday 30th June.