18 Nov 2021
Alex Done

Quick Take - DC overholding constraints

In today’s Quick Take, we’ll be taking a look at how National Grid Electricity System Operator’s (NG ESO) auction design has impacted the Dynamic Containment (DC) market.

Context - what’s been happening?

  • On 1 November 2021, NG ESO substantially decreased its low-frequency Dynamic Containment (DCL) requirement.
  • With lower procurement targets, competition in DCL has increased. For the first time since the launch of DC, we’ve seen participants rejected for exceeding ESO requirements.
  • With increased levels of competition, we got our first proper look at how the auction clearing algorithm works, including how the ESO deals with under/overholding and paradoxically rejected bids (PRBs are bids that are priced lower than the clearing price but still rejected).

Motivation - why is this interesting?

  • Understanding how the ESO’s auction design impacts the DC market is vitally important for both the ESO (who want to minimise costs to the end consumer) and DC providers (who want to maximise service revenues).
  • Since 1 November, volume caps and paradoxically rejected bids have become a crucial component of the DC auctions, and have the potential to inflate both clearing prices and total service costs.
  • This isn’t the first time we’ve seen auction design impacting service costs: the DA STOR market is a great example of how auction constraints have led to market inefficiencies. This is something the ESO is working on resolving presently and if the proposed legislation is passed, could reduce STOR market value by up to 60%.

Graphic - what does it look like?

The ESO’s under/overholding constraints mean that accepted bid volume must match DC requirements exactly. But what does this look like in practice? The graphic below shows the supply and demand curves for DCL in EFA block 3 on 8 November 2021, and illustrates the impact of under/overholding constraints on pricing and rejections.

Let’s talk through this graphic:

  1. The ESO accepts bids, starting with the cheapest, up to a volume of 229 MW, as none exceed the price cap or the volume cap.
  2. Because the ESO cannot underhold DC capacity (under current regulation), it must continue to procure DC to satisfy its 230 MW requirement - even though it only needs an additional 1 MW.
  3. The ESO rejects the next 168 MW of cheapest bids to avoid overholding. Crucially, all these bids are non-curtailable, and as such cannot be partially accepted.
  4. In order to meet the demand requirement exactly, the ESO accepts a 1 MW bid priced at £16.11/MW/h, which sets the market-clearing price.

Below the graph (but still within the image) is a table showing the total cost of procuring DCL in two scenarios:

  • What actually happened.
  • What would’ve happened had the ESO relaxed its under/overholding constraints, i.e. if these auctions had allowed for under/overholding where it was economical to do so. This is the approach taken in the revisions to the DA STOR market.

Key takeaway - why you should care?

  • Under/overholding constraints on 8 November for EFA block 3 caused the market to clear at £16.11/MW/h, with 168 MW of paradoxically rejected bids.
  • If the ESO relaxed under/overholding constraints, clearing prices would’ve fallen by £13.22/MW/h and decreased procurement by just 1 MW. Overall this would’ve led to an 82% reduction in total service cost.
  • The results - i.e. the auction design inflating the cost of the service - are essentially the same as those seen in the DA STOR market over 2021, and the precise reason the ESO has proposed changes to their auction design.
  • Moreover, the changes coming to DA STOR are likely to be rolled out across the rest of the ESO’s response and reserve auctions, which could have a similar effect on the DC market. In this specific instance, revisions to auction rules would equate to an 82% decrease in available revenues for DC providers.

Want more?

If you’d like to dive into some of the ideas discussed above in more detail, we’d recommend checking out some of the following:

If you’ve found this quick take interesting and you want to hear more about the topic, then please reach out. A lot of our research comes out of your great suggestions, so if you want more or the same - or something totally different - don’t hesitate to let us know! You can get in touch via our platform chat function, or you can find us on LinkedIn.

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