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PÖYRY REPORT / 4 Mar 2014

Valuing Flexibility is at the Heart of a Successful Energy Transition

The need for flexibility in supply and demand is growing, and markets must be able to react quickly in response to changes in weather. As a result market players, including those running the electricity systems, face new challenges that need new solutions.

The onward march of renewable generation has brought new risks for power stations and new challenges for balancing electricity supply and demand, says leading independent consultancy Pöyry. Their "Revealing the Value of Flexibility' report shows that the need for flexibility in supply and demand is growing, and markets must be able to react quickly in response to changes in weather.  As a result market players, including those running the electricity systems, face new challenges that need new solutions.

The EU Target Model for electricity, which aims to harmonise electricity markets across Europe, embraces these changes but there are also additional steps which must be taken to allow a transition to the low carbon economy.

Stephen Woodhouse, Director at Pöyry Management Consulting said “we are at a crucial time for Europe’s electricity markets. Setting the wrong rules may store up major problems for the future – leading to extra costs for consumers and possibly even putting security of supply at risk.”

Andrew Claxton, Director of Business Development at APX said “markets need to evolve to meet the new, emerging challenges and we need to draw on the expertise of all stakeholders to achieve this.”

New market designs will continue to undervalue flexibility

In response to the new circumstances, many EU countries are planning to introduce Capacity Markets which could lower risks for generators. But these new markets do not reward flexibility. As a result, the wrong type of less flexible power stations may be built, leading to increased cost for consumers.

There is also a risk that insufficient interconnection will get built if the value of flexibility is not recognised, and interconnection is a key part of the solution in dealing with more renewables cost effectively. 

Woodhouse continues “The need to act is urgent, in terms of both institutional arrangements and also infrastructure.  The rules for market coupling will be defined in the coming weeks and months, and plans for national capacity markets are advanced.  Investment and closure decisions are being taken now, and to keep the lights on in future we need to act now.”

Is there a better approach?

Pöyry has considered market-based ways of valuing ‘flexible capability’, which could support the integration of renewables into the system while allowing all market players to manage their risks.  Wherever possible, markets should be used to solve the problems and the role of regulation and single buyer transmission operators should be kept to a minimum to keep costs down.

Pöyry argues that ‘flexible capability’ has a value which can be traded in the market in the form of energy options.  Energy options will allow price and volume risk to be hedged, can respond to system needs over time, and can ultimately promote investment in the right type of capacity.  

Notes to editors

Today Pöyry releases a report which outlines ways in which flexibility can be valued in electricity markets.  The work has been sponsored by a group of 20 study members, including regulators, network operators, power exchanges, manufacturers, generators and vertically integrated utilities; and has benefited from dialogue with a wide range of stakeholders and policy makers from across Europe.  The study members include:

Agder Energi AS, APX Holding B.V., C.V.A. Trading S.r.l. a s.u., E-CO Energi AS, National Grid Commercial Holdings Ltd, Ofgem, Statkraft Energi AS, Wӓrtsilӓ Finland Oy, RWE Npower plc, Vattenfall AB, Fortum Corporation, Authority for Consumers & Markets, EDF - Activités Internationales et Stratégie S.A., Eneco Energy Trade B.V., 

The views expressed in this report are Pöyry’s and the conclusions are not necessarily endorsed by the study members or contributors in whole or in part.

EU Target Model

The EU Electricity Target Model will provide the framework for the single European electricity market, in particular setting rules for the allocation and use of transmission capacity between pricing zones. It will be implemented through the completion of a number of European Network Codes through the process put in place by the Third Package of European energy legislation. The implementation of the EU Electricity Target Model provides an opportunity for Europe to take a step forward in the integration of variable renewable generation to the market.

Market coupling

Market coupling is the process of joining together different market areas through implicit auctions to determine the use of interconnector capacity (e.g. in the Day-Ahead market).  The market (price) coupling process simultaneously determines volumes and prices in all coupled zones for the relevant timeframe.  It does not mean that there will be always be a single price for all of the zones, but rather than the prices in each zone are determined in a coordinated process.

Read the full report

Contact information

Stephen Woodhouse
Chief Digital Officer