Exploring the Economic Benefits of Co-optimising Procurement of Energy, Response and Reserve

Project summary

Energy and balancing services are currently procured sequentially in separate markets. The objectives are to improve understanding of the pros and cons of a co-optimised system in Great Britain, evaluate efficiency savings from co-optimising energy, response, and reserve products, examine the benefits of locational pricing for ancillary services, and share findings with stakeholders to contribute to the broader REMA discussion on future dispatch mechanisms.  

Name Status Project reference number Start date Proposed End date
Exploring the Economic Benefits of Co-optimising Procurement of Energy, Response and Reserve Complete NIA2_NGESO053 Sept 2023 Jan 2025

 

Strategy theme Funding mechanism Technology Expenditure Third Party Collaborators
Net zero and the energy system transition NIA_RIIO-2 Measurement £500,000 FTI Consulting LLP
Summary

Energy and balancing services are currently procured sequentially in separate markets. The objectives are to improve understanding of the pros and cons of a co-optimised system in Great Britain, evaluate efficiency savings from co-optimising energy, response, and reserve products, examine the benefits of locational pricing for ancillary services, and share findings with stakeholders to contribute to the broader REMA discussion on future dispatch mechanisms.  

Benefits

If energy and ancillary services were procured in a single process, we would expect the following benefits: 

  • Market participants would not have to guess which market they would be cleared in. They would not incur opportunity costs.
  • The clearing algorithm chooses which market to allocate each asset to maximise overall social welfare – this means the most valuable assets would be dispatched for the most valuable services, also reducing the overall cost of production.
  • Avoid the ‘herding’ phenomenon, where some markets are illiquid, and others are saturated.
  • No recent international case studies are available to give a sense of potential benefits. One example from the early 2000s is CAISO (Californian Independent System Operator). Prior to introducing co-optimisation, operating reserves were around 10% of annual energy costs. Despite dramatic uplift in intermittent wind generation, operating costs are now around 2% of annual energy costs.
  • Financial: avoided opportunity costs; lower cost of production derived from more efficient allocation of resource. 

This project will enable the ESO to determine whether:  

  • Co-optimising energy, response and reserve would have realised £xm system-wide savings and £xm consumer savings in 2022.
  • Co-optimising energy, response and reserve could realise £xm system-wide savings and £xm consumer savings from 2023 – 2040. 

This information is central to the debate about central versus self-dispatch for the Department for Energy Security and Net Zero’s (DESNZ)) Review of Electricity Market Arrangements.  

It is also expected that this project will identify avenues for further research, including considerations for compatibility with EU market design and pricing rules of co-optimised markets.

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Learnings

Outcomes

The project has so delivered useful qualitative insight into the theory and practicalities of the co-optimisation of energy, ancillary services and transmission, along with background about the considerations for implementing such a change in GB. The quantitative results are still in draft, but show that there is scope for savings on both system cost (the cost of producing electricity) and cost to end consumer (the total amount that bill payers would pay) both historically and in to the future. 

Lessons Learnt

To be confirmed at the end of the project