As we’ve previously discussed, nearly any asset - generation, storage or consumption - has the potential for flexibility. What’s more, there is tremendous potential profit in your flexibility. But what options are available to capture it? Several types of short-term markets exist today. They were designed at different times for different purposes, resulting in substantial differences.
If you asked ten industry colleagues what markets are available for flexibility, the first answer from nine of them would probably be balancing markets. This makes sense; balancing requirements have been around longer than any other short-term power markets (even if their market design has changed over time). Moreover, they were established with the explicit purpose of maintaining grid stability through flexibility, with lead times in seconds or minutes.
Balancing market design is extremely complex and varies from country to country, although the process of harmonizing balancing markets across the EU will eventually reduce these differences. However, due to the balancing market’s mission-critical role in grid stability, the barriers to participating in these markets are high. Your assets must be pre-qualified to ensure that they can deliver. In this market not only is the TSO your only counterparty, you are actually allowing them to make the final decision whether you produce or not produce, and you are obligated to deliver. On top of that, you have to keep up with complex rules that change frequently. And it’s essentially an oligarchy: prices are generally defined by a small handful of big players.
Traditional day-ahead auctions are also used for short-term power trading, and as the name implies power is traded for all delivery periods on the following day. Like balancing markets they have been around for a relatively long time, so were designed for dispatchable power such as thermal and hydro plants. As such, the relatively long lead times aren’t all that useful in terms of delivering flexibility in response to unexpected fluctuations in supply or demand.
A more recent development only available in a few countries is intraday auctions, generally occurring once or twice per day to trade power for all periods in the following 24 hours. Their role is somewhere between that of the day-ahead auction and the intraday continuous market. While lead times are shorter than in the day-ahead market, it’s still not really fast enough to be a strong tool for today’s flexibility challenges.
Continuous intraday markets are the most recent of the major markets. They grew alongside renewable energy because the traditional auctions don’t help with very short-term cases, such as getting rid of an excess power position half an hour before delivery to balance your portfolio. The intraday market, on the other hand, has lead times measured in minutes.
Unlike balancing markets, you trade directly on the wholesale market through an organized exchange. The rules are less rigid and you can change your mind at any time, trading back a position you entered before if conditions change.
This market offers more liquidity, but even more importantly, it is the most democratic market - a market for the underdogs. Prices are determined by overall market dynamics rather than being de facto controlled by the biggest producers. The barriers to entry are much lower than balancing markets, with no pre-qualification required. And if you trade through a service provider with their own market access, there are no real barriers - you could get started tomorrow. Despite the popularity of the balancing markets, intraday trading is the best opportunity to make the most of your flexibility.
There’s been a lot of noise around the idea of local flex markets, and a few are currently being tested. The idea is to trade flexibility locally, reducing congestion on transmission and distribution grids and thus lowering the need for grid build-out. There is some potential to the concept; it feeds well into the growing “buy local” movement and gives people a sense of community to be getting power from their neighbors. However, since the greatest transmission challenges are due to the fact that centers of renewable generation are generally far away from centers of high power demand, and thus on separate distribution grids, it remains to be seen how much these markets can contribute.
The path to profit: leveraging multiple markets
The strongest opportunities to trade your flexibility are balancing markets and continuous intraday markets. In practice, though, you don’t have to put all your eggs in one basket. You can split your flexibility across all available markets. The biggest players already do this simply in order to avoid overwhelming one market. In reality, this approach provides a great opportunity for all market participants, offering both risk management and the ability to maximize profit.