Just over two years ago, when forecasting the evolution of electrical system adjustment services, major energy companies and industry experts predicted a possible increase in costs in the following years. These costs are transferred to the final customer irrespective of the product has been contracted. With an increased participation of renewable energy technologies, which are considered as unmanageable, an increased use of adjustment services was predicted, given the increased variability in power delivery characteristic of these kind of technologies.

However, today the picture is quite different, despite the increase in the share of renewables in the daily market. The costs of adjustment services have been declining generically in the last two years, especially this year 2016. What is causing this change of model?

Evolution of adjustment services costs. M·Tech

Adjustment services encompass the set of mechanisms that are managed by the electricity system operator (in Spain, Red Eléctrica Española, hereinafter REE) that allow coordinate power generation with the requirements of demand at any given time based on their distribution within the system, meeting certain required safety and quality criteria. After the closure of the daily market, the market operator OMIE creates the Base Operation Program (PBF), a result of the economic matching of supply and demand. However, this result, though economically viable, need not be technically too. At this point is where REE, through the launch of several markets that include adjusting the solution of technical constraints, complementary services and deviation management. The goal of each covers controlling the frequency and voltage as a measure of system security, guaranteeing an adequate level of reserves (with Additional up power reserve and secondary reserve) and regulatory services and real-time balance (secondary energy, tertiary and deviation management).

As is clear from the above definition, these system costs therefore depend on the technology and its location to participate in the market. Obviously, the ability to shutdown and start up at specific moments of a burning coal plant or CCGT based upon a timely request for REE is much faster than in the case of a wind or solar plant, dependent on meteorology at any time, especially to ensure a constant power value. Thereby, the hypothesis of an increase in costs due to greater participation of renewables makes sense.

On the other hand, the higher the share of renewables, prices of daily OMIE market are lower. We have seen that this year 2016 when, thanks to strong participation of hydro and wind, we have reached monthly minimum values in the daily market of the last 6 years. Hence, it could be understood that this year system costs should have consequently increased. This inverse relationship between OMIE Price and adjustment services costs remains hourly, but what has happened is a change in the order of magnitude of the costs, which have been declining.

The biggest change has been from February 10th this year, the date from which it was legally possible for renewables to participate in adjustment markets. It all started in 2014 with the Real Decreto 413/2014, in which the activity of production from renewable energy sources, co-generation and waste was regulated. The methodology to participate in adjustment markets was defined later in the Operating Procedures in accordance with the resolution of December 18th 2015. Since then, many renewable producers began to participate in adjustment services, especially with PBF technical restrictions offers, mostly to bring down, due to the characteristics of this type of technology. The level of participation in these markets has increased since.

The increase in participation and input of new technologies has led to a rise in competition, resulting dragging prices downwards. This effect is clearly displayed on the technical constraints PBF, as such market is not marginal, but its retribution ends up based on the specific up or down offers of each plant. In the following graphs one can see the evolution of average prices of monthly adjustment services since August 2014. From February onward, you can see a clear reduction in average prices, especially derived from a lower value of the technical constraints PBF (green)-

After what has been said on this blog, the remaining question would be if such a pattern could be repeated from now on. As mentioned, the current regulatory framework allows a greater number of technologies to participate in this market, not only wind and solar, but also co-generators. Consequently, one might expect that this model will keep on. However, to replicate the conditions of this year, there is a main factor to take into account: the weather. Today water reserves are at lower values than those available at this time last year, which threatens the share of hydro in the generation mix and its subsequent participation in adjustment markets, along with uncertainty about wind participation.

And if weather may be enough uncertainty we must add the forecast changes promoted by the European Union within steps of coupling between markets systems, such as the launch of a pan-European platform to establish a continuous market into intra-day horizon, which would render meaningless current services as tertiary regulation or deviation management.

What we can assure is that, today, in addition to the reduced daily market prices we have been able to enjoy until early September, a further improvement in energy costs for many consumers which has been given by the reduction in adjustment services costs, in this case largely derived from a regulatory change. All this invites us to think that, regardless of the price of energy, future tenders for power contracts in the coming months should collect the moderation of Adjustment Services costs.

Susana Gómez | Energy Procurement Consultant

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