Nearly any asset - generation, storage, and consumption - has the potential for flexibility. And this flexibility has tremendous profit potential. But what are your options to capture it? Several types of short-term markets exist today. They were designed at different times for different purposes, creating a need for cross-market optimization to leverage the full monetary scope of your flexibility.
If you asked ten industry colleagues for flexibility markets, nine of them would probably say 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.
The balancing market design is extremely complex and varies from country to country, although the process of harmonizing balancing markets in 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, the Transmission System Operator (TSO) is your only counterparty, and they are entitled to make the final decision on whether you do or do not produce, and you are obligated to deliver. On top of that, you have to keep up with a set of complex rules that change frequently.
Traditional day-ahead auctions are suitable 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 and were originally designed for dispatchable power such as thermal and hydro plants. As such, the long lead times aren’t all that useful for delivering flexibility in response to unexpected fluctuations in supply or demand.
Intraday auctions, generally occurring once or twice per day to trade power for all periods in the following 24 hours, lie somewhere between day-ahead auctions 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 developed alongside the increase in renewable energy because traditional auctions aren't sufficient to address short-term needs, for example getting rid of an excess power position half an hour before delivery. The intraday market enables 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 if market conditions change.
Intraday continuous offers more liquidity and is the most democratic market, where prices are determined by overall market dynamics rather than basically being controlled by the biggest producers. The barriers to entry are much lower than for balancing markets, with no prequalification required. These advantages make the intraday continuous market one of the most effective and lucrative for flexibility trading.
There’s been a lot of noise around the idea of local flex markets, and some are being tested. The idea is to trade flexibility locally, reducing congestion on transmission and distribution grids, thus eliminating the need for a grid buildout. The concept has potential – it taps into the growing “buy local” movement and gives people a sense of community. However, since centers of renewable generation are generally far away from centers of high power demand and, therefore, on separate distribution grids, it remains to be seen how much these markets could realistically contribute.
The strongest opportunities to trade your flexibility are balancing and continuous intraday markets. The good news is that you can split your flexibility across all available markets so you can contribute to risk management while maximizing your profit.
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