As part of my series on major grid innovations, the third thread I’m exploring is monetization of ancillary services on the grid, mostly through emerging markets. This creates new revenue opportunities which can be met by new service providers or by technologies which currently aren’t compensated for this.
The grid innovation series started with 7 Reasons the Future is Electric and is continuing with articles on the high-voltage direct current revolution and blockchain technologies for new value chains around electrical generation and consumption.
What is an ancillary service?
The United States Federal Energy Regulatory Commission (FERC) defines ancillary services as:
those services necessary to support the transmission of electric power from seller to purchaser given the obligations of control areas and transmitting utilities within those control areas to maintain reliable operations of the interconnected transmission system.
It identifies six different kinds of ancillary services:
- scheduling and dispatch
- reactive power and voltage control
- loss compensation
- load following
- system protection
- energy imbalance
Note that this excludes basic generation, transmission, and distribution of electricity. Those are all primary services. Ancillary services, in keeping with the definition of ancillary as providing support to primary activities, keep the grid running smoothly.
Some of these are technology areas in their own right, but others have been provided ‘for free’ as a characteristic of the form of generation. Reactive power and voltage control, for example, are readily provided by large capital generation assets such as hydro dams and coal plants if those assets are relatively close to where the imbalance requiring regulation occurs. As these assets use synchronous electrical generators, they react automatically to address shifts in frequency and voltage due to the inertia and characteristics of the generator.
There are other types of technology which can provide this ancillary service, and these are now built into modern wind and solar generation plants, for example, to allow those plants to be better behaved members of the grid. One potential, being exploited in at least one state in the USA right now, is to slightly lower total wind farm output, and take advantage of the electronics built into the wind farm to provide this ancillary service at a fee for loss of generation revenue. Coal plants are open to this if they start getting revenue for their previously unpriced ancillary service as well.
However, that utility-scale wind and solar farms have electronic components which allow them to match grid frequency and voltage is an important point. As I pointed out in the 7 Reasons piece, electronics outperform the physical. This isn’t immediate, but if a service an be provided by an electronic component or an electronic component enhancing a physical component, almost inevitably the solution will become cheaper and have better characteristics. This means that the physical inertia of coal, nuclear and hydro plants will likely be outcompeted by electronic components. At best, this is a death-delaying factor for thermal generation.
Load following is straightforward. If demand goes up, supply must go up to support it. If demand drops, supply must drop. And this supply change must be very quick, otherwise network imbalances occur. In developed nations, total demand has been relatively flat for the past few years, but it has become spikier, with lower troughs and higher peaks. This is problematic in many areas where demand was projected to continue, and the drain of manufacturing due to global labor arbitrage — dominantly — was not accounted for.
This is another service wind and solar energy can easily provide. Dropping wind off the grid through SCADA control of feathering is very easy and very fast, as is dropping a string of solar panels in a farm. Similarly, if a wind farm is operating at 90% of capacity, it is one the fastest ramping forms of new supply outside of battery storage due to its characteristics. Feathering on demand is already occurring in Ontario, for example, where the nuclear baseload exceeds the bottom of the trough regularly. Using wind and solar generation for peak demand isn’t occurring that I am aware of so far but as it becomes an even more significant portion of the total capacity, this use case will occur and wind and solar farms will compete with gas plants for peak demand at the highest market prices.
This is true for solar farms as well, and it becomes even more important to manage the large addition of new supply to the grid as the sun hits a new timezone. Being able to add the new generation in a controlled manner while shutting down more expensive and higher negative externality forms of generation is critical.
I called out the importance of flexibility under central and autonomous control in my piece which calls out the 7 Factors Show Why Wind & Solar Are The 1st Choices. Most developed nations and many developing nations are bypassing the heavy manufacturing economic phase and leaping forward to consumer and knowledge work economies which are much spikier and don’t find inflexible baseload generation to be of value.
Scheduling and dispatch are more administrative in nature, typically managed in jurisdictions by organizations devoted to it. This is becoming an interesting place in the context of grid innovation due to the emergence of blockchain technologies which permit distributed smart contracts. I’ll be exploring the use of blockchain technologies for managing this ancillary service.
Loss compensation is the process by which grid operators make up the loss of electricity due to transmission of electricity through the grid, something which takes from 1% to 7% of all electricity. They do this by buying power themselves and calculating how much they have to add to address the loss. They can buy this power from anywhere, of course, allowing another use case for wind energy. Loss compensation is becoming a diminishing concern on modern grids however, as well-managed smarter grids have lower losses than traditional grids and high-voltage direct current transmission allows more electricity from further away and under more adverse conditions for transmission to arrive at the consumer. Smart contracts and hedging markets play in this space as well.
System protection includes advanced grid reliability analysis, failure protection, and security and privacy protection services. This is another administrative function. Reliability is top-of-mind right now in the USA, as current Secretary of Energy Rick Perry has instructed federal regulators to reward the inflexible generation sources for their surplus of onsite fuel in the absence of evidence that this increases grid reliability.
Energy imbalance is an interesting concern because it is one of the few places where renewables actually do create additional concerns for the grid outside of the requirement for additional transmission lines. It deals with fluctuations in supply and demand which can cause substantial variance between the two in a specific jurisdiction. This is exacerbated by failures of major capital generation assets, failures of transmission lines, but also by the natural and predictable variation of renewable generation. This is expensive for small jurisdictions, which is why regional markets are being brought into play to distribute the variance over a larger geography. It’s also interesting due to the emerging demand consumption of electric vehicles, which while eminently manageable will require attention, especially as they will emerge asymmetrically in different regions.
Some of these ancillary services are amenable to new energy markets, most obviously reactive power and voltage control, and load following. However, there is the potential for smart contract markets for other areas as well.
While there are obvious challenges with unfettered capitalism, intelligently created markets with the right level of regulation incentivize efficiency. Energy auctions, a form of market, have been responsible for part of the significant drops in wind and solar energy prices, rewarding those technologies for not having risks related to fuel costs that they have to include in their pricing models. Similarly, automation of market forces leads to reduced administrative burdens and quicker response of both supply and demand.
Not all of these ancillary services are currently in a position to take advantage of the advantages of market forces. There is significant regulatory burden in generation, a rational response to an historic natural monopoly. Now that electric grids are liberalizing with the greater ability to have multiple participants competing and driving costs down due to advances both in computerized administration and markets and new supply and demand control technologies, markets and proto-markets are emerging.
These emerging ancillary markets are one of the greater innovations in electrical grids I’ll be exploring over more articles. I’ll look at specific examples and assess the characteristics which make a market successful or unsuccessful.
As always, I’ll be paying close attention to comments. If I’ve mischaracterized something or made other mistakes, please let me know. Similarly, if there are emerging electricity services market examples, point them out to me, especially in non-English language countries.