You’re in an investment committee meeting, weighing UK energy opportunities beyond the good returns that you are already making from offshore wind, and are wondering if you can make good returns from the promised 12 GW of UK flexibility markets.
Other UK markets such as wholesale, retail, capacity, and ancillary services are well defined with known investments and known risks. If I invest £1bn in offshore wind at a strike price of £70 MWh, then a spreadsheet can estimate my returns over the life of the asset.
We cannot reliably calculate returns from flexibility as we are still working on the complete design for a fully operating flexibility market.
To date questions on how to operate flexibility have been mostly focussed on how the physical flexibility system will operate, such as what constraints are we paying to avoid, who has control of assets, what if the same asset is offered in two markets, and what type of energy assets to use.
For flex markets to work both the physics and money need to work together. We need a physical model, revenue streams, and an operating market.
There are a few trials which suggest how the overall market could operate from distribution network operators, NESO, and energy suppliers who are already engaging homes, businesses, and investors. International experience suggests that a near real time auction-based system may be the way to go. How this plays alongside the Balancing Mechanism needs to be considered.
It feels like we are a long way off 12 GW in 5 years’ time. As someone said this week, we need to get some smart people in a room and feed them until they come up with an answer.
