Unlocking the value of ancillary services markets

There are regional mechanisms across different areas, with the UK, DACH, and the Nordics each having dedicated markets to serve their specific trading requirements. 

Learning how to integrate ancillary participation into a trading portfolio is particularly relevant for portfolio optimisers, asset managers, traders and battery operators.

This blog will explore ancillary services, their market structures and how this might affect how your business trades in the future.

What ancillary services are and why they matter

Ancillary services stabilise the grid by acting as a central point for managing fluctuations in supply and demand. 

Key definitions 

When grid frequency changes, the frequency response automatically adjusts supply or demand, depending on which is outstripping the other. Reserve refers to the backup of energy when generation drops, with different types available: for example, non-spinning reserve is slower, whereas spinning reserve can be accessed immediately. Inertia plays a shock-absorbing role via giant, spinning turbines. Black start refers to the complete restoration of the grid during a blackout period without requiring an external energy supply. 

Relationship to system stability and security of supply

As the grid currently doesn’t have the capacity to store large amounts of excess energy, matching supply to demand is crucial, and this is the key role that ancillary services play on the broader network. Eventually, storage-related ancillary services will be integrated into the grid, including batteries for energy banking.

Key UK, DACH, and Nordic market mechanisms

Different energy markets require different ancillary services: we take a look at some of the key European ones. 

UK: The UK market uses several balancing techniques, including dynamic containment, which responds quickly to generation disconnections to stabilise the grid. The Balancing Mechanism is a reserve that responds to supply and demand issues in real time, while the Capacity Market ensures that reliable service continues during high-stress periods. 

Germany: The German model utilises a tier model of balancing mechanisms to keep the grid stable, with Frequency Containment Reserve (FCR) providing the fastest frequency response, with automatic Frequency Restoration Reserve (aFRR) activated automatically within 30 seconds, and the slowest of the tiers being manual Frequency Restoration Reserve (mFRR), which is manually deployed by human operatives. 

Nordics: The Nordics use a mix of capacity actions and automation to keep the grid stable, using the exact mechanisms as the German market. There are pioneering Transmission System Operators (TSOs) that improve stability by testing and trialling modern balancing solutions: Statnett is the Norwegian arm, and Fingrid is the Finnish arm.

Asset types and eligibility requirements

Conventional generation, storage, DSR and renewables

Larger generators, including nuclear and coal, fulfil the role of Balancing Mechanisms, as they can quickly dispatch or switch off energy as demand dictates. Battery storage can also perform this role, but only when a specific power output is required; however, in the future, this may be a viable solution for renewable energy response to supply issues.

Response times, metering, and availability

Demand Side Response can be supported by adjusting energy consumption to align with supply and demand, with both slow and quick reserves responding within minutes. Very accurate metering can also help keep track of an energy producer’s performance, with accuracy down to 0.5s and real-time telemetry providing instant visibility. This is particularly important when considering availability, as contractual obligations require providers to be available during specific periods, with financial penalties for non-delivery.

Revenue stacking with wholesale and balancing markets

While operating within the ancillary market can be beneficial, it's essential to understand how to co-optimise capacity across multiple products. Ancillary market participants can gain various revenue streams from one asset, for example, battery storage, earning an additional income and stabilising the grid at the same time. Energy can be bought when energy prices are lower, stored, and sold back into the market when prices have spiked, earning a profit for the energy buyer and seller. The problem with this technique is in double-counting, which is when a customer pays twice for essentially the same asset. Using battery storage across multiple regions can also be an issue, as each region requires different levels of compliance.

Future reforms and opportunities for flexibility

As significant decarbonisation goals approach, national grids are taking action to build network flexibility. National Grid ESOs) or NESO) market simplification, with the Open Balancing Platform a crucial development for the NESO, which aims to be more transparent and efficient than the current platform. The EU is also looking to standardise balancing products, with a common European platform being developed for the exchange of balanced energy. 

The role of AI and automation in dispatch will grow in the ancillary market, with enhanced forecasting, the result of more and more available data, including weather forecasts, the Internet of Things and historical data, all contributing to insight and automated reactionary and proactive action. One thing is clear: ancillary markets reward flexibility and well-designed solutions, and in the future, dispatch priorities will be key to unlocking new profit pools.