We’re now six months into I-SEM, so perhaps a natural point to reflect on how the market is developing. Over the last half-year, we’ve gained a number of interesting insights into how the new market is functioning and the exposures faced by participants, particularly wind farms.
Introducing balancing costs
In the old SEM, wind farms were not financially penalised for non-delivery. However, in I-SEM participants must manage their forecast errors or get ‘cashed out’ at the imbalance price. In simple terms, participants will either pay, or be paid, the imbalance price for delivering less, or more, than forecasted. Typically, wind farm forecast errors are largely in line with each other, as they all tend to over- or under-deliver at the same time. And because this forecast error is the largest variable on the system, wind will typically always be on the ‘wrong’ side of the imbalance price; buying when the price is high or selling when the price is low.
Leading up to the implementation of I-SEM, there was much speculation around what the level of balancing costs would be. Naturally, comparisons were made to the GB market, as it already operated on a similar design. So, a few months in, how do the comparisons stack up?
So far, so volatile!
The opening months of I-SEM have been notable for the imbalance price volatility. The chart below shows the absolute spread between imbalance prices and day-ahead prices, as a percentage of day-ahead price from the launch of the market up until January.
It is clear that I-SEM imbalance price spreads have been significantly greater than those in GB. This means that participants are faced with greater price exposures on their forecast errors. Furthermore, balancing prices in I-SEM have out-turned significantly lower than the day-ahead prices, so simply selling all generation to the Balancing Market is very costly.
Why the high level of volatility? A complex question to answer, but one of the most surprising factors has been the extreme levels of pricing from thermal generators, and how they have fed into the imbalance prices under the new design. For example, prices have frequently been set at negative levels (even -€1,000 MWh) by waste-to-energy generators, and up to €5,637 MWh by peaking plant. And as mentioned earlier, any wind forecast error will tend to be on the wrong side of these prices.
Minimising the exposure; avoiding the costs
As the market continues to evolve in the years to come, the financial risk around managing the cost of balancing will also vary, as predictable thermal generators change the way they operate, and new flexible generation potentially enters the market. However, the risk will not disappear, and typically in markets where the levels of renewables increase, the cost of balancing will increase also. In the Irish market, where Government ambition is to get to 55% renewables by 2030 (or hopefully 70% by 2030, as IWEA is pushing for), the high cost of balancing for developers and investors is a key hurdle to overcome - particularly when it has been made clear in the current RESS High Level Design that these costs will be fully born by the projects.
For this reason, SSE Airtricity is working to break new ground in the field of wind forecasting. In late 2018, in collaboration with UCD’s Centre for Applied Data Analytics (CeADAR), we were successful in obtaining funding from the Sustainable Energy Authority of Ireland (SEAI) to support a project focused on significantly improving the accuracy of wind generation forecasts. This project, named FREMI (Forecasting Renewable Energy with Machine Intelligence) will bring together SSE Airtricity’s vast knowledge and data, built up from developing and managing the largest wind portfolio in the market, with CeADARs skills as a renowned centre for excellence in advanced data analytics.
While existing forecasting techniques focus solely on meteorological conditions, FREMI will take a holistic approach, advancing these techniques through the latest Artificial Intelligence (AI) technologies to combine them with plant availability, system demand and localised grid constraints. This will greatly enhance the understanding of each wind farm’s likely market position, not only when operational, but in the development stage too.
Irish renewables leading the way!
The Irish energy system is already seen as world leading in its ability to facilitate substantial amounts of renewables on a relatively isolated grid. To enable us to meet future national targets, and the even loftier ambitions of the wind industry, we will also need to be world leaders in managing the effects that a high penetration of renewables has in an energy balancing market. By capitalising on advances in technology, and utilising the skills of partnering bodies such as CeADAR, we will ensure we achieve our goals – providing cheaper, cleaner energy to homes and businesses across the island.