Energy decentralisation: why it complicates energy trading
By Michelle Vezie-Taylor, Portfolio Management Lead
Historically, system reliability was provided by a few large-scale transmission-connected generating assets. Today regulation and technology are enabling more and more types of Distributed Energy Resources (DERs) to provide these same services. We are seeing a growth in grid-edge assets, such as storage and gas peakers, with high extrinsic value.
These assets generate value from wholesale markets, as well as from delivering flexibility services, which is forecast to be a £5bn market (in the UK) by 2050 – up from around £1bn today.
Alongside existing opportunities for flexibility, such as wholesale and ancillary services markets, there will be a growing number of local price signals of some form, whether set by the Distribution Network Operator (DNO) or other market mechanisms. DNOs are already looking to procure flexibility services and we expect growing interest in constraint management services to support grid hotspots. The exact mix of future services and business models is unknown, but there will likely be a greater number of markets to generate value from available flexibility.
For energy suppliers and traders there are several consequences of decentralisation:
- It will dampen the ability of large suppliers to rely on economies of scale to manage their imbalance position – there will be competing use cases for available flexibility.
- If the cost for trading each asset remains the same, then the transaction costs of trading portfolios of assets will increase dramatically – it costs the same to optimally trade a 1MW asset as it does a 100MW asset.
- As asset owners and decentralised generators become more sophisticated, they will expect to take greater control of monetising their assets. Already we see asset owners wanting to trade their own positions – using technology to circumvent the need to have large utilities managing positions on their behalf.
Fundamentally we see the value of flexibility increasing. However, value may pass to providers of flexibility and away from traditional utilities.
The transition to decentralised energy means there will be far more DERs to manage and many more ‘value pools’ available, i.e. opportunities to generate income from those DERs. However, where the value occurs will change, perhaps unpredictably and with little notice, energy suppliers will not be able to plan as far in advance and solutions will need to be highly versatile.
Today, energy traders use well-understood trading strategies to optimise energy assets across a limited set of markets, but there is a limit to the number of assets and markets one trader can manage. It can take the same effort to manage a small asset as a big asset. To meet the demands of the next decade with this explosion of asset granularity, traders will have to be able to up their game, by harnessing the power of intelligent technology. The alternative, which is to hire armies of expensive energy traders, will decimate profitability.