Auctions and Payments for ancillary services

Auctions and Payments for ancillary services

Ancillary services auctions are a mechanism used by electricity grid operators to secure the necessary resources to maintain a stable and reliable power grid. Ancillary services auctions allow grid operators to competitively procure these services from a variety of providers, including traditional power plants and newer technologies such as energy storage systems and virtual power plants.

Auction Process

In countries with a liberalized energy market, the TSO organizes auctions to procure the required amount of balancing energy that is needed. The TSO specifies the amount needed by looking at historical data and information regarding the particular market, i.e. depending on the energy mix and factors such as weather. 


Merit order decides the devices that get acceptance of a bid. This refers to the fact that bids are ranked by price in order from lowest to highest. When activation occurs, bids are called in merit order until the demand for energy has been met. Cheaper bids with a lower marginal cost of production are more likely to be called than more expensive ones.

Activation versus Reservation

There are two main mechanisms for payment from providing ancillary services, activation, and reservation. Reservation refers to when a power asset is prepared to offer either upward or downward regulation to the energy supply. Upward means producing more energy or consuming less energy and downward means producing less energy or consuming more energy. 

An example of upwards reservation is a power plant that has additional capacity to produce energy but is not currently running. An example might be a combined heat and power station that does not run in summer because there is no requirement for heat energy. In this example, the unit is bid on the ancillary services market as available to produce electricity should the need arise. The unit is able to receive payment for every hour that it is available to provide upward regulation this is called a reservation fee. 

In the auction process, the main goal is to provide a daily or hourly bid - according to the day ahead settlement and emissions allowances. Nano energies use their extensive knowledge of energy markets and trading to bid on the day-ahead markets using a semi-automated system. The goal of the auction is to utilize as much of the portfolio as possible with the highest attainable price. 

Depending on the service offered, activations can be relatively rare. This is especially the case for mFRR. With that in mind, there are many factors that affect Activation occurs based on merit order. The power plants with the lowest cost of activation will be activated first and the rest will be activated in increasing price order. In the example below all the offers to the left of the “requirement” line will be scheduled and all the offers to the right will not be scheduled.

Reserve payment continued: 

In the example below the grid operator would like to procure 20 MW in a given hour. There are 3 power plants, “A”, “B”, and “C” which are able to provide that power based on ascending merit order. 

In the example:

  • A: 10 MW x 100 EUR = 1000 EUR
  • B: 5 MW x 100 EUR = 500 EUR
  • C: 5 MW x 100 EUR = 500 EUR (out of the original 7 which was offered)

Frequency of Activation

As mentioned previously, activation occurs based on the price offered to the TSO. Therefore the rate of activation of a given device can be managed according to the activation price that is bid. However, because flexibility aggregators pool different resources into one single block, the activation price is often a weighted average between different devices. Here is an example: 

There are three devices grouped together into one aggregation block of 5 MW. One 2 MW biogas station, one 2 MW CHP and one 1 MW backup generator:

  • 2 MW Biogas - 50 EUR Activation price
  • 2 MW CHP - 75 EUR Activation price
  • 1 MW Backup Generator - 100 EUR Activation price

The biogas station has a marginal cost of activation of 50 EUR, the CHP has a marginal cost of activation 75 EUR and the Backup generator has a marginal cost of activation 100 EUR.

Weighted average: 

(50 x 40%) + (75 x 40%) + (100 x 20%) = 70 EUR for all 5 MW.

Because the 3 devices need to be combined into one aggregation block, the weighted average gives us the price of activation of 5 MW at 70 EUR. 

Conclusion

The reservation price can be collected from the TSO for every hour that the device has been accepted for reservation and is prepared for activation. Depending on the situation this can be up to 24 hours a day. The activation price is on top of the reservation price and is only awarded when a given device is activated based on the given activation price. In the case where multiple devices are combined into one aggregation group, the weighted average of the activation price is given for the entire group.

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