Written evidence submitted by APX Group (EDM0027)

Executive Summary

• The efficient and economic inclusion of demand and distributed generation in the existing GB wholesale market is a core challenges and opportunity for the energy industry
• Two core challenges with current initiatives to promote demand side response are whether they provide for an appropriate level of coordination between the different actors and ensure value for money for consumers
• APX is working with market parties to develop new services and products, and to explore whether market arrangements need to evolve, to encourage and facilitate trading of the new sources of flexibility (demand side response and distributed generation)

Introduction to APX Group

1. We believe that we have an important perspective on these issues.  APX operates near to real time markets in the Netherlands, Belgium and the UK. APX is the only Power Exchange in GB currently offering a full range of day-ahead, intraday and OTC services for electricity trading, and it has by far the most members in GB of any organised market. 

2. We have operated in GB since the start of NETA in 2001, and we are also a recognised leader in the process towards European market integration – having played a leading role in all market integration initiatives in the region since our original development of the market coupling concept in 2001.

3. We have recently been working with market parties and other industry bodies such as the Major Energy Users Council (MEUC) to understand how our market arrangements should evolve to facilitate and promote the participation of demand in the GB wholesale market. We are also active participants of Workstream Six of the Ofgem-DECC Smart Grid Forum, as well as the Ofgem Future Trading Arrangements Design Forum – where, amongst other things, the regulatory aspects of demand side response are considered.

APX day-ahead and intraday markets

4. APX UK has been operating power markets in the GB since 2001. APX UK now operates three key markets, the APX Power UK Spot and Prompt markets, where market participants can trade power products which range in duration from 30 minutes to 2 days, and the APX UK Day-Ahead Auction. The table below provides an overview of the products traded on APX Power UK Spot and Prompt markets.

5. The APX UK intraday market is used by market parties to balance their physical position and manage and reduce their exposure to imbalance charges. If for example a generator unit trips unexpectedly, the generator may purchase additional power on APXs intraday market to ensure that it remains balanced.

6. The APX UK intraday market is one of the most liquid intraday markets in Europe and accounts for over 95 per cent of intraday transactions in GB. The APX UK half-hourly intraday price represents the price of electricity immediately before delivery, and as a result, is the price which most accurately reflects real-time supply and demand fundamentals. This is important, because the fundamentals, and therefore the price for power may change quickly.

7. APX price data is also used by Elexon to calculate the Market Index Price which is used in GB cash-out prices to penalise generators and suppliers for being out of balance. The chart below shows the APX’s half-hourly price on the 18 and 19 February 2014.

8. The APX UK Power Auction is a day-ahead auction which closes at 11:00 GMT on the day before delivery. APX first launched a GB day-ahead auction in 2008, which was subsequently re-launched in April 2011, when it was market coupled with the Netherlands via the BritNed Interconnector.

9. Since the go-live of North West European market coupling in February 2014, the APX day-ahead auction has been coupled to the Netherlands via the BritNed interconnector, and to France via N2EX and the IFA interconnector. The APX UK Power Auction allows market participants to submit bids and offers into the auction until gate closure time at 11.00 GMT. A European algorithm (Euphemia) then uses the bids and offers and available transmission capacity to calculate the GB price as part of an interconnected market.

10. To coincide with the launch of NWE market coupling, APX developed and introduced “smart orders” as a new product offering for our members.  This was the first time that smart orders were available to UK market participants in a coupled day-ahead auction. Smart orders enable our members to reflect more accurately the physical constraints of their generation portfolio or demand profile into their bids in the day-ahead auction.

11. This is important as the day-ahead auction is a one shot process where members’ bids are accepted or rejected at a price determined by the auction algorithm. The introduction of smart orders facilitates the participation of demand, storage or aggregators in our day-ahead market.

12. For example, exclusive block orders are orders where at most one block can be accepted within a set of profile block orders. These can, for example, be used for demand management with a programme of load shedding entered into the day-ahead market on the most expensive hours when a price threshold is reached. The use of exclusive block orders enables a demand unit to maximise its potential revenue from participating in the APX UK Day-Ahead Auction, as the algorithm will select the most profitable period for load shedding.

13. As explained below, we have also been working with market participants to explore new products and services that APX could develop to reduce the barriers to demand side participation in the GB wholesale market.

Routes to market for demand side response

14. Demand side response is the ability of a load unit (or distributed generation) to increase or decrease their consumption (or production) of electricity for a specific period of time in response to a signal. This signal can take the form of an instruction or a payment from a Transmission or Distribution System Operator – as a service to manage issues with energy balancing or constraints and seek to ensure security of supply – or the signal can be the wholesale market price.

15. Currently there are a number of initiatives to encourage demand to respond to an instruction or a price from a TSO or DNO. These include STOR, Fast Response, Frequency Response, Demand Side Balancing Reserve, the proposed Capacity Mechanism and a number of contracts which are being developed by DNOs to promote demand side response to deal with specific constraint issues and avoid the cost of having to reinforce their networks. These contracts are designed to ensure security of supply and reduce the cost of managing constraints in the GB transmission and distribution networks.

16. Demand Side Response is also an important component of an efficient wholesale market. Demand could respond to price signals in either the APX UK Day-Ahead Auction (with hourly prices that are day-ahead) or the APX UK Prompt Markets (with half-hourly prices that are intraday). We see merit in the Government or regulator also seeking to encouraging initiatives which promote demand side resources, such as demand response, to participate in the wholesale market.

17. There are two core challenges with the current services being developed to promote GB demand side response. The first challenge is the limited coordination between the TSO, DNO and suppliers in developing the services and transparency of any demand side action. This creates a number of risks, including that any action by the TSO or DNO may put the supplier out of balance, or that a combination of the TSO, DNO and supplier may simultaneously call on the same demand unit (or distributed generation) for response. There is a question whether the current mechanisms allow for buyers of Demand Side Response (TSOs, DNOs and market participants) to be matched at an efficient and fair price with providers of Demand Side Response.

18. The second core challenge is to ensure value for money for consumers in developing such initiatives, particularly given the number of potentially overlapping initiatives, and that the current day-ahead baseload price for power in GB is approximately £35/MWh. To minimise implementation costs, any new mechanism should be compatible and consistent with existing market arrangements.

19. We believe that a cost efficient approach to promote demand side response is a market based, inclusive and coordinated mechanism for the procurement of demand side response (and distributed generation). This could be based on localised markets, where TSOs, DNOs and market participants may “compete” to offer and request demand side response in a coordinated and robust environment. Recent studies have shown that the benefits of a more coordinated and market based approach are likely to outweigh the costs.

20. Such an approach may also go some way to meet the requirement in the European Energy Efficiency Directive (2012/27/EU) that Member States ensure that national energy regulatory authorities encourage demand side resources, such as demand response, to participate alongside supply in the wholesale and retail market. We believe that there is merit in considering initiatives to promote participation of demand side resources in the wholesale market.

APX initiatives to facilitate demand side response in the wholesale market

21. APX are working on two initiatives to promote the participation of demand side response (and distributed generation) in the wholesale market.

Facilitating demand side participation in the GB wholesale market

22. We have been working with GB market participants and MEUC to develop a new service to reduce barriers and costs for I&C Customers (and distributed generation) to actively participate in the GB wholesale market.  

23. The new service provides I&C Customers with direct access to APX day-ahead and intraday markets. The new service works by APX creating a ring-fenced account, called a Position Account, for each participating I&C Customer. The Position Account is ring-fenced and sits within the Trading Account of the I&C Customer’s supplier. The Position Account provides the I&C Customer with direct access to APX’s day-ahead and intraday markets and allows the I&C Customer to buy and sell power in real time.

24. The Position Account would provide an I&C Customer with access to real time information on power prices in both APXs day-ahead and intraday markets and allows the I&C Customer to buy and sell clip sizes as small as 0.1MWh. To access the wholesale market the I&C Customer does not need to sign-up to GB electricity industry codes, post additional collateral or pay APX’s full membership fee. As a result the new service reduces the cost to I&C Customers of direct access to the GB wholesale market.

25. By participating in the GB wholesale market I&C customers may be able to reduce their overall cost of energy procurement; realise the full value of its flexibility, by directly offering that flexibility into the GB wholesale market; and, benefit from developing a better understanding of the GB wholesale market and the underlying prices.

26. The new service represents an efficient and effective solution for encouraging greater demand side participation in the GB wholesale market. It builds on the existing contractual and service relationship between suppliers, aggregators and I&C customers and sits within existing GB Trading, settlement and clearing systems. Unlike many other solutions, it is also compatible with the existing balance responsibility of the supplier. This is because the suppliers balancing position is automatically adjusted when an I&C customer buys or sells power via the Position Account.

Developing flexibility markets

27. The service explained above can be implemented relatively quickly. At the same time APX Group is undertaking more forward looking work to understand how market arrangements may need to evolve to facilitate and promote trading of new flexible resources – such as demand side response and distributed generation.

28. In developing new market arrangements, we consider the following high-level objectives as important. Any new market arrangements should:

1. encourage the development of new flexibility sources and local demand side participation;
2. ensure that the interests of consumers (or prosumers) are placed at the heart of the new arrangements
3. ensure the best use of the available flexibility resources by different actors in the market (TSOs, DNOs, suppliers, aggregators) by enabling economically efficient use;
4. enable the DNO and TSO to use the flexibility resources to support system operation, market based constraint management and security of supply; and
5. limit the impact on existing arrangements, thereby require minimum changes to existing systems and current responsibilities.

29. One potential solution is the development of a flexibility platform. Such a platform could facilitate access to wholesale energy markets for decentralised generation and demand, enable the market to optimally match supply and demand while taking into consideration network constraints, and give the TSO and DNOs the ability to solve network constraints in a market-based way.

July 2014