4 August 2011 JSS-MIC/BTV Energinet.dk’s ancillary services strategy Doc. No. 77566/11 v1, Case No. 10/5553 1/33 Contents 1. Introduction and summary..................................3 2. Framework conditions.........................................4 2.1 Legislation..........................................................................4 2.2 International agreements......................................................5 2.3 Stakeholders.......................................................................6 3. Development trends............................................7 3.1 International trends.............................................................7 3.2 National trends in the longer term........................................11 3.3 Technological trends in the longer term.................................11 4. Frequency-controlled reserves..........................12 4.1 Frequency-controlled reserves today.....................................12 4.2 Strategy for frequency-controlled reserves............................14 5. Secondary reserves...........................................18 5.1 Secondary reserves today...................................................18 5.2 Secondary reserves strategy ...............................................19 6. Manual reserves and regulating power .............23 6.1 Manual reserves and regulating power today..........................23 6.2 Strategy for manual reserves and regulating power................25 7. Properties required to maintain power system stability.............................................................29 7.1 Properties required to maintain power system stability – today.30 7.2 Strategy for properties required to maintain power system stability............................................................................31 8. Player involvement ...........................................33 8.1 Involvement of players in drawing up the strategy..................33 8.2 Involvement of players in implementing the strategy..............33 Doc. No. 77566/11 v1, Case No. 10/5553 2/33 1. Introduction and summary As the party responsible for ensuring security of supply in the short and long term, Energinet.dk is dependent on having clear objectives with regard to ancillary services, for example; an area that is currently the subject of a great deal of attention and development – both nationally and internationally. It has therefore proved necessary for Energinet.dk to clarify its strategy for achieving those objectives. The Danish Energy Regulatory Authority has therefore asked Energinet.dk to explain its ancillary services strategy. Publishing the strategy in this way is intended to help market players and other stakeholders to make their decisions on an informed basis and ensure that the players are also involved more in fleshing out the strategy. This memorandum presents Energinet.dk’s ancillary services strategy. Overall, the main element in the ancillary services strategy is to gain access to the necessary control resources via larger markets where there is fair, effective competition, while ensuring greater sales opportunities for Danish suppliers. Increased internationalisation will be an important means of achieving this. Increased internationalisation of the ancillary services markets is a natural consequence of the energy markets becoming more internationalised in recent years, with the markets now extending across most of western Europe. This internationalisation of ancillary services will be a key element in order for Energinet.dk to meet its overall objectives given the framework conditions in which the enterprise operates. The strategy has been drawn up for the period 2011-2015, but also contains objectives for the period up to 2020. The overall objectives in the strategy are as follows: - Achieving common markets for frequency-controlled reserves in the synchronous areas. The specific objective is to become part of joint German cooperation on the procurement of primary reserves, and for Eastern Denmark’s frequency-controlled reserves to be purchased on a common market for Swedish and Danish players. - Establishing larger markets for activating secondary reserves through cooperation with the German and Nordic TSOs. Initially, such cooperation will involve the avoidance of counter activation of reserves between neighbouring areas and subsequently the activation of Danish secondary reserves to cover imbalances in Germany. - Ensuring broader product definitions in the regulating power market enabling all available resources to participate. - Establishing an international regulating power market. Initially, the aim is to quickly start trading regulating power (ie existing national/regional products) across the border to Germany with a minimum of harmonisation. In the longer term, the aim is to have a common (harmonised) regulating power market on a par with the spot and intraday markets. - Sharing manual reserves over larger geographical areas (nationally and regionally). To begin with, Energinet.dk will analyse the possibility of for and Doc. No. 77566/11 v1, Case No. 10/5553 3/33 the potential in regarding Denmark as one single area and then look at the possibilities offered by sharing reserves internationally. - Integrating properties required to maintain power system stability into the power grid when economically viable. Tender rounds will generally be used to qualify the decision-making process. - Continuously involving players in strategy implementation and follow-up – through player meetings, for example. The specific objectives and initiatives are described in the following chapters. Chapter 2 examines the framework conditions for ancillary services in the form of legislation and international agreements. Chapter 3 describes development trends of importance to the future power system based on a breakdown of international, national and technological trends. Chapters 4-7 describe Energinet.dk’s strategic objectives – broken down into the following four sub- areas: - Frequency-controlled reserves - Secondary reserves - Manual reserves and regulating power - Properties required to maintain power system stability. Chapter 8 deals with player involvement – not only in connection with drawing up the strategy, but also when it comes to Energinet.dk’s objective of involving players in implementation. 2. Framework conditions 2.1 Legislation Section 1 of the Danish Electricity Supply Act stipulates that "the country's electricity supply is to be organised and implemented in accordance with consideration for security of supply, the national economy, the environment and consumer protection. Within this objective, the Act is to ensure that consumers have access to inexpensive electricity and continue to have influence on the administration of the electricity sector’s assets.” The Act is "in particular to promote sustainable energy use, including through energy savings and the use of CHP (combined heat and power), as well as renewable and environmentally friendly energy sources, while also ensuring the efficient use of financial resources and creating competition in markets for generation and trade in electricity.” As the transmission system operator (TSO), Energinet.dk is responsible for ensuring security of supply in Denmark and must in order to fulfil this duty among other things "maintain the technical quality and balance of the interconnected electricity-supply system.” (Section 27a of the Danish Electricity Supply Act). As regards the purchase of ancillary services with a view to ensuring security of supply, the overall focus of Energinet.dk’s strategy is on the following factors: Doc. No. 77566/11 v1, Case No. 10/5553 4/33 - Focus on the national economy ensures that the social costs of maintaining security of supply at a given level are as low as possible - Efficiency in the provision of ancillary services through continuous optimisation of the procurement process ensures that electricity consumers receive the services necessary at the lowest possible price - Open, international markets for ancillary services promote competition, innovation, and access to foreign markets for Danish producers - Increasing volumes of renewable energy will change the need for and supply of ancillary services. These factors are, among other things, based on the legislative framework governing Energinet.dk. Section 28(3) of the Electricity Supply Act stipulates that Energinet.dk is to "co- operate with transmission system operators in other countries to establish mutual, equivalent principles for electricity supply as well as for grid tariffs, grid access, transit, market issues etc., co-ordination of interconnectors (including the handling of balance and capacity problems) and to enter into any joint system operation agreements necessary in order to ensure that the benefits of interconnected systems are exploited.” Section 31 stipulates that "when carrying out its tasks Energinet.dk is to contribute to ensuring that the best possible conditions are established for competition in the markets for generation and trade in electricity.” According to section 2 of the Act on Energinet.dk, Energinet.dk's objective is to "ensure the efficient operation and expansion of the main electricity and gas infrastructure and to ensure open, equal access for all users of the grids.” 2.2 International agreements The requirements for ancillary services are regulated in the cooperation agreements that Energinet.dk has concluded with other TSOs. As Denmark is the only country in Europe to belong to two synchronous areas, the Continental synchronous area and the Nordic synchronous area, different requirements apply in Western Denmark (DK1) and Eastern Denmark (DK2), respectively. Western Denmark used to be a member of the UCTE (Union for the Co- ordination of Electricity Transmission) and therefore subject to the UCTE’s current requirements. Denmark as a whole was historically part of Nordel, the Nordic cooperation on system operation, and both Eastern and Western Denmark are subject to the requirements described in the Nordic System Operation Agreement. Because of its simultaneous membership of the UCTE, Western Denmark is, however, exempt from some of the obligations with regard to automatic reserves. With effect from 2009, the European Network of Transmission System Operators for Electricity (ENTSO-E) was set up as part of the EU’s liberalisation of the European power system. The new organisation took over all operational duties from the six existing TSO organisations, including the UCTE and Nordel. Doc. No. 77566/11 v1, Case No. 10/5553 5/33 2.2.1 Operation Handbook ENTSO-E RG Continental Europe’s Operation Handbook - Policy 1 (Operation Handbook) describes the requirements to be met by the areas in the Continental synchronous area. The requirements differentiate between three types of reserve, primary, secondary and tertiary, the latter being manual, and the first two being automatic. According to the Operation Handbook for DK1, the HVDC connections between DK1 and the Nordic Synchronous System, Konti-Skan, Skagerrak and the Great Belt Power Link are regarded as either production or consumption units, depending on their operational status. Western Denmark is not an independent control area, but is a part of TenneT GmbH’s control area under the bilateral agreement between Energinet.dk and TenneT GmbH. However, Western Denmark acts as if it were an independent control area in accordance with the aforementioned agreement, which describes Energinet.dk’s obligations in relation to TenneT. 2.2.2 Nordic System Operation Agreement The requirements applying to the Nordic synchronous area are described in the Nordic System Operation Agreement of 2006, in which binding reserve requirements are described in operating regulations. A distinction is made between manual and automatic reserves in the Nordic region. Automatic reserves are divided into frequency-controlled normal operation reserves (FNR), frequency-controlled disturbance reserves (FDR) and voltage-controlled disturbance reserves (there are no requirements regarding the latter in Denmark). Manual reserves are divided into slow and fast reserves. No slow reserves are purchased in Western Denmark. HVDC connections are regarded as production capacity in the Nordic region. The TSOs for the individual HVDC cables are only responsible for restoring normal operation in their own subsystem following cable outages or the use of emergency power. In other words, TSOs do not have to hold reserves for export (downward regulation). Chapters 4-6 elaborate on the requirements for the individual types of reserves in both the Nordic and the European systems. 2.3 Stakeholders As is evident from the above, Energinet.dk cannot drive forward the development in all areas on its own as there are many other stakeholders. Implementation of the strategic objectives is dependent on international agreements and approval by the authorities. Development will therefore have to take the form of teamwork between the various stakeholders as illustrated in the figure below: Doc. No. 77566/11 v1, Case No. 10/5553 6/33 AAuutthhoorriittiieess  DDaanniisshh EEnneerrggyy AAggeennccyy  DDaanniisshh EEnneerrggyy RReegguullaattoorryy AAuutthhoorriittyy  CCoommppeettiittiioonn aauutthhoorriittiieess  RReegguullaattoorrss iinn nneeiigghhbboouurriinngg ccoouunnttrriieess TTSSOOss ((bbiillaatteerraall)) EENNTTSSOO--EE ((mmuullttiillaatteerraall))  SSvveennsskkaa KKrraaffttnnäätt  RRGG NNoorrddiicc EEnneerrggiinneett..ddkk  SSttaattnneetttt  TTeennnneeTT  RRGG CCoonnttiinneennttaall EEuurrooppee  FFiinnggrriidd  5500HHeerrttzz DDaanniisshh ppllaayyeerrss Figure 1: Energinet.dk stakeholders 3. Development trends The legislation mentioned in chapter 2 and international requirements are just one element in the framework conditions that govern Energinet.dk's work. Some development trends will also be of significance to the Danish power system. Development trends can be divided into three groups: - International - National - Technological. These topics are described in brief below. 3.1 International trends As mentioned earlier, Denmark is subject to European operational standards, and changes to these will therefore also have an impact on Danish conditions. The continued infrastructure expansion also significantly affects Danish conditions. Currently, three international trends in particular are expected to be of significance to Danish conditions: - Harmonisation of operational standards in ENTSO-E - The Nordic frequency analysis - Use of international connections. These three trends are described in brief below. 3.1.1 Harmonisation of operational standards in ENTSO-E In ENTSO-E, work is being done to harmonise the current system operation agreements concluded by the six former TSOs. The current system operation agreements will remain in force until this work is complete. Among other things, the work is aimed at establishing uniform definitions of reserves across the synchronous areas. The following types of reserves are being used for the time being: Doc. No. 77566/11 v1, Case No. 10/5553 7/33 - Frequency containment reserves (FCR) - a reserve that stabilises the frequency in the event of frequency deviations - Frequency restoration reserves (FRR) - an automatic or manual reserve that restores the frequency to 50 Hz - Replacement reserve - a manual reserve that releases the other two reserves. Energinet.dk expects common reserve definitions in ENTSO-E to be ready by summer 2012, with the quantitative requirements and market terms being known by the end of 2013. It is also expected that Energinet.dk’s present reserve definitions can be accommodated within the common definitions that are being drawn up. In connection with this work, principles for cross-border trade in reserves are also being prepared. 3.1.2 The Nordic frequency analysis Frequency quality in the Nordic synchronous area has deteriorated in recent years. A review has therefore been initiated under Nordic auspices with the aim of analysing the reasons for the poor frequency quality and coming up with proposals for improving the situation, including a reassessment of the present requirements for ancillary services. Energinet.dk is involved in this work. The first stage of the work will focus on analysing and describing factors affecting frequency in the Nordic system with a view to better understanding the poor frequency quality. The next stage of the work will focus on proposing a specification and dimensioning for a (new) automatic reserve, including looking at the interaction between the other frequency and balancing activities. The outcome of the work remains uncertain, but the results may affect the requirements for automatic reserves, which could potentially change the present arrangements in the Nordic System Operation Agreement. The analysis is therefore part of Energinet.dk’s framework conditions. An open player workshop will be held in September 2011 where the results of the work will be presented to stakeholders. Energinet.dk will also involve players in the course of its work to identify technical solutions, including canvassing input and presenting interim conclusions to players. 3.1.3 Use of international interconnectors One of the other international factors of great importance is the expansion of infrastructure, especially international interconnectors. A number of interconnectors are planned in addition to those already in existence. Specifically, work has been launched to reinforce the AC interconnector on the Jutland-German border and to construct a new HVDC connection across the Skagerrak, which is expected to be in operation by the end of 2014. In addition to the projects already in progress, a number of projects are being investigated, including Cobracable with 700 MW of capacity between the Netherlands and Jutland, Kriegers Flak with 600 MW in a cable grid between Doc. No. 77566/11 v1, Case No. 10/5553 8/33 Germany and Zealand, and a new 400 kV interconnector from Zealand to southern Sweden to replace the 132 kV Øresund cables, which are expected to have a limited residual life. Analyses of a further interconnector between Eastern and Western Denmark are also being prepared. Both existing and planned interconnectors are shown in Figure 2: Norway Existing interconnectors Being investigated Skagerra k Decided 1,2&3 Skagerrak 4 Konti-Skan 1&2 Sweden Kassø-Tjele Øresund DK1-DK2 The Great Belt Øresund 2 COBRAcable Kriegers Flak Kontek Germany Figure 2: Existing and planned interconnectors International interconnectors will be an important element in integrating the large volumes of renewable energy that are planned for the future. Better- developed infrastructure will allow greater market integration as well as balancing and sharing of reserves over larger areas. Greater integration of the markets will mean increased opportunities for releasing capacity from international interconnectors to markets other than the spot market, eg regulating power and reserve capacity markets. The international interconnectors are not a goal in themselves, but a means of ensuring an efficient power system and market. Economics is the driving factor when Energinet.dk establishes new international interconnectors. Economic principles require resources to be exploited efficiently. The efficient exploitation of resources involves looking at all the potential uses of the technology. In the case of international interconnectors it is necessary to analyse on all the markets to which capacity could be released, including the spot and reserve capacity markets. Doc. No. 77566/11 v1, Case No. 10/5553 9/33 Energinet.dk will basically make all the capacity on the international interconnectors available to the markets. Transmission capacity must be allocated to the various marketplaces in such a way as to maximise the economic benefits, while maximum use must be made of the transmission capacities, but only as long as security of supply is not compromised or the infrastructure subjected to inappropriate wear and tear. That is why short-term overload capacity is not allocated to the spot or intraday markets. Releasing capacity to the spot market has largely been the optimum solution until now, but as Denmark becomes more integrated with the outside world, the optimum solution from an economic viewpoint will presumably be to utilise some capacity for other markets, including the reserve capacity markets. The reason for this is what is known as the declining marginal revenue of releasing capacity from international interconnectors to the spot market. If economic benefits could be derived from allocating transmission capacity to markets other than the spot and intraday markets – eg a reserves market – Energinet.dk would seek approval from the Danish Energy Regulatory Authority to reserve transmission capacity for such markets. Using the international interconnectors for the reserve capacity markets will presumably be the optimum solution in more cases in future because the greatest economic advantages of trading in the spot market have already been realised. Figure 3 illustrates the principle of dividing capacity between the reserves market and the spot market. MMaarrggiinnaall rreevveennuuee ffrroomm MMaarrggiinnaall rreevveennuuee ffrroomm ccaappaacciittyy aallllooccaatteedd ttoo ccaappaacciittyy rreesseerrvveedd ffoorr ssppoott mmaarrkkeett aanncciillllaarryy sseerrvviicceess OOppttiimmuumm aallllooccaattiioonn CCaappaacciittyy aallllooccaatteedd ttoo tthhee ssppoott mmaarrkkeett CCaappaacciittyy rreesseerrvveedd ffoorr aanncciillllaarryy sseerrvviicceess Figure 3: Illustration of optimum use of interconnectors ENTSO-E is drafting proposals for simple, transparent principles for calculating the economics of reserving capacity for reserves on interconnectors. They are expected to accord with Energinet.dk’s current principles as illustrated in the above figure. In future, Energinet.dk will ensure greater transparency with regard to the economic assessments that form the basis of investment decisions, thus also in connection with the establishment of international interconnectors. Doc. No. 77566/11 v1, Case No. 10/5553 10/33