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DEBUNKING THE MYTH THAT ENERGY MARKETS DON’T REWARD FLEXIBILITY

A couple of years ago hardly anyone was talking about the need for flexibility in power systems. That’s because the common wisdom then was that America’s power grids could handle the surge in renewable sources. Not true anymore. Energy experts, utilities and investors across the spectrum now recognize the growing importance of flexibility in power generation, today and into the future. The problem is: they’re still skeptical about its financial rewards.

They shouldn’t be.

Flexible generation already has a proven track record lowering emissions, raising efficiency and driving down costs . DNV GL, a recognized consultant in the energy sector, analyzed the savings potential and emissions reductions from of flexibility already in 2012 (download on the left). These factors give flexibility a tremendous, if still largely unrecognized, value. What industry leaders now need to understand about flexible power generation is that it not only works—but the sooner and faster they scale up its use, the greater they’ll profit in the transition to more efficient, less polluting power markets.

In the past, gas generation in a given energy market might have run, say, 4,000 hours per year. But with renewables now reducing that amount of required gas production to 2,000 hours, the same gas must earn double the revenue to be profitable. The  investment logic in electricity markets is clear, and flexibility only makes it clearer.

First, investors need strong price signals to calculate their expected return on investment. Second, they need to be able to make money from price spikes with their power generation capacity. And third, they need a profitable and financeable business model that enablesing this to happen.

In the past, gas generation in a given energy market might have run, say, 4,000 hours per year. But with renewables now reducing that amount of required gas production to 2,000 hours, the same gas must earn double the revenue to be profitable. The  investment logic in electricity markets is clear, and flexibility only makes it clearer.

First, investors need strong price signals to calculate their expected return on investment. Second, they need to be able to make money from price spikes with their power generation capacity. And third, they need a profitable and financeable business model that enablesing this to happen.

California is a prime example of a large state with high energy needs that could be generating more efficient, cost-effective energy through better flexible capacity. As the state drives the country’s most aggressive solar market and rapidly increases production of other renewable sources, it is likewise recognizing the urgency to increase its flexibility. That’s because the more renewables California has in the mix, the more emissions and dollars it can save through a quick response energy market—one that enables turning on and off gas production within a five-minute dispatch cycle, compensating for the periods when wind, solar and other renewable power isn’t doing the job.
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   Matti Rautkivi

   Sales & Marketing Director,
   Wärtsilä Energy Solutions
   
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Whereas California previously needed only a few thousand megawatts of flexible gas power capacity, the state’s current robust growth in solar and other renewable sources has put its daily flexibility needs well above 10,000 megawatts, and rising. In this scenario, flexible power generation that uses the best simple cycle electrical efficiency, fast-ramping wide load range, and very good part load efficiency comes at just the right , couldn’t have come at a better time. Now, investors are starting to catch on. 

More visibly successful results are already occurring at Southwest Power Pool, in North Texas and the Midwestern U.S., where recent market reforms that recognize the value of flexibility have translated into higher efficiency and lower costs of energy production—while also providing strong market signals that indicate how similar investments can be made elsewhere.

SPP is the first market in the U.S. where co-optimized energy and ancillary services are dispatched and settled on a five-minute basis. Flexible capacity that is able to react on these five-minute price signals extracts the value from the market, but it also enables more efficient dispatch on the system level. The new market structure in the SPP dramatically changed the operational profile of Smart Power Generation’s gas reciprocating engine technology. The existing plants are operating more often and starting more frequently—which is just the way flexible generation should be working. Still better news: it will lower the overall system operating costs, so everyone wins.

To put all this in perspective, let’s say the price of energy shoots up at a certain moment of the day. If you have flexible capacity, you immediately turn on your gas production generation asset  and catch the price spike. But if you don’t have flexibility, your gas only comes on in 30 minutes or one hour, and by then the price spike is gone—meaning you’ve wasted gas, produced unnecessary emissions, and not made money where you could have.


It would be painful to watch
your 200 MW asset running
as you lose $20,000 during the hour.



Or in another scenario, what if you are operating gas when the price drops close to zero or even negative due to excess renewable generation? Flexible capacity would shut it down—and would actually be making you money doing so—whereas inflexible capacity keeps operating while making a loss. Imagine a case where the electricity price is negative $100/MWh. It would be painful to watch your 200 MW asset running as you lose $20,000 during the hour.

An analysis of first-year results at SPP shows the drastic change in savings/earnings opportunities. Let’s take the case where a utility is looking for 200 MW of new capacity to meet its capacity requirement at SPP. If it goes with the traditional approach and only invests in low capital cost capacity, it will waste almost $18 million annually compared to the savings it would earn from flexible generation (and yes, the investment cost is included for both). Either the utility can invest in flexible generation by itself, or an IPP could build a convincing business case and contract the capacity to the utility. Either way, flexibility is a market winner. 

Where, you ask, do these savings come from? Simply from the ability to react on price signals and operate the plant in a flexible way. A plant needs to run often at part load, and to start more than 1,000 times per year. If it is able to do this, there is money to be made in the market. Contrary to popular myth, the financial value of flexibility is already being recognized in some markets. But it’s still not in others, and this needs to change. Once it’s understood that flexible capacity means higher profits for investors and lower costs of energy for consumers, there will be little rationale for delaying the technology’s expansion.

While flexibility may not have seemed like a smart investment decision just a few years ago, that reality has changed. And as the SPP results show, the industry is now finding itself in a position where it needs to catch up. One way is by learning more about Smart Power Generation technology and studying the real, quantifiable revenue it produces. Then investors, utilities and regulators need to ask: what can we do to reward flexibility so that we encourage rather than discourage its use?  



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INTERESTING? READ MORE ABOUT FLEXIBILITY IN THE USA