Paying Someone for Not Using a Resource is a Bad Idea

When organizations are putting significant effort in innovations and pilot projects and as scientists we have our doubts about the theoretical foundations of the new approach, I strongly believe it is our obligation to warn those organizations. Of course this is particularly the case if these are governmental organizations that are spending tax payers’ money. Laurens de Vries and I gave such a warning early last week by submitting an opinion article to Energeia on the “Failure of Flex Markets” (in Dutch, free to read until November 25, 2017).

A number of the Dutch (electricity) network operators have joined forces to use flexible demand to prevent costly reinforcements of the network. I think this is a really good objective: we expect more electricity use in the grid because of (for example) heat pumps, electric cars and solar panels, and with the old custom of scaling the network to the worst case, very costly reinforcements of the network may seem necessary. However, in some of areas an overload of the network will only be for a few hours, and only for a few times a year. In such cases, it may not be economical to reinforce the network. The alternative is to coordinate some of these loads: shifting them in time to prevent the congestion. The owners of loads that allow for this can then receive some compensation.

The problem that we discussed in our opinion article is that this situation cannot be seen in isolation: owners of flexible loads can (and some already are) monetizing this flexibility by trading in electricity markets. For example, currently there is significant value for flexibility in the (Dutch) imbalance market, and also in the long run and internationally there will be value for flexible demand, because of the change to intermittent power generation such as from wind, and the physical requirement that electrical supply and demand must be in balance at all times.

Typically the owners of flexible loads do not trade directly themselves, but hand over part of the control to a so-called aggregator: an electricity trading company with the objective of making the best use of this flexibility. Such aggregators will happily trade this flexibility with network operators at the right price. The consequence of this is that this price needs to be at least the amount that can be earned in the electricity markets.

This, however, may lead to significant problems in the long run: such an additional source of profit will draw more flexible electrical loads to a congested area. These loads will then all shift simultaneously to the moments where the most profit can be made in the electricity markets, leading to additional moments of congestion, and the network operator then needs to compensate all loads above the capacity.

We conclude in our opinion article that using a flexibility market to resolve congestion is not sustainable: it is like the idea of paying people for not using the highway during peak hours. The operator of the infrastructure is paying users for not doing something, and is thereby creating a market where an increase in supply (of flexibility) leads to an increase in costs for the buyer (the network operator), instead of the regular (stabilizing) property of markets that an increase in supply leads to lower costs for the buyer.

Flexibility is thus not the appropriate good to be traded in a market to solve congestion. The scarce good here is in fact the network capacity. By having consumers pay a dynamic and localized price for their momentary network use, this price can be used to keep consumption within the network capacity (Philipsen et al., 2016). However, it is still an open question of how to arrange this in the most efficient way. A very interesting multi-party optimization problem!

Laurens and I are happy to work on such interesting problems together. We would like to thank a few people and companies that made this possible. First, we are co-supervising the PhD project by Rens Philipsen (since October 2014) on market design for distribution systems within the GCP project. Also, in the beginning of this year (2017) Irma Stegmann started her master’s thesis project at an aggregator, i.e., the company Jedlix with Laurens as supervisor. The topic of her thesis is “Flexibility trading for aggregators of electrical vehicles within the Universal Smart Energy Framework” (USEF). Around the same time we started a project with this company on Future-proof Flexible Charging, where we investigate how to optimize the use of flexibility in charging electric vehicles, also in the context of USEF. Finally, we were invited by Liander for a Klankbordgroep called DYNAMO on the development of a market for flexibility. Discussing with all of us helped us to shape our opinion. Thank you all for these collaborations!

Picture by Kārlis Dambrāns Licence: CC BY 2.0: https://creativecommons.org/licenses/by/2.0/

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