INTERVIEW: Piclo pursues rapid gains in longer-term power market reform

Rapid trialing and adoption of local constraint and flexibility markets in the UK will lead to de facto regional and nodal power pricing in specific areas years ahead of similar reforms proposed at national wholesale level, Piclo's Policy and Market Strategy Director Matthew Billson told S&P Global Commodity Insights in an interview Aug. 21.

One of the most ambitious proposals under the government's REMA electricity market reform process is a move to locational marginal pricing in the wholesale power market.

Uniting diverse stakeholders on the benefits of this, however, is proving to be extremely difficult.

"We need to see beyond the challenges posed by REMA," Billson said.

This is particularly the case on locational pricing, enthusiastically promoted by National Grid ESO but treated with skepticism by politicians wary of picking regional winners and losers.

"Realistically we won't see policy change [as a result of REMA] coming in until 2028, maybe 2029," Billson said. "And the worry is that we'll see a sort of policy paralysis on some of the big steps."

He was much more positive, however, on the potential of smaller projects to galvanize "rapid incremental change" at regional level.

An example is the current trialing of a local constraint market by National Grid ESO. Piclo has been brought in to host the market on its platform.

"As it covers Scotland, the constraint market will send a de facto zonal market signal. I like the approach that if it works, you go all in with it," Billson said.

DSO flexibility auctions, meanwhile, are already sending a de facto nodal pricing signal down to substation level.

These small victories might not have the same theoretical impact as locational pricing in the wholesale market, "but it's a pragmatic way to roll out a pricing signal," he said.

UK Electricity Network Commissioner Nick Winser agrees, his Aug. 4 report to government recommending new short- and long-term regional flexibility markets.

"Urgent development of zonal flexibility markets and new, more encouraging, planning and operation rules will reduce transmission investment costs and provide valuable opportunities to deploy more renewables earlier," Winser said.

Auction volumes grow

Piclo provides flexibility services in six countries (the UK, Ireland, Italy, Portugal, Lithuania and the US/New York State), procuring the services via auctions on its Piclo Flex marketplace.

The biggest, most mature market for this kind of procurement is in the UK, where Piclo has relationships with four of country's six distribution network operators, plus National Grid ESO. In July Northern Powergrid was the latest DNO to sign up to the platform.

The platform has 16 GW registered across 55,000 individual assets, ranging from home batteries, EV charge point to utility scale batteries, CHP units and industrial autogenerators -- a mix of generation and demand response.

To date, it has helped deliver GBP60 million of contract awards with 1.1 GW of flex capacity procured.

This autumn UK DNOs will be holding the latest auctions on the platform, potentially amounting to tens of millions of pounds worth of flexibility contracts.

"These are long-term markets where DNOs forecast what flexibility they need up to five years ahead," Billson said. "The auctions we are running now will typically be for flexibility they will use next year and up until 2028."

And from this autumn, as well as day-ahead and intraday markets Piclo runs for National Grid ESO, "we expect the DNOs to also start using shorter term competitions," he said.

As experience grows so the size of auction volumes increases, from a maximum 200 MW four years ago to several hundred megawatts now.

"We call it the flywheel effect. System operators are more confident and so put more procurement through the platform," Billson said. "At the same time, asset owners see there's a bigger prize here and are more familiar with how to price their flexibility, driving liquidity in the market."

The company anticipates a similar evolution in, for example, Portugal, where the platform went live earlier this year.

"It's the first time they've run something like a flexibility market -- all the stakeholders are learning. That is the typical pattern we see in new markets. The regulator and government feel flexibility is important. They encourage local distribution networks to think more about it. They test the water with a small-scale flex market, which then starts to grow. We're seeing this happening across Europe, reinforced by the EU's electricity market design reform," he said.

Controls and reform

Billson was positive on the UK's latest distribution network price control, RIIO-ED-2, saying the move from network to system operator had sharpened the focus on flexibility for the five-year control to end-March 2028.

"Ofgem is encouraging DNOs to have a more standard way of procuring flexibility, which will help overall liquidity and ease access to the market," he said, noting the Electricity Networks Association was finalizing a standardized contract to bring comparability across DNO regions.

REMA, meanwhile, is looking at the broader principle of how to support flexibility in energy markets, not just local DSO markets.

"This is about revenue stacking -- how you make it easier for a battery asset to participate in multiple subsets of the overall electricity market, whether its wholesale, ancillary services, balancing mechanism, local DSO auctions or a local constraint market," Billson said.

This last option has been launched by National Grid ESO, using Piclo's platform.

"Local constraint markets will sit alongside the balancing mechanism. The ESO is trying something different here, and the other innovative step is to use Piclo as an external market platform [to run a first market in Scotland]," he said.

With UK battery additions reaching new heights this year, meanwhile, Billson said the market framework needed to catch up with the appetite to invest.

The government's Renewable Energy Planning Database, updated Aug. 8, shows 2.64 GW of battery capacity in construction, including Zenobe's 300 MW Blackhillock project, Tribus' 250-MW Lapwing Fen project and Cleve Hill Solar's 150-MW co-located battery project.

"The UK needs to evolve the wider market structures. You're seeing prices for ancillary services going down, which is great for consumers, but there could be a risk that, as in the wind sector, projects are paused because developers can't see the revenues they need," he said.