Electricity market reforms for procurement of ancillary services can deliver economic benefits: Joint study between Wärtsilä and KPMG

Hyderabad: The technology group Wärtsilä and KPMG, a leading consultancy firm, recently unveiled a joint study on the current status of the ancillary services market in India along with recommendations. The study demonstrates that supply-side flexibility is needed at the pan India level for an efficient and cost-effective integration of 450 GW of renewables by 2030. However, a step change is required in the way ancillary services markets are procured and markets are structured in India.. Moreover, the pricing of ancillary services should also encourage investments in the desired flexible generation technologies. The study suggests that India’s power grid could benefit immensely by jointly procuring the energy and ancillary services (co-optimized) in the same day-ahead and real time market, while tightening resource adequacy rules.

Managing India’s power system is becoming increasingly complex as its resource mix includes more weather-dependent and decentralized energy sources. To deal with such complexity, the system operator needs greater operational flexibility in order to reliably serve the load, which means an increased need for ancillary services to keep the grid stable. Modeling some renewable-rich states, such as Gujarat, Tamil Nadu, and Rajasthan, validates the need for additional operational flexibility at the state level. The state-level analysis reveals that the addition of 1000 MW of thermal balancing power plants, together with 500 MW 4-hour of battery storage in the electricity mix in each state, even in 2021, optimizes the existing power plants’ dispatch for better efficiency, lower O&M costs, and reduced renewable curtailment. This results in cost savings of at-least 3.2 – 7 cr per day for each modeled state. Thermal balancing plants have the capability to achieve 100 percent loading in less than 5 minutes.

In India, ancillary services have historically been delivered by identified thermal power plants. However, some of the recent changes proposed by the regulatory commission indicate further liberalizing of this market segment by encouraging other participants to offer ancillary services. India’s policymakers, regulators, and industry experts are convinced that energy and ancillary services markets require reforms in response to the changing resource mix and load profiles.

Commenting on the study, Mr. Sandeep Sarin, Head – Market Development and Policy, Wärtsilä India, said, “Given how our power market is structured today, we need to ensure that our grid is equipped to integrate 450 GW of renewables by 2030. We need more resources such as thermal balancing power plants, as well as battery storage to manage system imbalances caused by the intermittency of renewables, and to support the grid during periods of renewables drought. Apart from Solar and Wind, the Government should focus on changing the way our power market is structured to offer enough incentives for investments in flexible technologies. The joint study Electricity market design for efficient procurement of ancillary services in India to address changing system needs by Wartsila and KPMG makes a case for power market reforms in India using power system simulation models.”

Dr. Puneet Chitkara, Executive Director ITA-Lighthouse, KPMG said “COP 26 commitments can be met if India consistently adds at least 35 GW of RE capacity annually, duly supported by at least 2500 MWhr of battery storage systems. As RE, especially solar, penetration increases, the role of flexible thermal balancers becomes critical – these plants will need to be completely shut down at least two times a day. With such a plan, the need for new coal fired capacities beyond those that have already been planned, is completely obviated. Even today, if RE states contract BESS and thermal balancing resources, the cost of reliably operating the state power system, without inviting high DSM charges, can reduce by up to INR 7 Crore / day. Curtailment of RE resources also reduces considerably. The opportunity value of storage and gas based ancillary reserves is huge. When MBED is implemented, these technologies will attract even better revenue streams. The steps taken by MoP and CERC are very timely and their scope can be further expanded to help the Indian power system to transition from a coal-centric to a RE-centric power system.”

The study’s key findings include:

• The current market’s design and structure need to be further enhanced to manage imbalances efficiently at the state boundary. Efficient market design where energy and ancillary services are co-optimized will encourage investments in flexible resources for imbalance management.

• Even with large balancing areas facilitated by the MBED mechanism, investment in flexible assets is required to achieve reliable grids.

• The study demonstrates that India’s power system would not require any new coal fired power plants to be commissioned beyond the planned ones, to meet a 340 GW peak demand:

1. a)India’s power grid could immensely benefit from using both internal combustion gas engines (ICE) and battery storage for meeting the flexibility requirements. The results indicate that by 2030 India would need 38 GW of four-hour battery storage and 9 GW of ICE (thermal balancing power plants) for the cost-efficient and reliable integration of 450 GW of renewables.

2030. b)More than 35 GW of wind and solar capacities should be consistently added annually between now and 2030.

• Higher flexibility reduces the cost of power in the system by enabling the full dispatch of low-cost generators, while at the same time ensuring grid resilience.

• Resource adequacy needs a clear definition, and state utilities need to have a resource adequacy plan. Capacity payments will be key for attracting the right resources. Centralized or regional procurement helps lower costs.

• Co-optimization of the energy and ancillary services market is more efficient than separate markets for energy and ancillary services.