Reserve Review Pre Consultation Document

Reserve Review
Procuring Reserve for the next decade and

beyond
Pre-Consultation Document
July 2010
Table of Contents
Introduction ............................................................................................................. 6
Background ............................................................................................................. 6
Reserve: An Overview ......................................................................................... 6
Market Provided Services ................................................................................... 8
2020 Targets......................................................................................................... 9
Impact of the LCPD Directive............................................................................ 10
Interaction with the ARORA Project ................................................................. 12
Objective of the Project ........................................................................................ 14
Project Structure ................................................................................................... 14
Workstream 1: Near-Term Reserve Developments ......................................... 15
Workstream 2: Longer-Term Reserve Developments ..................................... 16
Detailed Project Aims ........................................................................................... 17
Scope.................................................................................................................. 17
Workstream 1: Near-Term Challenges: ............................................................ 17
Workstream 1A: STOR Review...................................................................... 17
Workstream 1B: BM Start-Up Review ........................................................... 20
Workstream 1C: Downward Regulation / Negative Reserve Review .......... 21
Workstream 1D: Reserve Costs and Imbalance Pricing.............................. 22
Workstream 2: Longer Term Challenges ......................................................... 25
Reserve Requirements to 2020 and beyond................................................. 25
Drivers of Operational and Market Behaviour in 2020................................. 26
Potential New Reserve Technologies ........................................................... 26
Impact of UK and EU Regulatory changes upon the GB Reserve Market .. 27
Project Timetable .................................................................................................. 30
Appendix A: STOR Tender Round Calendar 2010/11 ......................................... 32
Page 2 of 32Page 2 of 32
Executive Summary
National Grid’s recent “Operating the Transmission Networks in 2020“ consultations and the
recently published “Future Balancing Services Requirement Statements” show that there are
clear upward drivers behind the volumes of balancing services, predominantly reserve and
response, likely to be required by National Grid as we move forward to 2020 and beyond. At
a high level these drivers are:
• Increasing volumes of variable generation connecting to the transmission system,

predominantly wind-powered generation
• Increasingly larger generating units connecting to the transmission system, resulting
in the level of normal infeed loss risk rising from 1000MW to 1320MW and the
1
infrequent infeed loss risk rising from 1320MW to 1800MW .
Alongside the above view of increasing Short Term Operating Reserve Requirements, the
effect of the Large Combustion Plant Directive will see some generators that currently provide
reserve close. On the assumption that the Open Cycle Gas Turbines (OCGTs) at those
power stations that currently provide STOR also close, this would result in a proportion
st
(approximately 16%) of the existing portfolio of contracted STOR being lost by 31 December
2015. Any reserve capability provided through the main unit at those stations will also be lost,
although this may be replaced by other main units as running regimes alter as the market
further evolves.
Against this backdrop, the objective of the Reserve Review will be two-fold;
1. In the short to medium term to further develop and enhance the existing reserve
products and the associated systems, through incremental improvements to contract
and service forms where there is a clear and significant benefit to existing providers,
potential providers and National Grid.
2. In the longer term, explore options to meet the challenges posed to the reserve
market by the anticipated major changes to the generation types connected to the
transmission and distribution systems.
Engagement with the wider energy industry is crucial at this time of significant change and as
such the Reserve Review is intended to be structured around a programme of formal
consultation and discussions within industry working groups. The views of existing and
potential future reserve providers will be sought and will be crucial in ensuring that the reserve
needs of the next decade and beyond can be efficiently met and economically procured.
Two external Workstreams are therefore planned. The first, Workstream 1, shall look at the
short to medium term challenges; the second, Workstream 2, shall look at the longer term
challenges.
Workstream 1: Short to Medium Term Challenges:
This workstream will essentially look at the existing reserve products and systems and will
look to evolve them such that a greater pool of existing providers may participate in their
provision. This will serve two purposes; (1) facilitating competition which shall manage the
costs of such services in the short to medium term through (2) increasing the pool of potential
providers which shall hopefully mitigate the loss of the opted-out LCPD units from 2016.
The Workstream will consist of several product orientated sub-groups:
• Workstream 1A: Short Term Operating Reserve (STOR) Workstream:
• Workstream 1B: Balancing Mechanism (BM) Start-Up Review
• Workstream 1C: Negative Reserve / Downward Regulation
1
Subject to Authority approval of SQSS review GSR007
• Workstream 1D: Review of Reserve Costs in Imbalance Pricing
Workstream 2: Future Reserve
Workstream 2 will be focussed on the longer term reserve issues and will likely start with a
holistic view of the reserve service before focussing on the products and systems necessary
to deliver reserve services (in whichever form they are required) in the long-term.
It is envisaged that this workstream will initially establish the likely state of the reserve market.
This will be through marrying the existing work being undertaken to identify reserve
requirements to 2020 and beyond with an analysis of the likely plant mix connected to the
system, the likely sources of reserve and the issues that this will present with regard to
procuring sufficient reserve.
Building upon this the workstream will then need to perhaps examine who is best placed to
manage the requirements for system reserves and whether the current split of roles and
responsibilities between National Grid and the wider energy market is appropriate moving
forward. Following on from this, the review will need to establish whether the responsibilities
that may remain with National Grid may either be best served by the existing fragmented
approach to reserve (which is built upon the numerous existing services) or may be better
served by a new consolidated, perhaps even universal, reserve product that will seek to
manage National Grid’s and potentially the market’s reserve obligations in the long-term.
Initial Project Milestones
June 2010: Project Launch
The project was launched via a presentation at the June Operational Forum hosted by
National Grid. A copy of the presentation given at the forum may be found by following the
attached link.
http://www.nationalgrid.com/NR/rdonlyres/01799A3E-EB04-4FA0-B899-
36195B7E08E5/41761/Reserve_review_Jun10_OpsForum.pdf
July 2010: Pre-Consultation Issued
This pre-consultation marks the first stage of industry engagement through the Reserve
Review. Its high level aim is to present National Grid’s initial thoughts on the areas of reserve
sourcing and procurement that we feel need to be examined initially. The aim is for industry
parties to give their views, both on National Grid’s initial thoughts and also on any other areas
connected with the evolution of the market that might impact on National Grid’s reserve
procurement strategies or methods.
The closing date for responses to this consultation is 10 September 2010
August 2010: Industry Reserve Review Forum

th
National Grid intends to hold the inaugural Industry Reserve Workshop on 6 August 2010 at
National Grid’s offices in Warwick. Invitations to this event have already been sent through a
number of industry channels, however should you wish to also attend this event, please
contact Mark Duffield (01926 654971, mark.duffield@uk.ngrid.com).
The aim of the first Industry Reserve Forum will be to complement this pre-consultation
document and explore at a high level the reserve issues that National Grid and other
interested parties believe are necessary to review and also to decide the initial level of priority
that needs to be given to each of them. This will then set the immediate structure of work
moving forward.
Autumn 2010 onwards
Following the close of this pre-consultation and the initial Industry Reserve Workshop,
National Grid will set out the views of industry parties and itself and propose a more detailed
view of how the next steps of the Reserve Review will take shape. It is envisaged at this time
that those issues that the industry has given highest priority to will be taken forward through
existing reserve product annual reviews (e.g. the STOR service review) or will be the subject
of a secondary development review over longer timescales where more complex or detailed
proposals need to be considered over longer timeframes.
Section 1
Introduction and Rationale for the Project
Introduction
The “Gone Green” scenario communicated by National Grid at industry forums and through a
number of consultations gives a view of the future operating environment for the GB
Transmission System that sees the targeted reductions in CO2 emissions being met. Given
this view, a requirement to study the impact of this environment on the procurement of
reserve has emerged. This pre-consultation paper aims to initiate a review that studies the
key impacts of the changes envisaged within that Gone Green scenario on the reserve
marketplace and to propose solutions to the issues that are anticipated to become further
defined as a result of this review.
This document aims to act as the key point from which the overall structure of the Reserve
Review can be developed. It seeks the views of the industry on National Grid’s initial
thoughts and also to gain views on any subject areas related to reserve procurement that
National Grid has not yet considered. Respondents are also invited to give their views of the
respective priorities that should be given to each area of review work identified.
Background
Reserve: An Overview
Great Britain’s nominal operating frequency is 50Hz. In order to maintain the frequency within
the statutory limits of 49.5 to 50.5, National Grid has to balance generation with demand on a
second by second basis. Too much generation on the system will cause the frequency to rise
and too much demand will cause the frequency to fall.
National Grid takes a number of different actions to ensure that the system frequency is
maintained within the statutory and operational limits. The different actions are taken
depending on the different timescales required for managing the system.
Figure 4 shows the four main actions taken to respond to system frequency fluctuations;
margin and Short Term Operating Reserve (STOR), energy balancing, fast reserve and
frequency response. The timescales in which each action would be taken ahead of time is
described in Figure 4.
Figure 1: Actions taken in different timescales to manage system frequency
Reserve Services
Frequency Response
Operating Margin
and STOR
Energy
Balancing Fast
Reserve
Margin: Day Ahead through Balancing

Frequency
to despatch timescales Mechanism Fast
Response
(~90mins) actions: from Reserve
in 10-30
STOR: down to 20mins 90mins to 2mins <5mins
seconds
ahead of real time ahead of real time
Page 6 of 32
Section 1
The following sections describe each balancing services action in detail.
Operating Margin
The operating reserve requirement, also known as Short Time Operating Reserve
Requirement (STORR) is calculated so that the probability of demand not being met is only a
total of one day in every 365 days. Where the difference between the sum of the
synchronised generation capacity and the forecast demand is less than the operating margin
requirement, action must be taken to increase the operating margin. If the shortfall of
operational margin is lower than a specified threshold, National Grid issues a Notification of
Insufficient System Margin (NISM). Generally the market responds to the issued NISM by
supplying more synchronised generation to meet the operating margin requirement.
Setting the operating margin is a balance between reducing the risk of demand disconnection
and reducing the costs associated with operating margin actions.
Operating margin is made up of contingency reserve and operating reserve, as shown in

Figure 2.
Figure 2: The Main Components of Operating Margin
Operating Margin
Contingency Operating
Reserve Reserve
Short Term
Scheduled
Operating
Reserve
Reserve
Contingency reserve represents a margin of plant that is maintained in a state capable of

synchronising in sufficient time to achieve full output in specified timescales. This contingency
reserve requirement progressively decreases from the day ahead margin analysis process to
zero at the final short term margin analysis stage, approximately four hours ahead of real
time. The decrease in contingency reserve requirement represents the reduced probability of
plant loss and demand estimation error as real time approaches.
Operating reserve is the level of reserve planned at the final short-term margin analysis stage
to ensure that there is sufficient generation to meet real time demand. It is made up of:
a) Scheduled Reserve: BM units or balancing services providers that are able to

regulate output or consumption either automatically or on receipt of despatch
instructions. This is required both as positive reserve (often referred to simply as
reserve) and negative reserve. Positive reserve is often referred to as headroom and
negative reserve is often referred to as footroom. The volume of scheduled reserve
required may be offset by the excess availability of STOR providers above
requirement.
Page 7 of 32
Section 1
b) Short Term Operating Reserve (STOR): capacity capable of generating (normally

from standstill) or reducing demand within a defined period. STOR is made up of
contracted generation or demand that can be called upon to reach full output within
240 minutes and be able to provide this level of output for at least two hours.
BM Start Up
The BM Start-up Service gives National Grid on-the-day access to additional generating
BMUs that would not otherwise have run, and could not be made available in BM timescales
due to their technical characteristics and associated lead-times.
BM start up costs relates to the actions that National Grid has to take to ensure that BMUs
are ready for use within BM timescales; this includes the process of BMUs “warming up”,
during which the BMU is being prepared to generate if and when an offer is issued by
National Grid. Once a BMU has reached critical operating temperatures, additional fees may
be incurred to hold the unit at readiness to synchronise – this is known as “hot standby”.
Negative Reserve / Footroom
Negative reserve, also known as downward regulation, refers to the capability that there is to
reduce the amount of generation output on the system. It is necessary to control the level of
negative reserve held on the system to ensure that the frequency can be kept within its
statutory limits and does not rise out of control due to an excess of generation.
In circumstances where demand is low and the majority of generation is operating inflexibly at
or near its minimum stable output (i.e. the level at which it can not operate below), there may
be insufficient available MW reduction capability (footroom) to allow the required level of
negative reserve to be delivered. Actions have to be taken to exchange this inflexible
generation with flexible generation – this is achieved by the desynchronising of some of the
BMUs, allowing the output of other BMUs to be increased above their minimum stable output.
Taking such footroom actions increase the negative reserve capability and gives National
Grid more flexibility to respond to changes in the frequency either automatically via frequency
response or by instruction. All actions taken to increase the level of negative reserve on the
system are classified in BSIS as footroom costs.
The volume of footroom actions required is significantly impacted by the availability and the
running regime of generation, in particular wind turbines and inflexible plant types like nuclear
power stations. High levels of wind turbine and nuclear output during periods of low demand
results in other more flexible generation reducing output, moving towards their minimum
stable output, leaving little ability for National Grid to further reduce generation output. This
therefore results in an increased volume of footroom actions being required so that National
Grid can further reduce output on synchronised machines.
Market Provided Services
The “market provided” reserve services are essentially those which the market makes
available to National Grid “on the day” without the payment of a fixed availability fee, and
which National Grid utilises through the payment of a utilisation fee only. Broadly speaking
they are:
Page 8 of 32
Section 1
PGBTs Pre Gate BMU Transactions (PGBTs) can be used to provide

reserve on units that are not synchronised by agreeing in advance
of BM timescales a PGBT to synchronise the unit. Then the
headroom on this unit can be utilised in BM Timescales to provide
additional reserve should it be necessary. The additional energy
brought onto the system by the synchronisation can also then be
pulled back on other units creating further headroom which again
can be utilised for reserve if required in BM timescales.
BMU Specific Trades A tool similar to a PGBT, but executed through a different
commercial mechanism and timescale
Long Balancing If the market delivers an energy long position at Gate closure,
Mechanism Markets National Grid can resolve this by pulling back synchronised units
to a part-loaded position. This then has the benefit of creating
headroom that can be utilised as reserve energy if needed as a
by product of the long market
Free Headroom Free headroom is where a unit has part-loaded itself in a
balanced market, effectively providing National Grid reserve for
free
Footroom Footroom is the difference between the generation output and a
unit’s Stable Export Limit (SEL). Effectively it is the opposite of
Headroom and is used for negative reserve – i.e. reserve to cater
for unexpected demand losses, or over generation. It is usually
made freely available by fully loaded units, or over periods of low
demand needs to be created by desynchronising units operating
at SEL and replacing the lost energy by increasing the loading on
other units above SEL.
2020 Targets
The recent “Operating the Electricity Transmission Networks in 2020” consultation

published by National Grid highlighted a number of messages on the subject of reserve as we
operate the transmission system into the future. Key among these was the likelihood that the
overall reserve requirements would increase substantially moving forward. This is due to two
upward drivers:
1. Increasing volumes of variable renewable generators connecting to the system:

Wind generation output is more difficult to forecast accurately than conventional
generation. Hence the reserve requirement increases each year as more wind
generation connects to the system in order to cover the uncertainty in wind output. In
addition, the range of wind output increases, and therefore the range of STORR
increases; and
2. Larger individual generating units may connect: Increasing the largest infrequent
loss risk that reserve and frequency response products will be needed to manage.
Following on from the “Operating the Electricity Transmission Networks in 2020” consultation,
National Grid published its more detailed view of future reserve and response requirements,
these are shown below. The lines show a year round average figure for reserve, with
maximum and minimum figures being dependent on the levels of wind output uncertainty i.e.
should there be full wind output, the reserve requirement is at its highest; the minimum
requirement manifests itself at times of zero wind output.
Page 9 of 32
Section 1
Figure 3: Forecast Short Term Operating Reserve Requirements to 2025/6
18000
16000
High Wind
14000
12000
STORR (MW)
10000 Forecast year of increase

of Largest Infrequent Loss Average
Risk Min
Max
8000
6000
4000
Low Wind
2000
0
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15
2015/16
2016/17
2017/18
2018/19
2019/20
2020/21
2021/22
2022/23
2023/24
2024/25
2025/26
Clearly according to all of our presented data, there is a definite requirement to increase our
reserve holding. This could be through
• increasing the levels of existing sources of reserve through existing services

• developing new services to access new sources of previously inaccessible reserve
energy or capacity
Impact of the Large Combustion Plant Directive
The Large Combustion Plant Directive (LCPD) will compel all units that have opted out of it
(i.e. large industrial sites that emit sulphur and nitrous oxides in excess of certain thresholds)
st
to close after they have used up 20,000 hours of running, or by 31 December 2015,
whichever is sooner.
ELEXON publishes the most up to date data on actual running hours. Based upon these
nd
figures, the position as of 2 June 2010 and indicative potential closing dates for each of the
Power Stations that are opted out of the LCPD is shown below. The indicative dates have
st nd
made the assumption that historic levels of running in the period 1 January 2008 to 2 June
st
2010 are exactly maintained moving forward towards 31 December 2015, thus should this
change then these dates are obviously subject to revision.
In practise this means that the following generating units will all close by 31/12/2015, and in
the case of the highlighted units, potentially much earlier than that date:
Page 10 of 32
Section 1
Large Combustion Plant Derogations In Effect

Cumulative
Maximum Remaining Potential
Name Lead Party ID Hours (to
Hours Hours Close
01-Apr-10)
Grain POWERGEN 10000 1177 8823 31-Dec-15
Ironbridge POWERGEN 20000 5029 14971 31-Dec-15
Kingsnorth POWERGEN 20000 9349 10651 2-Oct-12
Didcot A INNOGY01 20000 7537 12463 31-Dec-13
Fawley INNOGY01 10000 755 9245 31-Dec-15
Littlebrook INNOGY01 10000 1213 8787 31-Dec-15
Tilbury LCP 1 Boilers 7 & 8 INNOGY01 20000 9572 10428 19-Aug-12
Tilbury LCP 2 Boilers 9 & 10 INNOGY01 20000 9821 10179 4-Jul-12
Ferrybridge C Unit 1 & 2 KGL 20000 5726 14274 31-Dec-15
Cockenzie LCP 1 Units 1 & 2 SPGEN01 20000 11564 8436 7-Oct-11
Cockenzie LCP 2 Units 3 & 4 SPGEN01 20000 10788 9212 24-Jan-12
These units are all mid to low-merit Coal or Oil units and so provide significant sources of
reserve to National Grid. This is predominantly in the form of Contingency and Regulating
Reserve from the main generating units at each site and Short Term Operating Reserve
(STOR) from the Open Cycle Gas Turbines (OCGTs) installed at most sites.
It could be anticipated that as the units close down and other new power stations open, other
st
units that have opted into the LCPD and that remain open past 31 December 2015 will move
in the merit order to become low-merit units and so the position for Contingency and
Regulating Reserves should adjust minimising the operational impact to National Grid. The
STOR provided by OCGTs at the stations earmarked for closure will almost certainly be lost
as the main units close, and the following chart gives an indication of the impact this will have
on the currently contracted levels of STOR.
Figure 4: Breakdown of STOR by Site Type
Approximately 16% of STOR is likely to be lost as a consequence of the LCPD, which will
potentially need replacing from other sources.
Page 11 of 32
Section 1
Interaction with the ARORA Project (“A Review Of Reserve Actions”)
Background to the ARORA Project
In late 2004, National Grid launched its second review (the first being NETA) of its reserve
procurement framework, in particular products, procurement mechanisms and reserve
information provision to assess whether the suite of arrangements continued to be the most
appropriate.
The high level objectives of this project were;
• to ensure that National Grid has an appropriate suite of Balancing Services which it
can use to meet its operational reserve requirements;
• to ensure these Services are procured in an efficient and economic manner, via
market based mechanisms where competition exists;
• to ensure parties are given equal opportunity to participate;
• to ensure that these Services are procured and used in a way which compliments the
energy market; and
• to ensure Market Participants understand when and how these Services will be
required, procured and used.
ARORA Proposals
The initial proposals were to establish reserve procurement mechanisms within three
procurement timescales:
1. Season ahead (similar to the then Standing Reserve and Supplemental Standing
Reserve services)
2. Within season (no explicit procurement mechanism)
3. Within day (similar to the then Warming service, developed into BM Start-Up)
Following consultation the industry agreed on progressing developments with 1 and 3 but
pushed back on the development of 2, as it was viewed that the System Operator (SO)
procuring in these timescales would not add any new capacity to the system and would
therefore be undermining the market and its ability to balance itself. The main driver from
National Grids perspective was to establish an open and transparent mechanism for
managing our Wider Reserve Obligations (i.e. the SO’s confidence of being able to meet our
reserve requirements) on the one or two difficult days per year.
Ofgem supported the industry’s view on proposal 2 as at the time there were a number of
concerns with this proposal over:
• Creating ‘another market’ where we would be a distressed monopoly buyer

• The “gameability” of such a market by generators (as National Grid acts on the
non-firm information given by Generators)
• The ‘panic’ signal that such a tender would send to the market, when the market
might be already “solving the problem”.
Importantly, Ofgem did recognise that there was a legitimate requirement for National Grid to
act within these timescales, but felt that establishing an explicit procurement mechanism had
too many disadvantages and that National Grid already have sufficient discretion to meet our
reserve obligations.
Page 12 of 32
Section 1
ARORA Implementation
In respect of proposal 1 (Season Ahead) the Short Term Operating Service was launched to
replace the previous commercial frameworks of Standing Reserve and Supplemental
Standing Reserve with the key changes being;
• Response time increased from 20 minutes to 240 minutes.

• Three tender rounds per year (seasonal rolling basis) as opposed to 1 tender
round per year.
• Tenders could be submitted for up to 2 years of service provision as opposed to
only a one year proposal.
• Standardised contractual framework as opposed to individual contractual
framework.
In respect of proposal 3 the existing within day reserve procurement mechanism was through
Warming and Hot Standby contracts. This was reviewed and evolved into the BM Start-Up
Service. The key deliverable was to create an improved contract structure with firm payment
structures to better facilitate all generation types unable to start up on the day within the BM.
The key changes are highlighted below;
• Firm Warming Fees (reflective pricing of elements of service offered regardless of

synchronisation) as previously warming element was not specifically paid for)
• Firm Energy Utilisation Fees (Fixed rather than variable)
• Improved reporting of Information in the “System Operator Reporting and
Notification” (SONAR) system relating to use of BM Start Up and Hot-Standby
terms
• Inclusion of service fees in the calculation of energy imbalance prices
Overall improvements were also implemented relating to the information provision of

Operating Planning Margin Requirement (OPMR) and its constituent components. The
intention was to assist Market Participants in having a fuller understanding of the underlying
variables affecting the market surplus (SPLD) figure as defined and available on the
Balancing Mechanism Reporting System (BMRS).
In addition to the information described above, the amount of generation declared available
via the processes described in Operating Code 2 (OC2) of the Grid Code but already
contracted by National Grid to meet its short term operating reserve requirement was also
published.
Page 13 of 32
Section 2
Objective of the Project and Structure
The aim of this section is to set out the overall aims of the project and to describe in more
detail the anticipated project structure.
Objective of the Project
The objective of the project is to examine the existing reserve market and reserve products
that are available and then through a review examine whether they are likely to be able to
meet the needs of all parties in both the short term. The review will examine the near term
drivers for change and refinement in the existing reserve products. It will also put in place a
programme of work to ensure that in the longer term, the reserve market is able to function
effectively. That is to say that it will continue to economically and efficiently facilitate the
appropriate levels of security and quality of supply in the context of a rapidly evolving energy
marketplace.
The project will seek to meet the following objectives:
1. To undertake a review of each of the existing “contracted reserve services” with the
principle aim to establish whether they are fit for purpose for the period running up to
2015/16
2. Where they are not to formulate incremental developments to those services with the
aim of implementing them no later than the start of the 2011/12 financial year.
3. To actively engage the wider industry, both the generation and demand side, to
a. gauge their views on the existing contracted reserve services;
b. gather their input into any proposals to further develop the existing contracted
reserve services;
c. identify any barriers to entry that the existing services pose to new entrants
into the existing reserve market
4. To assess the impact any developments to the existing contracted services might
have on existing IS systems – including the SONAR System – utilised by National
Grid and the service providers
5. Looking beyond 2015/16 and taking National Grid’s published “best view” future
reserve requirements, to examine the sources of reserve that might emerge to meet
the requirement, engaging the industry throughout this analysis
6. Given the potential sources for reserve to examine whether the existing contracted
reserve services are able to facilitate delivery of the reserve requirement and if not to
identify a revised service that will be able to; again thought will need to be given to
the IS systems that would be necessary to deliver any revised service.
Project Structure
As noted in the executive summary, National Grid intends to structure the Reserve Review
around two key streams of work:
Workstream 1: A focus on the existing reserve services and their development up to

2016.
Workstream 2: A focus on new and evolving generation and demand side

technologies and the impact they will have on reserve procurement
towards 2020 both in terms of product development and contracting
strategy
Page 14 of 32
Section 2
Workstream 1: Near-Term Reserve Developments
National Grid intends to focus efforts in this area around four key service areas:
1. Development of the existing STOR service

2. Development of the existing BM Start-Up Service
3. Examination of the existing techniques for managing negative reserve requirements,
leading to the possible development of new negative reserve products
4. The impact upon imbalance prices of National Grid’s reserve actions
Each of the initiatives will be taken forward through separate working groups as each of the
services tend to be of greatest relevance to a particular group of Users.
STOR
The development of the STOR service will be heavily interactive with the existing STOR
Annual Review process. National Grid envisages that there will be an overarching Working
Group under the Reserve Review that will take on the role of the longer term development of
the STOR service. When appropriate, the initiatives that have been developed through the
Reserve Review will drop into the formal governance of the STOR Annual Review for
implementation.
2010 2011 2012
Reserve Review Working Group - Ongoing Development of STOR Initiatives
STOR Annual Review 2010 STOR Annual Review 2011
1st April 1st April

2011 2012
BM Start-Up
As BM Start-Up is a commercial service, BM Start-Up initiatives are planned to be taken

forward under the Reserve Review structure only, i.e. there is no formal governance
mechanism that also needs to be involved. Should initiatives be identified and all parties
currently signed up to commercial agreements for BM Start-Up agree, then we would look to
implement simultaneous amendments to those agreements to implement any agreed
changes. This work is to be taken forward later in 2010/11 with a view to implementing
st
contractual changes for 1 April 2011 where possible.
Negative Reserve / Downward Regulation
As with BM Start-Up, any changes to this service would be through the development of a
commercial framework for a negative reserve service. Therefore the review aims to identify
and develop potential changes through discussions with users. Any changes would be
implemented via systems and/or contractual frameworks. As the management of negative
reserves is primarily an issue over the summer period, any implementation would be targeted
for summer 2011.
Page 15 of 32
Section 2
Reserve Costs and Imbalance Pricing
The review of reserve costs feeding into imbalance pricing will be initially be undertaken as
part of the reserve review. Any proposed implementation of initiatives relating to this area
would be taken forward through consultation on changes to National Grid’s Licence Condition
C16 Statements or through amendments to the Balancing and Settlement Code (BSC).
Decisions on whether any such changes are warranted will be made as part of the
discussions under this reserve review workstream.
Workstream 2: Longer-Term Reserve Developments
Workstream 2 will have a less formal structure, allowing it to adapt and focus its efforts
flexibly and in response to the challenges that become apparent for the longer term. Initially it
will rely principally on consultation to establish the key drivers and areas of focus that National
Grid and the energy industry collectively believe are the key drivers of reserve and behaviours
in the longer-term. Such consultations will then be enhanced with working groups being set
up where appropriate and the use of existing industry forums as appropriate.
Page 16 of 32
Section 3
Detailed Project Aims
This section aims to set out in detail the key aims for the Reserve Review Project together
with an outline programme of work for each of the presently envisaged workstreams.
Scope
The scope of the project is two-fold. The first area for which there is a requirement to
investigate is how the existing contracted reserve services may be utilised fully between now
and 2015/16. The financial year 2015/16 is selected as the breakpoint as the LCPD runs until
31 December 2015 and as of 1 April 2016 all units that have opted out of the LCPD will have
to close (unless they have done so already having exhausted their permitted operating hours
under their opt out). A significant proportion of the existing contracted reserve services are
sourced through units at these LCPD opted out stations and as such this is the point at which
some of the existing reserve services may reach the end of their useful working lives.
The second area of the project is therefore to examine the likely generation background and
potential for demand side participation beyond 2015/16 and onwards to 2020 and beyond.
Here the scope of the project will be to take the analysis already performed of the likely
requirements for reserve services beyond 2015/16 and to establish the likely sources of such
reserve. Given these likely sources the existing contracted services will then be appraised to
see if they can facilitate the provision of reserve through the likely sources, either in their
existing form or through minor modification. The project will also be tasked with identifying
and developing alternative contracted reserve services should the existing services be
deemed incapable of meeting the identified challenges to reserve provision moving forward.
Two external Workstreams are planned. The first, Workstream 1, shall look at the short to
medium term challenges; the second, Workstream 2, shall look at the longer term challenges.
Both will be facilitated at the highest level through consultations and workshops. Their key
objectives will be as follows:
Workstream 1: Near-Term Challenges:
This workstream will essentially look at the existing reserve products and systems and will
look to evolve them such that a greater pool of existing providers may participate in their
provision.
The Workstream will be consisted of several product orientated sub-groups:
1. Workstream 1A: Development of the existing STOR service

2. Workstream 1B: Development of the existing BM Start-Up Service
3. Workstream 1C: Examination of the existing techniques for managing negative
reserve requirements, leading to the possible development of new negative reserve
products
4. Workstream 1D: The impact upon imbalance prices of National Grid’s reserve actions
Q1: Do you agree with National Grid’s views that these four areas should be the
priority areas for the initial focus of Workstream 1 of the Reserve Review?
Workstream 1A: STOR Review
Short Term Operating Reserve (STOR) forms the clear majority of all contracted reserve. It is
currently procured through a thrice yearly tender process whereby potential STOR providers
may submit tenders to provide a service for any number of years up to 15 Years ahead (an
example of the tender process for 2010 is given in Appendix A).
Page 17 of 32
Section 3
At a high level a party can tender to provide a STOR service should it meet the following
criteria:
• Offer a minimum of 3MW or more of generation or steady demand reduction (this can
be from more than one site);
• Deliver full MW within 240 minutes or less from receiving instructions from National
Grid;
• Provide full MW for at least 2 hours when instructed;
• Have a Recovery Period after provision of Reserve of not more than 1200 minutes
(20 hours);
• Be able to provide STOR at least 3 times a week.
At the highest level the purpose of the STOR Review workstream of the Reserve Review will
be to thoroughly examine the existing contract form and highlight any unnecessary
complexities that have the potential to discourage potential providers from the STOR service.
It is clear that this process will interact greatly with the ongoing annual STOR review process
and so a number of the detailed level objectives as set out below will feed into this formal
mechanism as a means by which they may be implemented. It is likely then that certain
higher priority activities will feed into the 2010/11 STOR review, with other lower priority or
more complex issues being developed outside of this formal process through the Reserve
Review and then feeding into future year’s STOR Review processes.
Therefore to facilitate this, the detailed level objectives shall be (for the STOR Review):
1. To develop amendments to the Standard Contract Terms to better facilitate long-term

STOR tenders
The potential for Users to tender in up to 15 years ahead has recently been
introduced into the STOR contract form. However as a consequence of recent
discussions with providers looking to tender in over these longer timescales a number
of incremental improvements to the Standard Contract Terms specifically tailored to
the unique challenges and issues faced by long-term tenders have come to light. It is
National Grid’s intention to work with the industry in developing a set of Standard
Contract Terms that can look to accommodate long-term tenders more appropriately.
2. To develop a contractual framework better suited to the needs of aggregators
Aggregators are taking an increasingly active role in the STOR market, however as
they look to develop services the STOR Standard Contract Terms have to evolve in
ever more innovative ways on a case by case basis. To manage this process more
appropriately it would seem sensible to focus effort on the development of a standard
set of terms for aggregators building in the terms that aggregators specifically require.
The following objectives will then form the basis of additional work through the STOR Review
such that the worked up conclusions of this additional work may feed into future year’s STOR
Reviews.
3. To review the timescales over which reserve is provided. Such a review could
potentially examine the incorporation of the existing Fast Reserve service within the
STOR service. This would allow Fast Reserve at a non-BM level to be offered
through the functionality offered by the STOR Despatch system (known as SRD) and
potentially allow smaller sites to offer Fast Reserve where they are currently
precluded from doing so by the 50MW de-minimis contract requirement.
4. In a similar vein to look to remove the existing manual Fast Start terms from any
Ancillary Services Agreement where they currently exist. This could be through a
better signal of any value to reserve delivery in timescales of 5-10 minutes.
Page 18 of 32
Section 3
5. To review the existing Availability Window Structure of STOR, in particular the

Working Day / Non-Working Day contract structure. Currently Saturday is classed as
a Working Day meaning that industrial sites that operate Monday-Friday only are not
able to participate in the service. Another potential avenue is to develop contractual
and systems solutions that would permit users to tender in availability over specified
days only (e.g. Mon-Fri) and then paying availability fees only for those days tendered
where they overlap with the pre-defined availability windows.
6. To examine whether permitting BM providers to offer STOR on a flexible basis is
appropriate. In theory this could open up the possibility for low merit large generating
units to offer a STOR service at the week ahead stage where they are not planning to
operate in the energy market, though the benefits of this need to be quantified more
substantially.
The STOR Service is and will remain the main focus of efforts for procuring reserve for
National Grid. STOR offers the most robust way for National Grid to firmly contract for an
appropriate proportion of its Short Term Operating Reserve Requirement ahead of time,
allowing the rest to be procured on the day or through alternative mechanisms. For this
reason STOR will remain the focus of bulk reserve procurement and will continue to be where
the majority of revenues will be paid for reserve contracts.
However National Grid is aware that there may well be other providers that can offer a useful
reserve service to National Grid, albeit that such a service would be of a lesser standard than
the existing STOR service – potentially a service that has greater restrictions around its
availability or utilisation. National Grid therefore proposes to examine the feasibility of
introducing an optional reserve service that would complement the STOR service at times,
but which would always be supplemental to the main STOR service.
All aspects of the existing STOR service could be examined to see where there is scope to
review some of the key contract parameters, albeit this will have to be assessed against the
probability that this will reduce (possibly quite substantially) the value of ay reserve product to
National Grid. The key balance will therefore to balance the increasing flexibility with the
maintenance of a service that is still of some benefit operationally and financially.
Potential areas that are likely to be worth examining are:
• Time of provision of service (for instance examine the practicality of a Weekdays only
service or a working hours (8am-6pm) only service?)
• Minimum MW (vary from current de-minimis level of 3MW)
• Sustainability of delivery (vary from the current minimum requirement of 2 hours?)
• Utilisation limits (examine the current weekly and seasonal utilisation limits with a
view to moving to a maximum number of hours limit)
To reiterate, the key challenge for this workstream will be to examine whether it is possible to
design a flexible reserve service that can operate alongside the standard STOR service, that
offers a service that is operationally useful to National Grid while being more flexible that the
STOR service and which also offers to both National Grid and potential providers an
opportunity that makes financial sense.
Q2: STOR & Fast Reserve:

(a) Do you believe that those areas identified above are the correct ones to
focus on in the near term?
(b) Are there any other areas related to STOR and Fast Reserve that you feel
should be investigated?
(c) Do you agree with the suggested priorities for the work outlined above?
Page 19 of 32
Section 3
Workstream 1B: BM Start-Up Review
The BM Start-Up service was introduced approximately 3 years ago and provides a method
for National Grid to access unsynchronised generation within the Balancing Mechanism
where its submitted dynamic parameters do not normally allow for this to occur.
Predominantly the contract form is utilised to pay a generator an hourly rate to bring a unit
with a long (>=90mins) Notice to Deviate from Zero (NDZ) to a position where its NDZ is
<90mins. The contract allows this unit to be then maintained in this state of readiness for up
to 4 hours. Should the unit be required to synchronise, National Grid pays for this via a Bid-
Offer Acceptance in the Balancing Mechanism.
The contract form has generally functioned well since its introduction; however there are
areas where it is felt that it can be improved. It is these areas that the BM Start-Up Review
shall examine. They are:
• Increased Transparency
To examine the relative benefits and disadvantages of increased transparency of the BM

Start-Up Service. Because the BM Start-Up contract operates ahead of the Balancing
Mechanism, there is limited information in the public domain that allows parties to see what is
currently being provided by the service and at what price. Notifications of BM Start-Up
instructions are sent out via the SONAR system, however these do not state which BMU has
received the BM Start-Up instruction. It provides a MW volume, an estimated cost and the
time at which the Unit will redeclare its NDZ to the <90min parameter defined within that unit’s
contract. Information therefore can be inferred, but the lack of transparency may be a barrier
2
that means that parties that could participate do not. In addition only “Additional Synchs ” are
currently notified through the SONAR system, meaning that information regarding “Advance
3
Synchs ” is not published at all in advance. One area that therefore might be worth pursuing
is to investigate whether a screen on the Balancing Mechanism Reporting System could be
used to give a complete picture of the BM Start-Up position. This could identify all units that
are available for a certain period but have a zero PN submitted, which of these have an active
BM Start-Up instruction issued and which don’t. Further information could be incorporated
such as PN changes, Bid Offer Acceptances, NDZ changes etc;
• Frequency of Price Changes
BM Start-Up prices may be revised by parties at the week-ahead stage and they then remain
fixed for the duration of the following week. Should the service become more transparent,
with BM Start-Up prices of all units visible at all times (and not just when a unit is actually
issued with a BM Start-Up instruction as is the case currently) then the benefits of increased
competition could be fully realised should parties be able to vary their BM Start-Up
parameters at more frequent intervals.
2
“Additional Synchs” are those actions that result in a unit that was otherwise not planning on
generating to be brought onto the system and run for their Minimum Non-Zero Time.
3
“Advance Synchs” are those actions that result in a unit that was planning to generate to be brought
onto the system earlier than the operator of the Power Station has planned
Page 20 of 32
Section 3
• Events of Default
Whether there are further enhancements / modifications to the Events of Default that would
enable the contract form to function more effectively. The main focus here would be to
amend the wording around deemed ceases within the contract, which currently introduces
uncertainty within the contract form. This is because should a generator not follow certain
aspects of the contract a “deemed cease” forms part of the contract; the intention of which is
to cease any payment for the BM Start-Up contract. However in practice no cease is issued
by Control which can leave operational staff both at National Grid and the Power Station
unsure whether the unit should continue to follow the issued BM Start-Up instruction or stand
down. In such circumstances it would seem sensible to allow National Grid operational staff
to decide whether to stand down the unit following contract breach rather than have a
deemed cease – also there may well be scope to continue payment should any breach be
transient and corrected by the station prior to it adversely affecting the BM Start-Up
instruction;
• Changes to the NDZ Parameter
To examine whether changes to the NDZ parameter within the Grid Code would allow it to be
used more appropriately under the BM Start-Up contract. One suggestion is to examine
whether to replace the current “spot” NDZ parameter with a “time-varying” NDZ parameter,
meaning that the NDZ parameter would behave like other dynamic parameters and have a
MW level and associated “from” and “to” times. In this way a NDZ could “ramp” between
levels over time as part of the BM Start-Up contract indicating more accurately the levels of
“warmth” within the unit and hence its ability to synchronise.
• Identification and Removal of any “Barriers to Entry”
Finally to examine whether any barriers to entry exist and can be withdrawn via the
amendment of the BM Start-Up contract form.
Principal among these is the current requirement to have a 4 hour maximum hot standby
period as part of the contract form. If this could be lowered, or perhaps removed altogether it
would permit certain coal and gas fired stations that do not currently have a BM Start-Up
contract to potentially sign up to the service.
Q3: BM Start-Up
(b) Are there any other areas related to BM Start-Up that you feel should be
investigated?
Workstream 1C: Downward Regulation / Negative Reserve Review
At present the issue of managing negative reserve manifests itself either over periods of very
low demand (summer overnight minimums) or more rarely, on a localised basis whereby
there is insufficient footroom to manage the export of electricity out of a localised area of the
transmission system. National Grid manages these issues at present via forward trading on a
BMU specific basis, actions in the Balancing Mechanism and the recently developed
4
Generation Curtailment Service contract.
4
http://www.nationalgrid.com/uk/Electricity/Balancing/services/systemsecurity/GenerationCurtailment/
Page 21 of 32
Section 3
Looking forward there may be increasing levels of “must run” generation; that is to say
generation that must maintain an output due to technical or commercial reasons. This could
have the potential to make the management of negative reserve more complex. Conversely
the potential for demands to increase (e.g. through the more widespread adoption of electric
vehicles) could potentially simplify the management of negative reserve issues.
It is proposed in the shorter term to undertake a review of the negative reserve requirements
and tools used currently to manage them in order to examine whether any improvements can
be made. Primarily this might be through the extension of the generation curtailment service,
but further potential options may exist and will need to be identified and examined.
Incorporating additional demand side services into the management of negative reserves will
also need to be appraised.
Moving into the medium term an appraisal of the potential generation and demand positions
across the year will need to be established, together with an appraisal of whether the existing
tools are sufficient to meet any identified challenges with meeting the negative reserve
requirements.
This could include the development and assessment of a variety of options which could
include:
• The evolution of the contract form for the Generation Curtailment service, which allows
National Grid to desynchronise non-BM units at a pre-agreed price. Such a contract form
could be developed to permit the desynchronisation of both BM and non-BM units.
• A day ahead tender process for downward regulation actions in which National Grid signs
framework agreements with a number of parties who wish to participate, then following a
day ahead publication of the requirement for actions (max and min number and MW of
SEL needed to be desynchronised), counterparties may then tender their price to be de-
synchronised over the required period. National Grid could then select tenders at this
stage, or potentially utilise the Balancing Mechanism if that was assessed as being the
likely best option.
Due to the fact that the management of negative reserves is essentially a summer issue it is
proposed to leave any further development of services to manage negative reserve until the
start of 2011.
Q4: Negative Reserve

(b) Are there any other areas related to Negative Reserve that you feel should
be investigated?
Workstream 1D: Reserve Costs and Imbalance Pricing
Workstream 1D will focus its efforts at examining whether the costs of reserve are feeding in
appropriately into imbalance prices. At present the service fees associated with the reserve
services feed into imbalance prices in a number of different ways:
Short Term Operating Reserve
STOR availability fees are targeted at the settlement periods (through the Buy Price Adjuster
submitted as part of the Balancing Services Adjustment Data) within the STOR availability
windows. The per settlement period rate is then focussed most sharply on those periods
where reserve has historically been utilised via a weighting factor.
Page 22 of 32
Section 3
The utilisation costs of STOR from the Bid-Offer acceptances accepted to despatch any BM
STOR provider also feed into the calculation of imbalance prices. However there is no
current mechanism through which the costs of non-BM utilisation can feed into the imbalance
price.
BM Start-Up
The costs of BM Start-Up instructions are similarly fed through into imbalance prices through
the Buy Price Adjuster. Here a £/MWh figure is derived by dividing the total cost of the BM
Start-Up contract by the MWh capacity it delivered (or could have delivered had it not been
cancelled). This is then further divided by the number of hours National Grid determines that
the BM Start-Up instruction would have been delivering that capacity. The fee is then applied
equally to each settlement period in the period that National Grid has determined the BM
Start-Up instruction was delivering capacity.
Period BM Unit Period over which BPA is

receives BM Start- implemented (as determined by
Up fees National Grid)
Negative Reserve / Downward Regulation
Although contract fees are not commonly payable by National Grid for the purposes of
maintaining adequate Negative Reserve / Downward Regulation, should they be then they will
feed into the calculation of imbalance prices in a similar manner to the STOR availability fees,
with the exception that they would be applied to the Sell Price Adjuster (SPA), rather than the
Buy Price Adjuster. At the present time negative reserves are normally made available and
utilised through the BM and so can potentially feed into imbalance prices through the Bid-
Offer acceptances issued.
Potential Areas for Review
Given the current treatment of reserve fees within imbalance settlement, the following areas
are those which National Grid believes should be examined further:
• Market Length and Reserve Option fees:
Page 23 of 32
Section 3
Under current imbalance pricing rules, the Buy Price Adjuster and Sell Price Adjuster
5
only impact upon the main imbalance price . They do not impact upon the reverse
imbalance price which is set according to a market reference price. Therefore in a
long market items such as STOR availability payments and BM Start-Up fees will not
impact upon the imbalance price and in a short market neither will any negative
reserve option fees. It could be argued that system reserves are a vital component of
maintaining the energy balance in either a short or a long market and as such the
costs of providing them should be reflected upon users who are out of balance
regardless of the market length.
• The incorporation of the utilisation payments of non-BM STOR into the imbalance
price calculation
As these costs are currently not included within the imbalance price calculations so
the intention would be to develop and implement a suitable methodology for doing so.
Q5: Reserve Costs and Imbalance Pricing

(b) Are there any other areas related to reserve costs and imbalance pricing
that you feel should be investigated?
5
In the case of a short market, System Buy Price is the main price and so may be calculated with
reference to a Buy Price Adjuster. In a long market System Sell Price is the main price and so may be
calculated with reference to a Sell Price Adjuster.
Page 24 of 32
Section 3
Workstream 2: Longer Term Challenges
Workstream 2 will look at the long term provision of reserve services and, working with
existing and future industry participants, plant and equipment suppliers and other interested
parties, will aim to establish the likely sources of reserve beyond 2015/16 to beyond 2020. It
will also aim to identify any issues with the current reserve procurement mechanisms that
potentially frustrate the likely sources of future reserve. It will identify the challenges that
these issues present when viewed against the current methods of procuring reserve and it will
have the overall aim to develop a procurement strategy and the tools to execute that strategy
to meet our future reserve requirements. It has already been established that these
requirements are likely to rise given the developments that are already known (e.g. new
nuclear units (>1320MW), increased volumes of wind generation connected to the National
Electricity Transmission System).
The key areas for workstream 2 to address are seen as:
• Potentially to further develop the analysis of likely levels of reserve that will be
required throughout the period to 2025
• To examine the likely drivers of operational and market behaviours in 2020
• To assess the potential sources of reserve in 2020
• Look to structure reserve product(s) to best meet the challenges envisaged
• To examine the issues raised by the recent consultations released by Ofgem
(Project Discovery) and DECC (Energy Market Assessment) and their potential
impacts upon reserve procurement
• To examine the impacts of European legislation upon the reserve market in Great
Britain
Q6: Do you agree with National Grid’s views that these areas should be the priority
areas for the initial focus of Workstream 2 of the Reserve Review suggested
priorities for the work outlined above?
A more detailed appraisal of each of these areas is now set out below:
Reserve Requirements to 2020 and beyond
A key basis upon which the work under workstream 2 will be taken forward is the reserve
requirements curves out to 2020 and beyond, already published by National Grid earlier in the
6
year . Within this document we have published our current best forecast of the annual
average 4-hour ahead of real-time requirement for reserve given the likely generation mix
proposed by the National Grid “Gone Green” scenario. Also included within the documents is
National Grid’s best forecast of the seasonal and diurnal shapes of the reserve requirement.
These published requirements will underpin any scenario modelling that National Grid
undertakes as part of Workstream 2 and as such it is important that they represent a
consensus view of the future requirements curves. National Grid is keen to share its
methodologies and to invite comment upon them in order to ensure that such a consensus
can be realised.
Q7: Do you believe that there is further information regarding the future reserve
requirements that National Grid could usefully look to model and provide?
6
http://www.nationalgrid.com/uk/Electricity/Balancing/services/FutureRequirements/
Page 25 of 32
Section 3
Drivers of Operational and Market Behaviour in 2020
The energy market itself is likely to undergo a significant transformation – especially as it

seeks to cope with the growth of variable renewable generation connected to the total system.
Greater volumes of balancing actions are likely to be needed from both the energy market
ahead of gate closure and by National Grid before and after gate closure.
However the balancing tools available to both the energy market and National Grid overlap to
a significant extent and so the interplay between National Grid’s reserve contracting strategy
and that of the wider market will be crucial. It would be imprudent for National Grid to either
under- or over-contract reserve services; to under contract (based on an assumption of a
significant amount of market corrections up to gate closure) could lead to an erosion of
security of supply, whereas to over-contract (assuming too little action from the market) could
lead to inefficient actions on both sides, as the market has to procure its actions at higher
prices, while National Grid has access to a source of comparatively cheap reserve that
remains underused.
It is crucial then that all parties within the industry can develop a clear understanding of the
roles and incentives on each party with regard to procuring and maintaining reserves. Once
parties are comfortable with the expected actions of each other then the most efficient
outcome can be achieved. The communication of parties’ intentions might become even
more crucial in the future as greater volumes of reserves are required and utilised by all
parties. A key future consideration in this area might be the best way in which to facilitate
such communications and make the information accessible to all parties.
Potential New Reserve Technologies
Another key strand in workstream 2 will be to examine the new technologies that have the
potential to provide reserve by 2020. As part of this work the fundamental capabilities of each
technology and any restrictions on its ability to provide reserve will be examined.
The core technologies that might be anticipated to come on-line over the period to 2020 are:
• A greater role for demand side services – potentially adapting the models of demand
side reserve procurement used in other countries
• SMART grids and metering

o Electric Vehicles – through control of their charging cycles / use of stored
electricity within batteries when parked
o Pumped Heat Storage – large scale control of domestic schemes
• Batteries and other forms of large scale electrical storage
The above is far from an exhaustive list and industry input is sought in order to form an initial
view of these technologies most likely to be widely adopted and also which are most likely to
offer an effective reserve service. Once established a detailed feasibility study can then be
taken forward to identify any potential technical or commercial issues that might arise and
frustrate their adoption as a reserve service with the aim being to try to work up solutions to
any such barriers.
In addition there are also possibly new large scale generation technologies that may start to
connect to the system
• Carbon Capture and Storage Power Stations

• Super-critical coal
• New nuclear powered generators
Page 26 of 32
Section 3
Should a particular technology mean that it is not able to fulfil the requirements of the existing
reserve product then an examination of any technical constraints around it will need to be
carried out with a view to perhaps adapting the current services to enable a useable reserve
service to be contracted.
Q8: Please give your views on emerging or existing technologies for which further
consideration of their usefulness as a reserve service is warranted and what
priority would you give to each technology regarding such further
consideration?
Impact of UK and EU Regulatory changes upon the GB Reserve Market
As previously noted there are a number of key pieces of regulatory work that are currently
ongoing that have the potential to significantly impact upon the GB Reserve Market. Both EU
legislation and the DECC / UK Treasury Energy Market Assessment have the potential to
influence the wider energy market and hence the reserve market, however the programme of
work most likely to directly influence the reserve market is Ofgem’s Project Discovery.
Project Discovery
Workstream 2 will also be heavily influenced by the work that Ofgem has commenced through
Project Discovery. Within the project document, Ofgem has set out its ideas as five
packages, with each package potentially introducing more significant proposals when viewed
against the status quo and when viewed against the previous option.
Figure 3: Ofgem Packages under Project Discovery
Within the Project Discovery document, a number of areas were highlighted that could have a
direct influence on the work that will be potentially undertaken as part of Workstream 2 of the
Reserve Review. These include:
Page 27 of 32
Section 3
Package A – Targeted Reforms:
Ofgem has floated the idea of a daily reserve tender to be initiated by National Grid. This
would notionally see National Grid publish its day-ahead reserve requirement and seek
tenders for the provision of this reserve. The theory is that the price paid for that reserve
would more accurately reflect the real-time system and market conditions. Ofgem also
theorise that should this price then be fed into the imbalance settlement prices, reserve costs
can more accurately be part of imbalance prices and so provide an enhanced signal to market
participants.
Package B – Enhanced Obligations:
In this package, Ofgem puts forward the notion that the System Operator (SO) should have
an enhanced obligation to forecast future reserve needs and to then procure this in the form
of sufficient back-up and flexible generation. The parallel with obligations on the Swedish and
Finnish System Operators is drawn. In Sweden, the SO has been granted powers by
legislation to acquire peak load reserves via tender in the period 2003 - 2011. Recently the
Swedish regulator has recommended a profile of gradually reducing reserve requirements out
to 2020 be procured, with one eye on the potential for greater demand side response
capabilities in the run up to 2020.
Ofgem has also put forward as part of this package the idea of a centralised renewables
market, with a potential design as highlighted below
Page 28 of 32
Section 3
Package C – Enhanced Obligations with Renewables Tenders
This package effectively adds to the above Package C a reform to the existing Renewables
Obligation in order to enhance further the existing incentives on developers to construct
renewable capacity. In itself it does not appear to impact upon reserve procurement any
differently to those packages.
Package D and Package E
Both of these packages foresee the ability to pre-ordain the suitable mix of future generation
and then seek to have this constructed through the auctioning of technology specific capacity
for generators. Close to real time it would seem that these options pose little significant
impact on reserve procurement, however they could be useful to ensure that margins for the
system peak as a whole remain resilient in the long term.
Q9: Do you agree that the above regulatory developments are the key
developments to consider in the context of this reserve review?
Q10: Are there any other developments that you are aware of that have the potential
to significantly impact the provision of reserves into the future?
Page 29 of 32
Section 4
Timetable and Next Steps
Project Timetable
The proposed timetable for the project throughout 2010 is as follows:

rd
Friday 23 July 2010 Pre-Consultation Issued
th
Friday 6 August 2010 Reserve Review – First Industry Seminar to be held
th
Friday 10 September 2010 Closing Date for Pre-Consultation responses
th
Thursday 30 September 2010 STOR Review 2010 initial review to be published
September – December 2010 Further Reserve Review Workshops
October 2010 Publication of Reserve Review “Next Steps”

document
Consultation Responses and Summary of Questions

th
The closing date for responses to this consultation is 5pm on Friday 10 September 2010
Consultation responses may be emailed to: energy.operations@uk.ngrid.com
Or posted to: Mark Duffield

Network Operations
National Grid House
Warwick Technology Park
Gallows Hill
Warwick
CV34 6DA
Unless marked as confidential it is the intention of National Grid to publish on our website all
responses received.
Should parties not be able to attend the industry workshop or wish to discuss issues on a
bilateral basis, National Grid will also be happy to arrange bilateral meetings with interested
parties as part of or following this consultation. Should interested parties wish to do so, they
should contact Mark Duffield (mark.duffield@uk.ngrid.com, 01926 654971) in the first
instance.
A summary of questions asked in this consultation is as follows:
Q1: Do you agree with National Grid’s views that these four areas should be the
priority areas for the initial focus of Workstream 1 of the Reserve Review?
Q2: STOR & Fast Reserve:

(b) Are there any other areas related to STOR and Fast Reserve that you feel
should be investigated?
Page 30 of 32
Section 4
Timetable and Next Steps
Q3: BM Start-Up
(b) Are there any other areas related to BM Start-Up that you feel should be
investigated?
Q4: Negative Reserve

(b) Are there any other areas related to Negative Reserve that you feel should
be investigated?
Q5: Reserve Costs and Imbalance Pricing

(b) Are there any other areas related to reserve costs and imbalance pricing
that you feel should be investigated?
Q6: Do you agree with National Grid’s views that these areas should be the priority
areas for the initial focus of Workstream 2 of the Reserve Review suggested
priorities for the work outlined above?
Q7: Do you believe that there is further information regarding the future reserve
requirements that National Grid could usefully look to model and provide?
Q8: Please give your views on emerging or existing technologies for which further
consideration of their usefulness as a reserve service is warranted and what
priority would you give to each technology regarding such further
consideration?
Q9: Do you agree that the above regulatory developments are the key
developments to consider in the context of this reserve review?
Q10: Are there any other developments that you are aware of that have the potential
to significantly impact the provision of reserves into the future?
Page 31 of 32
Section 5
Appendices
Appendix A: STOR Tender Round Calendar 2010/11
Page 32 of 32

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Reserve Review

Procuring Reserve for the next decade and

• Increasing volumes of variable generation connecting to the transmission system,

Workstream 1: Short to Medium Term Challenges:

The Workstream will consist of several product orientated sub-groups:

• Workstream 1A: Short Term Operating Reserve (STOR) Workstream:

• Workstream 1B: Balancing Mechanism (BM) Start-Up Review

• Workstream 1C: Negative Reserve / Downward Regulation

Workstream 2: Future Reserve

Initial Project Milestones

June 2010: Project Launch

July 2010: Pre-Consultation Issued

The closing date for responses to this consultation is 10 September 2010

August 2010: Industry Reserve Review Forum

Figure 1: Actions taken in different timescales to manage system frequency

Margin: Day Ahead through Balancing

The following sections describe each balancing services action in detail.

Operating margin is made up of contingency reserve and operating reserve, as shown in

Figure 2: The Main Components of Operating Margin

Contingency reserve represents a margin of plant that is maintained in a state capable of

a) Scheduled Reserve: BM units or balancing services providers that are able to

b) Short Term Operating Reserve (STOR): capacity capable of generating (normally

Negative Reserve / Footroom

Market Provided Services

PGBTs Pre Gate BMU Transactions (PGBTs) can be used to provide

The recent “Operating the Electricity Transmission Networks in 2020” consultation

1. Increasing volumes of variable renewable generators connecting to the system:

Figure 3: Forecast Short Term Operating Reserve Requirements to 2025/6

10000 Forecast year of increase

• increasing the levels of existing sources of reserve through existing services

Impact of the Large Combustion Plant Directive

Large Combustion Plant Derogations In Effect

Figure 4: Breakdown of STOR by Site Type

Interaction with the ARORA Project (“A Review Of Reserve Actions”)

Background to the ARORA Project

The high level objectives of this project were;

• Creating ‘another market’ where we would be a distressed monopoly buyer

• Response time increased from 20 minutes to 240 minutes.

• Firm Warming Fees (reflective pricing of elements of service offered regardless of

Overall improvements were also implemented relating to the information provision of

Objective of the Project

The project will seek to meet the following objectives:

Workstream 1: A focus on the existing reserve services and their development up to

Workstream 2: A focus on new and evolving generation and demand side

Workstream 1: Near-Term Reserve Developments

1. Development of the existing STOR service

2010 2011 2012

Reserve Review Working Group - Ongoing Development of STOR Initiatives

STOR Annual Review 2010 STOR Annual Review 2011

1st April 1st April

As BM Start-Up is a commercial service, BM Start-Up initiatives are planned to be taken

Negative Reserve / Downward Regulation

Reserve Costs and Imbalance Pricing

Workstream 2: Longer-Term Reserve Developments

Detailed Project Aims

Workstream 1: Near-Term Challenges:

The Workstream will be consisted of several product orientated sub-groups:

1. Workstream 1A: Development of the existing STOR service

Workstream 1A: STOR Review

1. To develop amendments to the Standard Contract Terms to better facilitate long-term

2. To develop a contractual framework better suited to the needs of aggregators

5. To review the existing Availability Window Structure of STOR, in particular the

Potential areas that are likely to be worth examining are:

Q2: STOR & Fast Reserve: