One of the issues hotly debated in the Ukrainian electricity market relates to imbalances in the national power system, and that in turn leads to restrictions on nuclear power and RES generations. The Ministry of Energy and Environmental Protection has recognized the need to hold tenders for construction of a new fast start generation facilities to enable the flexibility of the national energy system. Today it is clear that Ukraine lacks a due number of such capacities, as outlined in the National Power System Assessment Report worked out by the Ukrainian power system operator NEC Ukrenergo and approved by the National Energy and Utilities Regulation Commission (NUERC).
It turns out that fast start load following facilities and energy storages have different technological purposes; that their payback cannot be secured by revenues from a sole service; and that to attract qualified investors to projects for the construction of gas-piston power plant (GPPP) or energy storage, one should develop a liquidity of electricity market and precisely outline the terms of a tender.
In this interview by ExPro, Igor Petryk, Market Development Director of Wärtsilä Eastern Europe, explains why & which indicators should be used to determine the winner of the competition, which generation should really be classified as a fast-start capacity, and what should be done to a tender, so that companies with appropriate level of technical expertise and financial resources could outcompete.
Translated by: Elizaveta Zavhorodnya
Recently, the new head of the Ministry of Energy Olga Buslavets said that it is necessary to pedal tenders for a new generation facilities or for new energy storages. Is such a comment timely or belabored?
I believe that this need cannot be belabored because it is acute, it exists in the power system, as it was described by the NEC Ukrenergo in the National Power System Assessment Report, which was approved by the regulator a month ago. From this moment and on, this is an official need, which has been approved in accordance with the procedure established by law. This has become a fact.
It is about the need for flexibility in the power system, which arose from the growing of renewable energy generation. I see, why you said the problem seems belabored. True, there are debates in the industry, and in the community now, in which opponents of the development of renewable energy are gaining strength. Even if they are not convinced opponents, they relate the fact that now the burden of the "green" tariff is very high, plus electricity consumption is slashing in the power system. This means that we have to limit someone in power generation, in particular the most inflexible generation, the nuclear one, disregarding that the latter is the cheapest. This gives the impression that the renewable energy facilities have become alike "orphans", "unloved children" in the family.
What can you say about the purpose of different technologies –fast start generation or energy storages?
Although we say that energy storages and fast start generation are elements of flexibility needed in the power system as the share of RES increases, they still play a slightly different role at this stage of technology development. We modeled the Ukrainian power system. Previously, having done similar work in many countries and seen differences or similarities, we [Wärtsilä company- Ed.] realized that in Ukraine the development of RES will lead to imbalances and the need for dispatch restrictions, and we confirmed this with clear calculations, modeling in Plexos software. Plexos is an internationally recognized tool for mathematical modeling of power scheduling.
We have shown that flexibility must emerge in order to balance the energy system, first, physically, and second, to reduce the limitations of renewable generation, while curbing the impact and dependence on coal generation as quasi-flexible. Investments in flexibility provide very significant savings at the energy system level. Then we modeled two options, one with really fast-start capacities, and today gas-piston power plants match best to all technical and economic parameters. And the second option is energy storage systems based on rechargeable batteries for energy transfer.
We considered these two options not from the point of of the business model and how to make money on it, but from the point of economic effect on the power system. We took different versions of the installed capacity of renewable sources and different capacities of batteries or gas-piston power plants.
As an outcome, it was clearly evident that additional investment in gas-piston power plant leads to a reduction in the total cost of electricity, even with incurred capital expenditures for a construction of a new facility. Batteries play about the same role, but because of the current high cost of these energy storage systems, and because they do not produce energy themselves, but only purchase, store, then transfer it whenever needed, then, at the level of the energy system, their economic effect was not noticeable.
So, you came to conclusion that one would rather have gas-piston power units?
We concluded that there are two approaches to lessen limitations of nuclear generation or renewables, while reducing the use of coal-fired power plants in non-economic partial load mode when the shaft reserve is held. The most effective tool for this is a gas-piston power plant, which, according to our estimates, in aggregate, on fuels alone can save about € 300 million a year for the power system. Installations with batteries did not have an economic effect, it was negative.
However, I want to emphasize that Wärtsilä is not an opponent to batteries. Even more, in our activity ambit there is a large business for integration of power systems with the use of batteries.
That is, you also offer to companies various options of installation of batteries?
We offer technical solutions that may use batteries. We do not manufacture batteries by ourselves, there are specialized manufacturers for this. We work out integrated solutions in which we use our control systems, i.e. our own software, which are the "brains" of such storage systems. Here we are impartial, we have consider really objectively technologies which are more suitable, and I’d like to emphasize that batteries are absolutely necessary now in Ukraine, but for a slightly different purpose. For what they now want to do in the NEC Ukrenergo with the involvement of the EBRD and IFC.
For what purpose?
This is about the provision of the primary reserve. That is, it is frequency regulation, exactly what the Ukrainian power system also lacks, but it is another problem. You know that the Russian Federation now actually provides this service for free, only because the systems are integrated. But this is not a viable structure, and it will change as soon as Ukraine separates from Russia and switch to the European energy system. Therefore, the NEC Ukrenergo, as far as I understand, has determined a need of 230 MW as primary reserve, and batteries, namely load-following batteries (we will not talk about capacity batteries, but load-following batteries), will be able to play the best role in this case. That was how the project of the EBRD and Ukrenergo for 200 MW appeared. And this is not at all a competitor to what we are talking about now, i.e. load following and balancing facilities.
That is, it is necessary to differ: storage systems are good as a primary reserve for frequency restoration, but for flexibility of power system gas-piston units would be the best fit?
Absolutely so, at this particular stage of technology development. We anticipate that in about 5 years, if the trend in cheapening of technologies continues, batteries will be able to compete in energy transfer, i.e. its accumulation of electricity during solar activity and then transfer to the evening peaks of consumption. In our opinion, now this can be done only with a support from the state, or in some other way, which can be appealing to investors. That’s because a market-based business model is not "taking off" yet.
Does it mean that accumulating energy storages won’t work out in the market so far?
People are very confused about this. And it seems to me that the confusion just arises because they do not separate the two main applications of batteries (there are actually more). Power capacity batteries are likely to be in demand in the market for ancillary services for frequency control.
I want to emphasize once again that fast-start load following generation and batteries do not compete with each other currently. But they will probably compete in a certain application in about five years, and then the distribution of the areas of application of shunting power and batteries will be practiced. Fast-start load following capacities will increasingly be diverted as secondary reserves or even seasonal reserves, when energy is accumulated in the form of, say, a synthetic fuel during summertime. And in winter, this energy can be used when there is little wind and sun, and mostly dark days.
Today, the transfer of energy to evening peaks is not proved to be an attractive model for batteries use in any country in the world
More than one project with batteries has already been announced in Ukraine: both Myronivsky Hliboproduct (MHP) and DTEK have already made their statements on that.
If you carefully read the statements of DTEK and MHP, in both cases, it is an attempt to find an application and a business model that would pay off the investment in the battery storages. In the case of DTEK, this is a pilot project, as far as I know, with a small battery capacity. It is by definition a pilot - to understand what can be a business model for investment on a larger scale.
Today, energy arbitration, i.e. the transfer of energy to evening peaks of consumption, is not proved as an attractive model, not only in Ukraine, but in any country of the world. There may be some exceptions. Without additional incentives, in Europe it does not work, nor in America.
Batteries are now most widely used in the UK and Ireland. We have recently announced a 100 MW project in the UK, but batteries there are not there to store and then resell energy at a higher price, or this is only a occasional use of them for the latter purpose.
In general, their payback consists of several factors, what is called a value stacking, i.e. the imposition of several different incomes to recoup the investment. The British model envisages, among other things, participation in the ancillary services market, as well as a participation in the capacity market that exists in the UK. They sell this capacity as a reserve, and that partially (30%-40%) adds revenues to payback. There may be other sources of income. In general, this is the only way for investments to recoup themselves.
Is the best option, in your opinion, so that one could combine the transfer of energy and the provision of ancillary services, reserves, and make the application of batteries work?
That’s the way this is now happening in other countries. By the way, in the 100 MW project in Britain with the involvement of Wärtsilä, the investor is creating a network of chargers across the country for electric vehicles. Batteries are part of this network, and the investor is going to earn extra money in the market of ancillary services and the capacity market. That is, these are the three main components of the business model.
I see. But, reverting to the gas-piston power stations, could you please specify how many gigawatts Ukraine may need?
According to our modeling, the optimal capacity is the estimated 2 GW, and this is the optimal from technical and economic points of view. As the volume of renewables increases, for the power system - the more fast-start options, the better. But there is an economic component, capital costs, so if one takes into account all these factors and make optimization, the best capacity is just the 2 GW.
Let's talk about the conditions of the tender itself. What, in your opinion, terms for an investor are the most attractive?
To begin with, I would like to note that Wärtsilä's activities in Ukraine are not related to investment and ownership of a project. When we talk about attracting of an investment, our employees express their opinion on how best to create a regulatory framework in Ukraine. In this case, there is no conflict of interest, because we are not investors or participants in such a competition.
The Art. 29 of the Law "On the Electricity Market" states that the transmission system operator in a form of report determines the need of the power system for fast-start reserves, and then the report is approved by the regulator, and the Ministry holds a tender for the purchase of such a capacity. On the one hand, the need is defined, and on the other hand, there must come those who can implement this need with their own money, their investments. Those will come with their sweat money when they have certain guarantees, for a certain risk accompanying, as a rule. This happens if one has a very specific business model to see projected profitability and return on investment.
For some reason, Ukrainian society is ashamed to talk about profit, but this is the basis of capitalism. If you want to buy a thing, you must understand that one sells it to you at a profit. It seems to me that we have a huge problem of awareness. It is necessary to hold this tender in a way that an investor would come with his money not to Argentina, not to Brazil, not to Italy, but to Ukraine. In a combination of factors, such as profitability vs. risk, should be an attractive in the project.
It is important that this tender take place in kind that investors come here with appropriate experience and qualifications, rather than having a tender of speculators, who come and, roughly speaking, outcompete the tender their lowest price proposal, having nothing behind them, and then re-selling the rights vested instead of build something. Therefore, there should be a very strict but fair selection of professionals. These bidders should have some experience in investment projects, not experience in, say, the construction pits for power plants. Because now in the Procedures for the tender they outline only prerequisite criteria of prior participation as the contractor, for example, in a power plant construction. The example of a construction pit excavation, I’ve just mentioned, is very endangering.
Other than that, the conditions for return on investment should be very simple and create an effective business model with feasibly projected cash flow and income. Given this, an investor can go to the bank and get € 50 million or as much as he may need to build the station. A bank, as a rule, says: "Here is an Excel spreadsheet for 15 years, and you are welcome to write in each year box, the amount of income, which you project." The investor must enter into such a spreadsheet the amount of millions of euros, or hundreds of thousands of euros, he project for each year as incomes. For the bank to believe this, it should be substantiated either by a contract, or in some other way, that I don't see now in the case with Ukraine. In other countries, it may be a combination of a contract plus former accomplished projects in the market. In the case with Ukraine, there is no market experience for that kind of projects yet, so we cannot project anything here.
How would one ensure that an investor could calculate profitability for the first year, the second, the third ...
How would one determine the cost of the service by an investor?
The cost of the service can be determined through competition during a tender. This is done wherever there is a competition in tenders.
Using only capital expenditures as an indicator when choosing the winner is not the best way to follow
Will investors offer the cheapest cost option for building the station?
The law stipulates that a service for the construction of a new generating facility is purchased. That is, the service is the construction of the facility. Therefore, the price should be for the capacity to be created. The existing Tender Procedure stipulates that investors come and compete with each other with their capital expenditures. I want to say that this is a very bad idea. Capital expenditures are one of the elements, but there exist another element, the cost of operation. Operating costs must also be competitive, and a comprehensive benchmarking of these elements enable one to determine the LCOE (Levelized Cost of Electricity). This is the cost of electricity production throughout the life cycle of at a particular facility, with taking into account both capital and all other variable costs and fuel efficiency, of course. Therefore, our suggestion is that the winner should be determined through the LCOE benchmark.
Could you please tell us more about the paybacks for an investor in such a project?
True, it’s the first thing an investor cares for. Now in the Ukrainian power system all generating facilities, except the "green" ones, have been built long ago and are depreciated. There is no element of capital expenditures in their electricity production cost. This means that anyone who enters this market will not be competitive, because one will have a new and relatively large element of capital expenditures that needs to be depreciated, reimbursed, preferably with a profitably.
It is necessary to equalize the enter conditions into the market, which means that the element of capital costs of the project must be compensated to the investor in another way, namely - through participation in the competition. In that case, we achieve two results: firstly,- we return to the investor his costs of the construction of a new facility, to stimulate his interested in creating shuc a new facility; secondly, we create a new facility in the power system to compete with existing facilities, herewith we achieve real pricing based on market competition.
The LCOE empowers us to determine the truly cheapest bid proposal, and then the winner enters into an agreement the transmission system operator in accordance with the law, and under this agreement receives funds from the transmission system operator for a new capacity. Our position is that the investor needs to reimburse the cost of construction, fixed costs, and generate some profitability. The profitability can also be a condition of competition, say 7% - 8%, or 10%, and then investors will be able to calculate their LCOE according to this formula.
What, in your opinion, is the optimal model for the use of fast-start load following stations to be built as an outcome of the tender?
The model is probably not detailed in the render so far, but I hope it will be about the same as in some European countries, when the transmission system operator orders a capacity, holds a competition, selects the winner, the winner builds the station, and makes the station available for the system operator. In periods when the system operator does not need to use the station, it has the right to earn money in the electricity market. I think this is just such a very fair model, it would allow an investor to earn, and that would be good for the market as a whole.
For example, in the UK, if one’s capacity installation is not booked for tomorrow, then one has the right to go and sell energy in the free market and to dispose of their power as one wishes. For example, to sell half of the electricity generated into the day-ahead market, and thus ensuring a guaranteed income for half of its capacity. The other half of the electricity is reserved for the intraday market, and can even be partially sold in the market of ancillary services. Fast-start reserve capacity can be easily split, because the station is multi-unit, and it can operate with any power capacity within its design range, roughly speaking, from 1% to 100%, if the station, for example, consists of 10 units.
The station does not consist of one installation, doesn’t it?
This never happens. At least there are, as a rule, two installations at least, because there should be a schedule of maintenance, repairs. The owners of the station do not want to be left without energy sources at a time.
What will the NEC Ukrenergo be able to pay to an investor within today's regulatory framework?
For a kilowatt-hour or for a service as a whole? There are various potential business models. One is when a tender is held, the winning investor receives a PPA (Power Purchase Agreement), or another agreement under which he will be dispatched, and which lists the commands the station will handle, which teams will work on the station, for how long they will be handled, in what mode, the time (hours) per year the station will work, the average number of starts and shutdowns per day, and so on. All this will be registered, and the system operator will pay money accordingly. But these conditions are not yet known in Ukraine so far. And that's why I suggested that the best way is to pay according to the design capacity of the station, as it is done in other countries.
A kind of a booking fee basis to ensure one will always have a certain amount of megawatts ready to switch from zero to 100 percent?
Precisely, the fee is for what you have built to provide this service immediately. This fee in 10 or 15 years should fully payback your investment plus a return. It should be guaranteed, because without a guarantee investors will not come.
In periods when the system operator activate the station as a reserve and the station produces a certain amount of electricity, it consumes fuel, motor resources, which should be reimbursed by the system operator, possibly at break-even point (BEP).
Another model for return on investment is through energy bills per kilowatt-hour. But it a useless approach, because it is impossible to calculate the cash flow for a fast-start facility in advance, as its work schedule is unpredictable. Investors are not interested in relying solely on supplementary income from market participation.
To solely rely on the market of ancillary services, I'm afraid, one won’t get investments paid off
There should be a history record of prices in the ancillary services market, shouldn’t it?
Not only for ancillary services. One need records on other full-fledged segments of electricity market. To solely rely on the market of ancillary services, I'm afraid, one won’t get investments paid off. Today, the situation in market segments is distorted, because price caps are very low.
Currently, the Ukrainian electricity market is not a true market. When it was created, they took the European model as a pattern, and have turned it into parody in kind, which is dragging on until now. Although, this year the European model is already beginning to change in the direction of even greater liberalization, when price caps are either removed or set at a very high level, and electricity trades embrace larger time spans rather than one hour, and they even are moving to 15-minute schedule to the trading. This means that the market more accurately reflects the situation within one-hour of trading activity.
If we disregard the price caps, we can see that in the same German 15-minute market, prices fluctuate much more than in an hourly market, so it allows, for example, for a fast-start reserve facilities to earn and ensure expected payback, because they will see that prices in some trading periods rise quite high.
In addition, I would like to return to the word "fast-start reserve capacity." Previously, some market participants probably did not fully understand its notion, now, I think, this notion is clear to everyone. However, even today I hear about a gaffe term such as ”fast-start coal-fired power plant”, so it is worth one fully understands the notion and nature of a fast-start reserve capacity. Recently, the NEC Ukrenergo's Chief dispatcher Vitaliy Zachenko said that Ukraine should have a fast start station, it should start quickly to full capacity in 15 minutes, and be able to start again within in 15 minutes after its compete shutdown. This generation must provide at least 8 starts and shutdowns per day with an adjustment range of 80%. It is clear that no, if any available, coal-fired or gas-fired power plant can withstand or meet such parameters.
Can such requirements be met only by a natural gas piston unit?
The most efficient and fastest (currently no faster technology) are the gas-piston power plants. We are currently building several that of power plants in kind for Germany. These will be thermal power plants, which in addition to electricity produce heat for the cities of Mainz and Wiesbaden, Dresden, Bremen. These plants are designed, for example, say in Dresden, for 2 thousand starts a year, that is about 5-6 starts per day, with a start time in 2 minutes. Only manufacturers of gas piston technologies took part in tenders for fast start reserve capacities, because no other technology can meet such requirements.
Is a start-up in 2 minutes the ever unsurpassed indicator?
Our latest model comes to full power capacity in 40 seconds. With such 10 MW units, it is possible to compile a power plant of the capacity desired by a customer. Noteworthy, the start-up time of such power plant as a whole will not change – the same 40 seconds to reach the top of capacity range.
Author: Dmytro SydorovAuthor: ExPro