In this contributed article, Mark Macaulay, partner, Adam Brown, counsel, and Roddy Cormack, senior associate, from the projects team at law firm Dentons address the market opportunity for pumped storage hydropower.
Inertia, a key but complex physical aspect of electricity systems, is the ability for rotating machinery, traditionally via thermally powered turbines, to provide system stability by resisting sudden changes in frequency.
System frequency stability refers to maintaining operating frequency following disturbances between generation and load – like spikes in power demand or outages. This is crucial for power delivery and preventing damage to equipment.
Grids fed by traditional thermal power have inertia and system frequency stability built in. This means the impact of power plant outages is not felt instantly (if a generator fails, its turbines do not stop turning instantly) and it is easier for grid operators to act to maintain frequency.
Solar panels and most wind turbines cannot provide this kind of inertia. As the proportion of thermal power on the grid declines, so does the supply of this built-in “stability service”.
However, it is possible that the demand for this capability will fall as well, as the nature of electricity generation shifts.
Recently, the GB Electricity System Operator (ESO) has, with Ofgem’s approval, reduced its minimum inertia requirement for system operation, and is contemplating further reductions – but it has also launched new tenders to ensure that minimum requirement is met.
Overa, the sensitivity of wind and solar power to sudden weather changes, causing rapid fluctuations in output, means that grid operators have to consider maintaining a supply of inertia or functionally equivalent stability services carefully to minimise the risk of major blackouts or other system failures.
A strategic advantage for pumped hydro?
Options in a “zero-carbon” grid include zero-carbon thermal power (e.g. nuclear), Pumped Storage Hydropower (PSH), synchronous condensers (that do not generate electricity but resist frequency changes) and using batteries for fast frequency response.
PSH can provide system stability through inertia without generating. However, the challenge for zero-carbon grids is not just to find solutions that work, but to identify which are the most efficient and award them appropriately for the service they provide.
If PSH projects become more significant providers of stability services, this raises the question of how this will this affect the competition for “cap and floor” support for Long Duration Energy Storage (LDES) being run by Ofgem.
Under cap and floor, a minimum revenue floor helps LDES operators manage high capital costs and long build times, while the revenue cap controls costs for consumers.
Part of the process of setting the cap and floor is a Cost Benefit Analysis (CBA), carried out by Ofgem with assistance from the ESO.
No such thing as a free spin?
Thinking about system stability, specifically inertia, as a service in its own right, is one thing when considering a device or action with the sole purpose to provide that service, and another when considering equipment or behaviour that also generates power.
It is harder to value inertia that’s provided alongside other services.
The ESO, in connection with its most recent tender for stability services (including inertia), states that it will only accept the most competitive offers to provide those services if they are no more expensive than what the ESO thinks it would have to pay to achieve the same system stability results via a balancing mechanism (which manages the balance between electricity supply and demand).
For the CBA, the ESO has indicated that it does not propose to model system operability benefits (like inertia) “directly”.
However, it will aim to “capture” projects’ potential to earn revenue (outside the cap and floor) from providing subsidiary services.
In short, the CBA process could cut both ways for PSH projects.
Ensuring inertia remains a strategic consideration
There is also a question over how Ofgem may seek to recognise the value of inertia in the LDES context.
One approach would be “shadow pricing”, assigning value to a service with no readily available market price.
But perhaps for the ESO, the value of LDES plant inertia would lie partly in a reduced need to tender specifically for stability services (possibly using the balancing mechanism instead).
Alternatively, Ofgem may apply weighting factors (values for data that reflects importance) to LDES projects that provide clear stability benefits, preventing over-prioritisation of short-term financial metrics at the expense of primary grid stability needs.
Weighting criteria for projects contributing essential system stability would also be a step in the right direction.
Another approach would be to require LDES projects to demonstrate inertia contribution potential as part of the cap and floor process, which would help recognise the value of systems like PSH without needing a cash figure.
The establishment of minimum stability contribution criteria is likely to be the most appropriate framework for aligning LDES deployment with whole-system needs beyond arbitrage value alone.
Non-inertia-providing assets must not undermine resilience in LDES projects, avoiding market distortions in doing so as well as the encouragement of future market mechanisms to formally recognise inertia in a structured way.
While inertia may not yet be factored into cap and floor calculations, its current importance should influence final assessments and influence calculations in future.
Given that this is a common concern across all ESOs globally who are managing the transition away from thermal power production, Ofgem’s approach to recognising inertia within the CBA framework may be viewed with interest beyond the UK.