ILDEFONSO FELIPE NOVELO GARCIA

6.4

Combined Business Model for an Aggregator

A combined business model can expand the horizon of flexibility by both selling excess flexibility in specified markets as well as trade through bilateral contracts. As stated in previous chapters, some actors have limited access to markets or are excluded from various trading methods due to lack of profit. By engaging in di↵erent trading methods, the aggregator can reach out to more buyers. Additionally, in reality buyers of flexibility will not demand flexibility in the exact same hours, and thus the aggregator can optimize the value of his flexibility portfolio by exploiting this. The trade-o↵ between di↵erent trading methods for an aggregator will be discussed in this section. It is assumed that the aggregator has a certain volume of flexibility available to a given price, and hence only the aggregator’s revenue is studied here.

6.4.1

The trade-o↵ between contracts and markets

The aggregator faces a trade-o↵ between the volume of flexibility to be bound in con- tracts and the volume of submitted bids in a market, and it is difficult to calculate the optimal combination of these methods without using an advanced optimization model5_.

When determining the optimal combination, the aggregator must consider the alter- native value of other opportunities. Market barriers, market access, bargaining power and other complicating factors should also be taken into account. The aggregator must ensure sufficient flexibility available to cover all his agreements at any time, as he will incur large penalty costs if he fails to do so. The aggregator’s profit when operating with a combined business model can be described as

max ⇡ACBM = ⇡AM⇢ + ⇡CA(1 ⇢) (6.31)

where ⇡MA is the profit obtained from trading in existing markets, piCA is the profit from

bilateral contracts with buyers and ⇢ indicates the allocation of flexibility. As the ex- pression states, the flexibility should be allocated to where it is valued the most. In contracts, the aggregator has the opportunity to determine the rules by designing the contract and specifying the contract terms. It is believed that buyers requiring secure supply, as grid companies, would prefer to engage in contracts rather than markets to ensure a sufficient volume of flexibility available at all time. In contrast, retailers and wind power producers might be less interesting in committing on a long-term perspec- tive as their problems are related to more unpredictable incidents. However, these actors might be willing to engage in contract on a seasonally basis, as the regulating prices are higher during the winter. Short-term contracts with certain actors could be combinable with long-term contracts, and can ensure that excess flexibility in given periods is sold.

In the existing electricity markets the aggregator can obtain profits by optimizing bids submitted in the di↵erent markets. To do so, the aggregator needs an advanced opti- mization model considering the frequency of events and timing of the peak load, where

prices are highest. Trading flexibility in existing electricity markets does not solve the capacity problems of the grid companies, but retailers and wind power producers can indirectly gain from lower regulating prices. Bids of flexibility in Elspot is expected to decrease the average spot price, and hence retailers, as buyers in this market, will gain from this while wind power producers, as suppliers in this market, will face revenue losses. As discussed in Subsection 6.3.4 the Reserve Option Market provides the highest profit for an aggregator as he receives an option premium regardless of the volume of submitted bids.

Due to the fact that the aggregator must ensure sufficient flexibility available in all agreements he will not be able to bind up large volumes in the Reserves Option Mar- ket and at the same time engage in long-term contracts on large volumes with a grid company. Hence, the aggregator could specialize on one core business and find smart solutions to utilize excess flexibility in every hour. One opportunity is to engage in short- term contracts with retailers or wind power producers, or trade the excess flexibility in existing electricity markets or separate flexibility markets. Research has suggested that new separate flexibility markets will arise. It is, however, uncertain wether an aggregator will exist within such market but if the aggregator can act as a monopoly in a flexibility market this will be even more profitable than contracts.

6.4.2

Illustrative study of a combined business model

The profits from di↵erent business models are compared by performing simple estimates. The calculations are based on an available volume of 5 000 kW flexibility in a specific hour, like in the calculations in Subsection 6.3.4. Thus the costs related to the flexibil- ity portfolio are equal in both trading methods, making the results comparable. The flexibility is aggregated from 5 000 households in which can reduce 1 kW each in the specified hour. The two-part linear contract applied in the calculations is presented in Subsection 6.2.2.

Table 6.3: Contracts between the aggregator and the buyers of flexibility.

Grid company Wind power producer Retailer

Wholesale price 0,8 0,8 0,8

Lump sum 33 803 -63 867

Revenue aggregator 37 765 3 899 4 829

As seen from Table 6.3 the lump sum in the two-part linear contract between aggregator and wind power producer is negative due to profits lower than their reservation profits. Additionally, the profit obtained in a contract with a retailer or wind power producer is substantially lower than in the contract with the grid company. The profit from