In the previous post, I suggested that creating a competitive heat market could be the best way to deliver value for customers. This would involve breaking up heat network “verticals” into their constituent parts (generation, distribution and supply) with genuine competition in each segment.
Sounds lovely, but there are plenty of devils in the detail. For example, how do you match supply and demand across multiple parties in real time? What happens if a supplier requires more or less heat than they’ve contracted for? What if a generator puts more or less heat into the network than was planned?
To help us deal with these devils, could the electricity market serve as a model for heat?
A quick summary of the electricity market model
I was going to write a summary, but this very good introductory guide from Elexon says it better than I can. If you’re not already familiar with the way the electricity market works, it’s worth a read. But if you’re short on time, I’ll try and pull out the relevant features in the next sections.
Of course, if you’re a real glutton for punishment, you can read the full Balancing and Settlement Code (BSC).
How applicable is the electricity model to heat?
Topology
The electricity system is a single, large, integrated network designed around large generators putting electricity into the transmission network. This carries electricity to 14 distribution networks across the country, which connect to every customer. In other words, it’s one big system connecting every customer to every generator via the distribution and transmission systems.
In contrast, even as heat networks grow and interlink, there will probably always be many district heat networks across the country rather than one monolithic network. These networks will range in size from the minimum needed to support a competitive market (say several thousand homes), right up to city-wide scale.
Time-dependency
Electricity is generated, transported, delivered and used continuously in real-time, and supply must always match demand. For the purposes of trading and matching supply and demand, electricity is considered to be generated, transported and used in half-hour chunks called settlement periods.
Heat isn’t produced and consumed in the same instant like electricity. But on a continuously operating heat network, any heat energy consumed at one end of the pipe must be immediately replaced by heat generators at the other end, which means timing matters. Because of this we’ll need to adopt a similar strategy based on settlement periods.
Trust and authority
In the electricity market, all trust is concentrated in National Grid (the system operator). Parties have to notify National Grid of all contracts (via a notification agent) so they can be used in balance and settlement calculations. Imbalances are settled centrally using the BSC Central Systems. Parties needn’t trust each other but they must trust the system operator, who’s arbiter of all things.
This approach probably won’t work for the heat market. Parties must be able to interact easily and quickly, for example notifying contracts or working out how much heat has been produced or consumed. Waiting on a central nationwide authority to establish the truth would be cumbersome and time consuming.
In any case, it’s difficult to imagine a central authority like National Grid providing services to a large number of decentralised heat networks of varying size.
A localised, trustless (or low trust) model therefore seems most appropriate as it would allow parties involved in a given heat network to interact directly without reference to a central authority.
Coordination
In the electricity market, parties can assess what demand will be and freely enter into contracts, either directly or via an exchange. So far so good. But contracts can only be struck until an hour before the settlement period covered by the contract (a cut-off point known as Gate Closure). After Gate Closure, National Grid takes control, manually matching supply and demand by dealing directly with generators and suppliers, agreeing prices or payment. It’s not uncommon for this to take place by phone. This is a highly-centralised, manual process.
This kind of top-heavy command-and-control approach certainly wouldn’t be our first choice for a new heat market. As an alternative, we could use the same means of conveying price information (e.g. an exchange) to coordinate production and consumption right up to the current settlement period. This would require excellent connectivity between the parties and probably a pre-agreed pricing model for balancing services.
Timeliness and information flow
Determining usage and imbalance takes a long time in the electricity market. As meter data trickles in, imbalances are calculated four times over 14 months, with the picture becoming a little clearer each time. 14 months!
Imbalance position should be clear much more quickly. If we’ve got a clean slate for heat, is it too much to ask that imbalances are completely reconciled once a month? Why not weekly? Or daily? Come to think of it, if all meters are networked, why shouldn’t all usage and generation data be current within an hour?
Transparency of imbalance pricing
Not only does imbalance in the electricity system take a long time to finally quantify, the cost or benefit to the parties is complex to calculate, involving a sea of esoteric terms like Continuous Acceptance Duration Limit, Market Index Definition Statement, Loss of Load Probability and Reserve Scarcity Price. The resulting pricing applies to all parties on the network.
This might be acceptable among highly expert actors in the electricity market, but isn’t ideal for a more inclusive heat market.
Furthermore, imbalance pricing probably shouldn’t be the same for every heat network. Instead it could be calculated according to the requirements of each individual network rather than being the same for all. For example, a heat network with lots of 70s-built sheltered housing may place a higher value on reliability than a network serving mostly new-build flats.
Cost to suppliers
Becoming an electricity supplier is expensive. The license itself is cheap but the cost of IT systems (needed both for operations and for compliance with Balance and Settlement Code) is high, as is the cost of specialist people. As a ballpark figure, allow at least £1m to set up as a supplier and another £1m per year for systems and people on an ongoing basis.
It’s also necessary to lodge credit (i.e. deposit cash) with Elexon to cover the credit risk that comes from imbalance. Particularly for small suppliers, this can be prohibitive.
Given that there will be many heat networks of varying size, the majority probably won’t be able to bear high cost for IT systems or specialist people. IT systems must therefore be lightweight and low cost, as should the requirements for specialists.
In addition, a more liquid market and tighter information feedback would minimise exposure to default risk, reducing the need to lodge credit.
Summary comparison
Here’s a roundup of how applicable the electricity market model is for a new competitive heat market.
| Aspect | Electricity market | Proposed competitive heat market |
| Topology | A single national network | Lots of networks of varying sizes |
| Time dependency | Half-hour settlement periods | Similar to electricity. Perhaps hourly? |
| Trust and authority | All trust is concentrated in National Grid | A trustless (or low trust) peer-to-peer model would allow parties on a network to interact directly without reference to a central authority |
| Coordination | Highly centralised and manual process to match supply and demand after Gate Closure | Use price information to coordinate production and consumption up to current settlement period |
| Timeliness and information flow | Imbalance calculated four times over 14 months | Imbalance position should be clear in days or even hours |
| Transparency of imbalance pricing | Imbalance pricing is complex and the same across the network | Imbalance pricing should be simple, transparent and appropriate for each individual network |
| Cost to suppliers | Systems and people are expensive. So is the requirement to lodge credit | IT and people cost must be low. Cost of credit should be minimised by tightening information loop |
What’s the verdict?
When you look at it closely, it’s clear that the electricity market is slow, clunky, arcane, expensive and highly centralised. Hardly a model you’d want to adopt verbatim for a competitive heat market, which we want to be fast, efficient, accessible, cheap and decentralised.
So now we know what characteristics we want our solution to have, but we haven’t yet sorted out many of the devils in the detail. In the next post, I’ll propose a solution that I hope fulfils our shopping list of requirements.
carbon limited 
This is starting to sound promising. 🙂
To pick up on one point:
“Heat isn’t produced and consumed in the same instant like electricity. But on a continuously operating heat network, any heat energy consumed at one end of the pipe must be immediately replaced by heat generators at the other end, which means timing matters. Because of this we’ll need to adopt a similar strategy based on settlement periods.”
This isn’t true.
On teeny tiny networks the volume of piepwork is such that load changes are translated almost immediately back to the heat supply and it’s a good enough approximation.
On larger networks changes in flow travel at the speed of sound (>1000 m/sec) but heat changes only travel at the speed of water (2-3 m/sec at peak; substantially less during regular operation).
Throw a couple of km at things, with variable distances between the various supplies and demands, and (1) it’s not at all obvious who supplied who with what and (2) it’s not as easy to manage as a storage-less electricity system or a gas system where counting product into a bucket and back out of a bucket is relatively straightforward.
True flexibility that would allow an ‘operator’ to manage a distribution network that allows multiple ‘producers’ to ‘supply’ multiple ‘consumers’ is chuffing hard.
It’s simple enough commercially where one ‘operator’ buys heat from multiple ‘producers’ into a lowest-cost pool and resells it to multiple ‘consumers’ as a monopoly though.
The latter is the standard approach on the continent, with appropriate oversight of the ‘operator’ by their either being owned by the consumers, a non-profit organisation, or otherwise regulated to act in the interest of the consumers rather than the producers.
This last point is, I think, is where some of the producer-operator networks we have in the UK perhaps aren’t the ideal commercial model. They do finance the pipework though, and without the guaranteed revenue from bering allowed to run the production units you might struggle to finance those pipes…