This market structure is an unfit design for distributed energy resources (DERs), which are photovoltaic generation, wind turbine generation, and so on, and forecasting output is difficult. DERs should decide each bidding price and quantity of all time periods based on the day-ahead weather forecast. However, output forecast cannot be done perfectly, forecast error will be occurred [3]. Difference between actual output and bidding quantity give penalty to DER. This penalty reduces the economic value of DER. Additionally, the construction cost of DERs in the 1990s was higher than the present cost. The average market price which was decided by mainly thermal, large scale hydro, and nuclear generation was too low to pay for the massive initial cost of DER. However, DERs are one kind of the low carbon and renewable energy plant, it is good for security of energy source supply, and environmental protection. Therefore, the European Union, the United States, and other countries have promoted several DER policies, mainly renewable portfolio standard (RPS) and feed in tariff (FIT).

In some countries, modification of the electricity power market design has started. For example, the United Kingdom is starting the Electricity Market Reform (EMR) [6,12]. The objective of EMR is the securement of the investment needed to deliver a reliable diverse low carbon technology mix. This reform is mainly constructed following four policies [5]:

The policy which has an especially high relationship with DERs is FIT–CfD. FIT–CfD stabilizes returns for DERs at a fixed level known as the strike price. DERs receive revenue from selling their electricity into the spot market as usual. In addition, when the market price is below the strike price they also receive a top-up payment for the additional amount. To compare with strike price, average market price in a certain period (eg, 1 month) use for reference price. Conversely if the reference price is above the strike price, the generator must pay back the difference. Fig. 13.4 shows the image of FIT–CfD.

DERs should bid to the spot market differently from normal fixed FIT. Accordingly, DERs output should be controlled in order to avoid the penalty caused by the difference of bidding quantity and actual output. FIT–CfD retains short-term market signals for efficient operation to DERs. Additionally, the strike price will be decided by auctions or use some other competitive process. Fixed FIT only improves long-term revenue certainty, but FIT–CfD makes the construction cost lower by fair competition. As a result, FIT–CfDs have more cost-effective points than other options for support, reducing the cost to consumers. It will be interesting to see the results of the FIT–CfD starting from 2017 in the United Kingdom.

Future policies for DERs such as FIT–CfD will be more competitive and DERs will be required to have high controllability. The only one kind and one plant operation will become more difficult to get high profit. Virtual power plants (VPPs) are one of the effective business models applied to this trend and maintain the economic value without FIT. VPPs combine not only several kinds of DERs but also contracts of demanded response (DR) and increases the VPP’s diversity and robustness. Fig. 13.5 shows an image of VPP.

Navigant Research, a market research and consulting company specializing in green energy market, defined VPP as,

 

From this definition, we can take two important points. The first point is “remotely and automatically dispatch and optimize DER.” The output characteristic of DER is highly dependent on where this located. In order to combine several characteristics and reduce the uncertainty effect, DERs consisting of VPPs should be widely placed and have various kinds where possible. Therefore, the remote communication environment needs to be able to operate the wide spread of DERs in cooperation. Additionally, in order to enhance the VPP’s economic efficiency, entering into a real-time market or capacity market, not only the spot market, is necessary. VPPs are required for real-time operation and frequency response to enter these markets. These operations cannot be realized manually, and automatic control applied to whole VPP systems is needed. The second point is “linking retail to wholesale markets.” The market price will become even more variable and unforecastable because of the mass penetration of DER with high uncertainty. Therefore, market bidding and DER operation should be optimized to maximize the VPP profit in consideration of the DER’s characteristics and price variability [10]. Besides, advanced retail contracts, including DR, are useful. There is a probability that the combination of a bidding strategy and the condition of contracts which give high expected profit to VPP is proposed by taking into account the customer’s and DER’s characteristics.

VPP systems have already started. Next Kraftwrerk is targeting the real-time market mainly in Germany, Energy Pool is making DR an important project in France, and so on. In the future, several VPP systems will be proposed and implemented. These will have a larger effect on the electricity power system and market than simple DERs which have been introduced.