VPP Participation in the FCR Cooperation Considering Opportunity Costs

Round 1

Reviewer 1 Report

The paper “VPP participation in the FCR Cooperation considering opportunity costs” by Ribeiro et al. presents a methodology for estimating the profitability of a VPP (aggregating solar/wind sources and hydrogen electrolysers) entering the FCR market.

The main contribution of the paper is the evaluation of opportunity costs, which are to be taken into account when considering the overall convenience of this operation.

In this vein,  the Authors provide a sound methodology and show how this strategy would be profitable in the case of Spain and Portugal, should these countries abandon the present national strategy and introduce an FCR market.

While the general procedure is indeed convincing, the results are obtained using  a number of assumptions (pp. 7-8 and p.12) that might fail to be true. The relevant uncertainty does not impair the application of the methodology but could alter the convenience for the VPP to put in a bid and consequently the overall profitability. The Authors might introduce a short paragraph to illustrate this point, especially the possibility of these VPPs turning into “price makers”, should their number and capacity grow to account for a sizeable portion of the market. 

The paper is well-written and reads well. A few typos should be removed.

Author Response

The authors would like to thank the reviewer for the provided feedback.

The comment regarding the consequences of the VPP becoming a price-maker instead of a price-taker is a very interesting one. Indeed, in the original paper, this was only briefly discussed. A paragraph was reformulated with a new reference.

“As mentioned by [27] regarding energy markets, it is due to the simplicity of model implementation that the common assumption is that producers cannot impact the market-clearing price with their bids. These market agents are “price takers”, like the VPP of the present paper, which bids at zero price to ensure it is cleared. However, if the VPP presents a large portion of bids, it will have impact in the market clearing price [27]: the market clearing price would be lower, because more expensive bids would not be accepted. In this case, the revenue of the VPP itself would be lower, as it is proportional to the market clearing price.”

Reviewer 2 Report

This paper studies the participation of Virtual Power Plants in Portugal and Spain in the international FCR market by aggregating wind power generation, photovoltaic power generation and electrolytic hydrogen equipment. Based on the wind power generation, photovoltaic power generation and electrolytic hydrogen equipment aggregated by Virtual Power Plants, this paper considers the opportunity cost of Virtual Power Plants participating in the FCR market in the electric energy market and the hydrogen market, and calculates the aggregation scale and income of Virtual Power Plants in Portugal and Spain in the future.

The review opinions of this article are divided in·to the following 10 points :

1.         In the ' 2.2 Assumptions and limitations ' section of this article，why the FCR upward and downward energy activation (UP_enc,t and DN_enc,t) is assumed as parameters known in advance , instead of a variables which is need to be optimized.

2.         In this article，RGS is assumed to be constant at 20 %, which means that only 20 % of the relevant energy entities in this paper can be used to participate in the FCR market. Is this the reason for local policies or other reasons? Is there a possibility that the revenue of the FCR market exceeds the energy market, resulting in the opportunity cost of participating in the FCR market?

3.         In this article, CBMP is assumed to be known, and in order to ensure that VPP will always win the bid, the quotation of VPP will always be lower than that of CBMP. How to consider the uncertainty of CBMP in practice and make the quotation of VPP more reasonable?

4.         In this article, the sales price of the hydrogen market will directly affect the opportunity cost calculation of HE.Is it necessary to consider the impact of changes in the price of the hydrogen market on the opportunity cost of HE？

5.         This paper considers the participation of Virtual Power Plants in the FCR market, but only part of the resources of the whole country as a large virtual power plant to participate in the FCR market, how to consider the scheduling relationship of the internal resources of the virtual power plant?

6.         In this paper, Portugal and Spain are involved in the international FCR market as two large Virtual Power Plants, but in order to ensure that the market is active and competitive, there may be multiple Virtual Power Plants within the two countries. How to consider the resource allocation of the FCR market with multiple Virtual Power Plants? If you do not need to consider, please explain.

7.         Portugal and Spain, considered in this paper, seem to be measured as two independent wholes in terms of scale and return respectively.is there a possible alliance between the two countries, and as a whole to participate in the international market to obtain more benefits? Please explain.

8.         The parameters of HMin and HMax in Table 2 will directly affect the boundary value of the variable DHc, t. What is the data source of this part? Is the data reasonable?

9.         In the ' 3.Results ' section of this article, from Figure 9, there seems to be a large order of magnitude difference between PT and PE 's VPP monthly revenue. Is this reasonable? What is the cause?

10.     In the ' 3.Results ' section of this article ，table 3 refers to the ' Capacity factor of HEs ', please add what the changes in its data mean for the power systems and electricity markets in Portugal and Spain.

Author Response

The authors would like to thank the reviewer for the feedback and detailed questions. Below are the authors' replies, with the original reviewer comments and questions on bold. 

This paper studies the participation of Virtual Power Plants in Portugal and Spain in the international FCR market by aggregating wind power generation, photovoltaic power generation and electrolytic hydrogen equipment. Based on the wind power generation, photovoltaic power generation and electrolytic hydrogen equipment aggregated by Virtual Power Plants, this paper considers the opportunity cost of Virtual Power Plants participating in the FCR market in the electric energy market and the hydrogen market, and calculates the aggregation scale and income of Virtual Power Plants in Portugal and Spain in the future.

The review opinions of this article are divided in·to the following 10 points :

1. In the ' 2.2 Assumptions and limitations ' section of this article why the FCR upward and downward energy activation (UP_enc,t and DN_enc,t) is assumed as parameters known in advance , instead of a variables which is need to be optimized.

Beginning with the end of the question: the energy activation is a result of the power system conditions in a given moment, so when the frequency is below 50 Hz upward energy is activated and vice versa; as such this variable would never be able to be optimized. Regarding the assumption of energy activation being known in advance, it can be said that analyzing the hourly data it appears impossible to forecast how much downward and upward energy will be activated in a given interval; in any case, average values and standard deviations are known (Figure 6) and this should be enough for a realistic strategy of the VPP.

A sentence was reformulated in the manuscript: “Downward / upward energy It is assumed that the values of energy activated by the upward and downward FCR bid, DN\_en_{c,t} and UP\_en_{c,t} respectively, are known and proportional to the ones in France and to the submitted VPP bid capacity, B_{c,t}, as per Equations 6 and 7. This means that these values are model inputs which in reality would be impossible to forecast although Figure 6 gives us average and standard deviation values, which would be useful for the VPP bidding strategy.”

2. In this article，RGS is assumed to be constant at 20 %, which means that only 20 % of the relevant energy entities in this paper can be used to participate in the FCR market. Is this the reason for local policies or other reasons? Is there a possibility that the revenue of the FCR market exceeds the energy market, resulting in the opportunity cost of participating in the FCR market?

In the paper it is written “The second coefficient, $RGS_c$, represents the reserve margin for which these units are available for FCR provision (e.g., 5\%, ensuring that a minimum of 95\% of the generated power at any given moment is reserved for the energy market)”, so the reviewer’s interpretation that “only 20 % of the relevant energy entities in this paper can be used to participate in the FCR market” is not in line with the authors’ intention.

3. In this article, CBMP is assumed to be known, and in order to ensure that VPP will always win the bid, the quotation of VPP will always be lower than that of CBMP. How to consider the uncertainty of CBMP in practice and make the quotation of VPP more reasonable?

This question is briefly approached in the paper: “Although here is assumed that CBMPs are known in advance, in reality, they would need to be forecasted.

A noteworthy conclusion is that exogenous variables, such as natural gas prices, carbon pricing, and even market strategies employed by BSPs, pose challenges in assessment, rendering the precise computation of future CBMPs complex.”

Forecasting the CBMP one year ahead is difficult for some of the given reasons such as natural gas prices and carbon pricing. But on a daily basis these variables would in fact be easy to predict as they don’t change so much. More complex would be to understand market strategies of market competitors. In the authors’ opinion, the forecasting of CBMP should be somewhat similar to the forecasting of energy market prices, which is a common practice and for which there is a vast literature. Machine learning algorithms are common in this field.

The paragraph above has been reformulated:

“Although here is assumed that CBMPs are known in advance, in reality, they would need to be forecasted.

A noteworthy conclusion is that exogenous variables, such as natural gas prices, carbon pricing, and even market strategies employed by BSPs, pose challenges in assessment, rendering the precise computation of future CBMPs complex.

Note that the forecasting would take place in the day-ahead; it is likely that the natural gas and carbon pricing would be easy to forecast because variations would tend to be minimal in this time frame.

More complex would probably be the understanding of market competitors’ strategies.

This is basically the same forecasting problem that market competitors face in the day ahead energy market.”

4. In this article, the sales price of the hydrogen market will directly affect the opportunity cost calculation of HE.Is it necessary to consider the impact of changes in the price of the hydrogen market on the opportunity cost of HE？

The answer to this question is connected to the beginning of the answer given in 3. A real-world VPP working in this market would need to assess the daily changes of the hydrogen market to begin with, in order to forecast it.

The answer to the question itself is yes, it is necessary to consider the hydrogen price. Let us consider that the hydrogen price is very large and the FCR market price is low: on the one hand, the FCR market is paid by availability and this revenue will be low; on the other hand whenever the hydrogen electrolyser needs to provide upward reserve it will generate less hydrogen and therefore sell less hydrogen, which would be highly remunerated. According to the definitions and equations given in the paper, this is a high opportunity cost.

A paragraph underlining this idea was added in the discussion:

“Note that in the present analysis the hydrogen price was kept constant, but it is in itself a source of uncertainty.
If the hydrogen price is very large, upward reserve reserve activation implies that the electrolysers decrease their energy consumption and therefore hydrogen production; this leads to high opportunity costs.”

5. This paper considers the participation of Virtual Power Plants in the FCR market, but only part of the resources of the whole country as a large virtual power plant to participate in the FCR market, how to consider the scheduling relationship of the internal resources of the virtual power plant?

This interesting question concerns an issue that is “technical” and lies outside the scope of the paper. Let us consider that the VPP is providing 100 MW of reserve and suddenly there is an increase in the frequency that requires activation of 1 MW of downward reserve (to be provided by wind / solar). Where would this 1 MW come from? There are several possibilities: the VPP would switch off one wind turbine that would be generating 1 MW, would decrease 10% of a wind farm that would be producing 100 MW or would decrease 1% production the total solar farms production that could be in that moment 100 MW. Existing VPPs such as the one cited in ref [13] are already confronted with this technical question.

A paragraph was added to the discussion highlighting this:

“Technical questions about the dispatch of existing sources within the VPP perimeter were left outside the paper.
For instance, suppose that in real time it is required for the VPP to activate 1 MW of downward reserve; this puts the question of where will this 1 MW come from?
It is the VPP task to decide whether this 1 MW will imply the reduction of production from one single wind turbine or from a whole solar farm.
Such problem is already faced by VPPs such as the one in [13] so it is assumed that VPPs already possess knowledge about the best way to solve the real-time dispatch.”

6. In this paper, Portugal and Spain are involved in the international FCR market as two large Virtual Power Plants, but in order to ensure that the market is active and competitive, there may be multiple Virtual Power Plants within the two countries. How to consider the resource allocation of the FCR market with multiple Virtual Power Plants? If you do not need to consider, please explain.

Generally, increasing market competition drives down profit margins. This is an interesting scenario that also lies outside the scope of the paper. It was assumed that there would be a single VPP, but naturally, if the business model is attractive there will be competing VPPs in this market. In any case, such VPPs would compete as participating units do nowadays, so in reality the mentioned resource allocation is not relevant.

A paragraph was added:

“Another limitation is that there is a single VPP operating in each country.
It is well known that increasing market competition drives down profit margins, but the study of multiple VPPs lies outside the scope of the paper”

7. Portugal and Spain, considered in this paper, seem to be measured as two independent wholes in terms of scale and return respectively.is there a possible alliance between the two countries, and as a whole to participate in the international market to obtain more benefits? Please explain.

Indeed, Portugal and Spain, are different countries with separated TSO, so these TSOs need to be in the market as separate entities. (It should be obvious that different BSPs are, by definition, different entities). In the FCR Cooperation there are small countries (e.g. Slovenia) and large countries (e.g. Germany and France). Thus, the mentioned “alliance” is not possible. But the market integration is in itself an alliance, since resources from different countries are shared, countries that have less supply side bids buy their supply on foreign countries, and so on. Market integration, in general, is already a benefit.

In the introduction some sentences were added:

“In general, it is expected that such a market integration is a benefit for the participants, which can share resources in a wider market leading to market efficiency.”

and:

“Spain and Portugal transmission grids are operated by different TSOs, so each of them would join the FCR Cooperation as a separate entity.”

8. The parameters of HMin and HMax in Table 2 will directly affect the boundary value of the variable DHc, t. What is the data source of this part? Is the data reasonable?

In the paper it is written: “The demand of HEs DH_{c,t} is likewise treated as a parameter, dependent on the parameter G_{c,t}. Specifically, it is zero when G_{c,t} is below the user-defined variable HMin. Subsequently, it increases linearly until it reaches the installed HE installed capacity PN_{c} when G_{c,t} surpasses the user-defined variable HMax, as outlined in Equation 1”

This was added in the methodology when introducing these variables:

“The intuition for HMin and HMax is the following: if in a given hour, the renewable energy generation is small, no hydrogen is generated, and if there is a high renewable energy generation, the hydrogen electrolysers work full capacity. This is in line with the strategic objectives of the European Commission in ensuring that hydrogen generated with grid connected electrolysers work more during hours with more renewable generation. As for the values of Hmin and Hmax, they were found after analysing the time-series for renewable energy generation in such countries, and adjusting Hmin and Hmax such that the capacity factors of HEs (figures A1 and A2) would be at least 50%.”

The capacity factors are, thus, a result of altering such parameters, and they were made explicit in the paper. The provided Excel sheet would allow for changing these parameters and computation of VPP revenues and opportunity costs are immediately produced.

9. In the ' 3.Results ' section of this article, from Figure 9, there seems to be a large order of magnitude difference between PT and PE 's VPP monthly revenue. Is this reasonable? What is the cause?

Portugal and Spain are countries with different size, so naturally the results are of a different order of magnitude. Note that the parameters in scenarios presented in table 2 are also very different for the two countries.

In the discussion it was added:

“Results in Portugal and in Spain naturally differ in magnitude because the Spain has significantly more population, more renewable energy generation and, in the future, more hydrogen electrolysers are expected to be installed there. Therefore, results reflect this magnitude difference.”

10. In the ' 3.Results ' section of this article ，table 3 refers to the ' Capacity factor of HEs ', please add what the changes in its data mean for the power systems and electricity markets in Portugal and Spain.

The capacity factor was addressed in the answer to question 8. For the power system itself nothing would change; as the capacity factor is a simple indicator that means what is the average use of the electrolysers in relation to their installed power.