Evaluating compensation for flexibility providers in the South African Wholesale Electricity Market

The electricity sector in South Africa is undergoing restructuring, with proposals in place for the introduction of a wholesale electricity market. The generation mix is currently dominated by an ageing coal fleet with limited flexibility. The share of variable renewable energy (VRE) has been increasing both through the capacity installed by independent power producers and behind-the-meter distributed generation, potentially increasing the requirements for flexibility to compensate for the additional uncertainty introduced by VRE. One of the challenges associated with electricity markets is the missing money problem — the phenomenon where prices in electricity markets do not fully reflect the value of certain resources essential for ensuring reliability, for instance, generators that provide flexibility. By modelling the day ahead market-clearing, unit commitment, and economic dispatch rules in the wholesale market, this study evaluates the proposed South African wholesale market, assessing the implications of limited flexibility on the resulting wholesale prices as well as the compensation for dispatchable and flexible generators. The study finds that existing dispatchable generators that provide flexibility may encounter challenges related to missing money as the share of VRE generation rises, particularly due to increased periods of low wholesale energy prices. Additionally, the study finds that in future scenarios modelling projected growth in VRE adoption, dispatchable generators face higher cycling costs, while curtailment of VRE generation also increases. The addition of storage (corresponding to 10% of peak demand) in the power system helps mitigate some of the potential cycling impacts but limits the number of periods of higher prices. This underscores the need to assess additional market mechanisms to ensure the value of flexible resources is fully reflected, thus guaranteeing the long-term reliability of the power system.