A virtual power plant, or aggregator, is a new type of activity in the electricity market. Key features of electricity aggregation services

On 27 July 2023, Law of Ukraine No. 3220-IX "On Amendments to Certain Laws of Ukraine Regarding the Restoration and 'Green' Transformation of the Energy System of Ukraine" came into effect. This law amends a number of regulatory acts governing the activities of renewable energy source (RES) generation, including the Law of Ukraine "On the Electricity Market" (hereinafter referred to as the Law).

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In this article, we will examine a new development in electricity legislation: aggregation activities. Below, we will break down the definition of aggregation, the requirements and specific licensing conditions, and determine how this will work in practice and which market participants will find it relevant.

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Article contents:

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1. What is aggregation activity?

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2. Requirements for aggregation activities and obligations.

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3. Conclusions. How might this work in practice?

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1. What is aggregation activity?

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According to Part 1 of Article 1 of the Law, an aggregator is an independent aggregator or another electricity market participant that carries out aggregation activities.

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The Law defines aggregation activity as follows: it is an activity in the electricity market carried out by a business entity, involving the combination of electrical installations intended for the production, consumption, and/or storage of electricity for the purpose of buying and selling electricity, providing ancillary services, and/or providing balancing services in the electricity market.

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The combination mentioned above constitutes an aggregated group, the participants of which are connected to each other based on an agreement for participation in an aggregated group.

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In terms of structure and the model for combining participants, an aggregated group is legally most similar to a concept already familiar to the market: the balancing group. Just as a balancing group has a single entity responsible for balancing (the one that established the group), an aggregator in an aggregated group manages the aggregation of electrical installations for all participants within that group.

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In legal terms, an aggregated group is a union of market participants into a single aggregation unit (a virtual power plant) aimed at generating additional profit by optimizing electricity trading, as well as providing ancillary and balancing services to NPC Ukrenergo.

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2. Aggregation activity requirements and responsibilities.

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It should be noted that aggregation activities require a license from the National Energy and Utilities Regulatory Commission (NEURC). However, the Law provides for exceptions where a license is not required, specifically if the entity intending to carry out aggregation activities already holds one of the following licenses:

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- electricity generation license;

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- electricity storage license;

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- electricity supply to consumers license;

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- license for the right to conduct business activities as a guaranteed buyer.

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At the same time, while holding the aforementioned licenses and conducting aggregation activities (without obtaining a specific aggregation license), a market participant must comply with the licensing conditions for aggregation.

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It should also be noted that the Law introduces the concept of an "independent aggregator." To qualify for this status, an aggregator must not engage in the supply of electricity to consumers. Unfortunately, at the time of writing, current regulations do not provide a clear distinction between operating as an "aggregator" versus an "independent aggregator."

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The aggregator also acts as the party responsible for the balance of all members of the aggregated group, except for consumers who receive electricity from other suppliers. Thus, in our view, an aggregated group can be considered a balancing group within the electricity market, but with broader capabilities regarding the purchase and sale of electricity, as well as the provision of ancillary and balancing services.

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The Law also imposes capacity limits on electricity generation facilities that may be part of an aggregated group. This limit is set at no more than 20 MW of installed capacity for each individual generation unit.

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In this regard, the provision in the Law stating that the aggregator is not liable for electricity transmission and distribution service fees deserves special attention.

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Among the aggregator's duties outlined in the Law, we would like to highlight the following.

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- act as a balancing service provider in cases defined by market rules;

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- offer generating capacity on the balancing market in accordance with market rules;

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- offer and provide ancillary services to the transmission system operator in cases and in the manner defined by market rules;

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- inform members of the aggregated group at least once per billing period about the results of the aggregated group's activities (volumes and costs of electricity and/or services purchased and/or sold on the electricity market, etc.);

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- ensure the ability to manage electrical installations that are part of a single aggregation unit, separately for each commercial metering area of the network.

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Regarding the final requirement to ensure remote control of electrical installations, we interpret this as the aggregator needing appropriate software that allows for the remote management of electricity generation and storage units. This requirement is logical and follows from the obligations to offer generating capacity on the balancing market, provide ancillary services, and execute dispatch commands for the aggregation unit.

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The market cost of such software is extremely high. This indicates that the barrier to entry for aggregation activities is significantly higher than for electricity supply or trading.

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The aforementioned obligations demonstrate that, in the legislator's view, an aggregator (and an aggregated group) is akin to an electricity producer and is essentially a virtual power plant consisting of small, distributed units for generation, consumption, and storage.

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3. Conclusions: How can this work in practice?

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Given the recent legislative changes, it can be concluded that the introduction of aggregation as a new type of activity is a positive trend for both Ukraine's energy system and the market participants who will join aggregated groups or become aggregators themselves.

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As noted above, based on legislative norms and operational requirements, an aggregation unit will be viewed primarily by the transmission system operator, NPC Ukrenergo, as a single generation unit rather than a large number of individual participants. In essence, this is a virtual power plant that will participate in balancing the energy system and providing ancillary services. This will allow both the aggregator and the members of the aggregated group to generate additional revenue.

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We believe that in practice, this will look as follows (for example): Several renewable energy power plants join an aggregated group managed by an aggregator. This union is formed based on a corresponding agreement for participation in an aggregated group. The aggregator acts as an alternative to the Guaranteed Buyer for renewable energy producers; it purchases the generated electricity, resells it, and acts as the balance-responsible party. Additionally, the aggregator provides ancillary services to NPC Ukrenergo and executes dispatch commands. The aggregator earns a profit from these activities and makes the agreed-upon payments to the members of the aggregated group.

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We would like to specifically note that, unfortunately, the Ukrainian energy market often faces situations where mechanisms work well on paper but encounter significant problems in practice (for example, PSO settlements). Given the large volume of debt owed by NPC Ukrenergo on the balancing market, the question arises: will NPC Ukrenergo's debt to aggregators continue to grow, and how will payment discipline be maintained? Unfortunately, we will only see the answer to the latter question after the fact.

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FEDOTOV & PARTNERS is a legal and consulting firm specializing in services for the electricity and natural gas market. Our experience in supporting energy companies means we don't just know what the energy laws say—we understand how the energy business works in practice. If you have any legal questions, we are always ready to help and offer you the most effective solutions.

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