Ancillary Services: The Hidden Value Streams Stabilising Modern Grids

For decades, ancillary services operated in the background of power systems, quietly maintaining grid stability whilst thermal generators earned the bulk of their revenue from wholesale electricity sales. Today, as variable renewable generation displaces synchronous plant and system operators confront unprecedented technical challenges, these once-peripheral services have moved to centre stage.

Ancillary services represent a constellation of technical capabilities required to maintain power system security and quality. Unlike energy, which satisfies consumer demand, these services ensure the system can deliver that energy reliably — maintaining voltage levels, balancing supply and demand in real time, and providing the physical characteristics necessary for stable operation. For investors and operators of generation, storage, and grid assets, understanding ancillary services has shifted from technical curiosity to commercial imperative.

The Fundamental Categories

System operators procure ancillary services to address distinct technical requirements, each critical to grid stability. Whilst terminology and procurement mechanisms vary between jurisdictions, the underlying physics and commercial structures share common principles across GB and European markets.

Frequency Response Services

Frequency response addresses the continuous challenge of balancing generation and demand. In a synchronous power system, frequency serves as the instantaneous indicator of system balance: when demand exceeds supply, frequency falls below its nominal level (50 Hz in GB and continental Europe); excess generation drives frequency upward. Frequency response services automatically adjust output to correct these imbalances.

These services operate across different timescales. Primary frequency response activates within seconds of a frequency deviation, typically through governor action on thermal plant or sophisticated control systems on battery storage. Secondary response operates over tens of seconds to minutes, restoring system frequency after primary response has arrested the initial deviation. Dynamic services adjust output continuously in response to frequency fluctuations, providing a persistent corrective force.

The value proposition varies substantially by technology. Battery storage systems can deliver exceptionally fast, precise response with minimal degradation. Wind and solar assets, equipped with appropriate control systems, can curtail output or absorb power (in the case of batteries co-located with renewables) to provide frequency response. Thermal plant offers response through governor action, though with slower response times and operational constraints.

Operating Reserve

Operating reserves provide insurance against sudden, significant imbalances — typically the loss of the largest single generator or interconnector. System operators procure these services to ensure they can manage credible contingency events without involuntary load shedding.

Reserve services are characterised by their response speed and duration. Fast reserve must deliver within seconds and sustain output for the period required for slower reserve to activate. Short-term operating reserve (STOR) in GB, for instance, requires assets to deliver contracted capacity within defined timeframes and sustain it for a specified duration. Replacement reserve operates over longer horizons, allowing the system operator to restore earlier-acting reserves to their pre-contingency state.

The procurement of reserve services has evolved substantially. Whilst thermal generators traditionally dominated provision through part-loaded operation (running below maximum output to retain upward capability), demand-side response and battery storage now compete effectively in many markets. The ability to provide reserve without consuming fuel or generating emissions whilst doing so represents a structural advantage for storage and demand flexibility.

Reactive Power and Voltage Control

Voltage management rarely captures headlines but represents a critical technical constraint, particularly as power flows become more complex and variable. Reactive power, measured in volt-amperes reactive (VAR), maintains voltage levels across the transmission system. Unlike real power (measured in watts), reactive power oscillates between source and load without performing net work, yet its proper management is essential for system stability and efficient energy transfer.

Generators have historically provided reactive power as an obligation bundled with connection agreements, reflecting the relative ease with which synchronous machines produce or absorb reactive power by adjusting excitation. As the generation mix shifts toward inverter-based resources — solar, wind, and battery storage — the technical and commercial landscape for reactive power provision changes substantially.

Modern power electronics can provide reactive power with considerable flexibility, often with lower losses than synchronous machines. System operators increasingly procure reactive power through explicit markets or bilateral contracts rather than relying solely on obligated provision. The locational value of reactive power — voltage support requirements are geographically specific — creates opportunities for assets positioned in constrained areas of the network.

System Inertia: The Challenge of Declining Rotational Mass

System inertia represents perhaps the most fundamental shift in power system characteristics as grids decarbonise. Traditional synchronous generators — thermal plant, hydroelectric facilities — contain substantial rotating mass. When system frequency deviates from nominal, this physical inertia resists the rate of change, providing precious seconds for frequency response services to activate.

Inverter-based generation — solar, wind, battery storage — contributes no physical inertia in its default configuration. As these resources displace synchronous plant, system inertia declines, and the rate at which frequency can change following a disturbance increases. This physical reality creates operational challenges: with less inertia, the system must activate corrective response faster to prevent frequency excursions that trigger protection systems and potentially cascade into wider disturbances.

System operators have responded through multiple pathways. Minimum inertia requirements may oblige synchronous generators to remain online even when not economically optimal for energy provision. Synthetic inertia — control systems that enable inverter-based resources to mimic inertial response by detecting and responding to rate of change of frequency — offers a technological solution, though regulatory frameworks for procuring and valuing such services remain in development across many jurisdictions.

The investment implications are substantial. Synchronous condensers — rotating machines that provide inertia and voltage support without generating power — have experienced renewed commercial interest. Battery storage systems capable of providing synthetic inertia and fast frequency response can access value streams unavailable to generation-only assets.

Procurement Mechanisms and Market Structures

System operators procure ancillary services through diverse mechanisms, reflecting both technical requirements and market design philosophy. Understanding these structures is essential for evaluating revenue potential and operational requirements.

Mandatory vs. Commercial Provision

Some services remain mandatory obligations embedded in connection agreements. Generators may be required to provide reactive power capability, operate within specified frequency ranges, or maintain certain technical capabilities as conditions of grid access. These obligations typically receive no explicit payment beyond connection charges.

Commercially procured services operate through competitive markets or bilateral contracts. GB's frequency response and reserve markets exemplify competitive procurement, with system operators tendering for services and selecting the most economical combination of providers that meets technical requirements. Payment structures vary: availability payments compensate providers for maintaining capability, whilst utilisation payments reward actual delivery when called upon.

Temporal Market Structures

Ancillary service markets operate across different timeframes, each serving distinct operational needs. Long-term contracts — monthly, seasonal, or annual — provide revenue certainty for investors and ensure system operators secure critical capabilities well in advance. These contracts typically cover baseline requirements that persist regardless of daily system conditions.

Day-ahead and within-day markets allow system operators to fine-tune procurement based on forecast conditions — anticipated wind and solar output, expected demand levels, planned outages. These shorter-term markets enable flexible assets to optimise revenue by shifting between energy and ancillary service provision based on relative value.

Real-time dispatch represents the final layer, with system operators calling upon procured services as actual conditions require. The distinction between availability (being ready to deliver) and utilisation (actually delivering) creates different revenue components and operational considerations.

The Changing Value Proposition

Several structural forces are reshaping the economics of ancillary service provision, creating both challenges and opportunities for asset operators and investors.

Scarcity and Displacement

As conventional thermal plant retires, the volume of inherent capabilities — inertia, reactive power, flexible reserve from part-loaded operation — diminishes. This scarcity can drive substantial value increases for remaining providers. Battery storage, flexible demand, and advanced wind and solar controls can often provide superior technical performance at lower operational cost, but procurement volumes may temporarily outstrip supply as the transition unfolds.

The geographical dimension of scarcity merits particular attention. Reactive power requirements are location-specific; inertia needs vary by synchronous area; constraint patterns create localised demand for flexibility services. Assets positioned strategically can command premium pricing reflecting their unique ability to address local technical requirements.

Regulatory Evolution and Market Design

Regulatory frameworks continue adapting to accommodate new technologies and procurement approaches. Minimum technical requirements for service provision — response speed, sustained duration, ramp rates — increasingly reflect capabilities of storage and demand flexibility rather than assuming thermal plant characteristics. Pre-qualification processes, performance monitoring, and payment structures evolve to encourage innovation whilst maintaining system security.

Market power concerns arise as ancillary service markets mature. Concentrated provision of critical services — particularly those with high technical barriers to entry or limited suitable locations — can enable strategic pricing. Regulatory oversight typically intensifies as commercial stakes increase, balancing incentives for investment against protection of consumers who ultimately fund these services through system charges.

Investment and Operational Considerations

For investors evaluating generation, storage, or demand-side assets, ancillary service revenue represents an increasingly material consideration in financial modelling.

Revenue Volatility and Optimisation

Ancillary service pricing exhibits distinct volatility characteristics compared to wholesale electricity markets. Scarcity pricing during tight system conditions can produce exceptional returns, but structural oversupply — particularly as new battery storage capacity enters operation — can depress prices substantially. Long-term contracts provide revenue stability but may sacrifice upside during scarcity periods.

Optimisation becomes critical: most assets can participate in multiple markets simultaneously or shift between energy and ancillary provision. Battery storage operators routinely solve complex optimisation problems, balancing wholesale trading, frequency response, and reserve provision to maximise returns. The technical capability to switch between services rapidly — limited only by market rules rather than physical constraints — represents competitive advantage.

Technical Requirements and Asset Design

Different ancillary services impose distinct technical requirements that influence asset design and operational capability. Frequency response demands precise, rapid adjustment and sophisticated control systems. Reserve provision requires sustained output over defined periods. Reactive power capability depends on inverter design and connection characteristics.

These requirements drive design decisions with lasting financial implications. Battery storage systems optimised for rapid, frequent cycling in frequency markets may specify different cell chemistry and thermal management than systems focused on longer-duration energy arbitrage. Wind farms capable of providing reactive power and frequency response through advanced controls can access revenue streams beyond wholesale electricity sales, potentially justifying incremental investment in control systems and grid connection capability.

The Investor Perspective

Institutional investors financing energy transition infrastructure increasingly recognise ancillary services as material to project economics rather than incidental revenue. Due diligence processes now routinely examine ancillary service strategies, contractual positions, and assumed capture rates with the rigour historically reserved for wholesale electricity price forecasts.

The analytical challenge lies in projecting revenue across markets that are themselves transitioning. Historical price data may offer limited guidance as the generation mix evolves and procurement mechanisms change. Scenario analysis becomes essential: modelling outcomes under different retirement schedules for thermal plant, varying penetrations of renewables and storage, and alternative regulatory approaches to procuring critical services.

Operational track record in ancillary markets increasingly differentiates asset operators. The ability to deliver contracted services reliably, optimise across multiple revenue streams, and adapt to evolving technical requirements represents intangible but valuable capability that financial models struggle to capture explicitly.

Ancillary services have evolved from technical curiosities bundled with conventional generation to explicit, commercially significant products essential for grid stability. As power systems continue decarbonising, the value and complexity of these services will likely increase, creating sophisticated markets where technical performance, strategic positioning, and operational expertise determine commercial success. For investors and operators alike, fluency in ancillary service markets has shifted from specialised knowledge to fundamental competence in energy transition infrastructure.