Unlocking Local Energy Markets
27 Sep 2018
BIEE Conference blog by Rachel Bray, Energy Policy Group, University of Exeter
How do we put consumers at the heart of the energy system? Historically electricity markets and network operation in GB have been designed to reflect the centralised top down configuration of the system; with generation flowing from large scale power stations and fed through the arteries of the transmission network down through to the veins and capillaries of the distribution network. Consumers to date have had a passive role in how the energy system actually operates. However, this traditional model could be set to change.
The need to decarbonise generation to meet Climate Change targets; the falling costs of renewable technologies and leaps in IT capabilities, provides GB with a seismic opportunity to revolutionise the way in which electricity is generated and traded. Potentially changing the energy system from a top-down, one-way system to a much more complex locally distributed network, with much lower carbon emissions. A system which provides consumers with more choice.
New markets and services
Much of the growth in renewable generation in GB is taking place locally at the distribution network level. Distributed generation has doubled over the last 5 years and now represents over a quarter of total GB capacity. This growth in distributed generation has the potential to transform the current market structure of electricity trading and introduce new markets and services, as well as new market participants.
One new innovative market model approach is the local energy market (LEM) approach. The concept of the LEM is to establish a marketplace which draws together a community of renewable energy and low carbon generators, storage and demand side response providers at both the domestic and non-domestic level. Through the marketplace these providers can then participate in energy trading; entering both traditional and new market services.
New market services provided by the LEM community could include dynamic pricing, aggregation, peer-to-peer trading (P2P) and various demand side management options which can help to overcome system balancing issues at the local level; whilst the LEM marketplace itself provides a safe and easy route for participants to aggregate in the delivery of these services.
Flexibility services provided by LEM participants could be utilised by DNOs to solve capacity and voltage constraints on the networks, deferring or even avoiding expensive grid reinforcement costs, whilst also adding value to the whole energy system through more intelligent management of renewables.
Analysis undertaken by Imperial College suggests that reduced system operation costs of between 25% and 40% could be achieved through the deployment of new, cheaper, flexibility sources connected at the distribution level rather than by conventional generation. Therefore, local distributed generation could be exploited to establish a more efficient, cleaner and cheaper electricity system given the right regulatory environment; as well as giving consumers more choice in buying and selling electricity.
The evolution of key actors
However, in order to enable this localised energy future the roles of key market actors such as the TSO, the DNOs, suppliers and aggregators would need to evolve. A number of activities are already being progressed by BEIS, Ofgem, National Grid and the Energy Networks Association in this respect; but there is still much to be determined over the next few years; including the emergent roles that could be established by new market entrants such as LEMs.
Current policies, regulations and market rules all revolve around the Supplier Hub model which places suppliers as the core intermediary between customers and the energy system.
However, for LEMs to be realised, BEIS and Ofgem need to design a new model which allows customers to transact through different intermediaries, multiple intermediaries or through no intermediaries, depending on how each customer wishes to engage with the market. For instance, the P2P model is currently inaccessible to consumers due to the current market design. However, by allowing consumers and prosumers to have more than one energy supplier at any one time; allowing them to trade their excess generation between themselves without transacting through a licensed supplier; and by allowing them to sell their excess generation to whomever they choose, would open up access to new markets.
In addition, the proposed transition from DNOs to DSOs (distribution system operators), with a new remit to actively manage the networks and act as facilitators in coordinating flexibility, should be one of the biggest enabler of LEMs. However this transition is not an inevitability and it has also been questioned whether the DSO function as currently proposed will go far enough in achieving effective change.
A whole systems approach
Even though BEIS, Ofgem and industry have issued projects, strategies and consultations aplenty, many of these appear to be happening in a disjointed piecemeal fashion, instead of being part of a whole systems approach to achieving energy transformation. This has resulted in a situation where much of the change occurring at the network and market levels at present is reactive rather than proactive. For example, BEIS and Ofgem appear to have left all DSO transition decisions to be made by the network operators themselves, rather than setting a long-term strategic vision for future network development and operation.
An uncoordinated approach to regulation – at all levels of the electricity system – will have the effect of slowing down the energy transition and therefore delaying any progress in innovative consumer choice models. What GB needs therefore is a clear overarching strategy and implementation roadmap; which truly enables the energy transition, if we are to see LEMs realised anytime soon.
Reproduced with the permission of BIEE, this article forms one of eight blogs poduced in the run up to the BIEE conference. Access all of the blogs here.
Rachel Bray is a Research Fellow in the University of Exeter Energy Policy Group. Her research looks at the regulatory barriers to the creation of local energy markets in GB.
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