Local energy markets rethink the utility customer relationship


As rooftop solar panels, home battery storage and electric vehicles (EVs) become more affordable and widely available, distributed energy resources (DER) are becoming a common feature of modern electricity grids, writes Johnathon de Villier, a research analyst at research firm Guidehouse Insights.

As DER penetration is increasing rapidly, Guidehouse Insights predicts nearly 300GW of new distributed solar and 37GW of new distributed energy storage will be installed worldwide between 2020 and 2025.

The shift from a centralised, unidirectional grid to one that is distributed, dynamic and interconnected (and therefore more complex) presents a challenge for utilities and grid operators that guarantee secure and reliable power to their customers.

This article was originally published in Smart Energy International Issue 5-2020.
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While utilities strive to keep the grid in balance, DER owners want control over their own assets. This includes the freedom to self-consume the power they generate and compensation for power or services they provide to the grid. Increasingly, even consumers who do not own DER want visibility into where their electricity comes from.

Often, they will pay a premium for electricity from renewable sources.

Net metering and feed-in tariffs have not aged well as a mechanism to align utility and customer needs. In fact, these policies pit the two parties against each other. Prosumers are incentivised to maximise behind-the-meter generation and advocate for the highest possible tariffs, irrespective of effects on the grid system, while utilities have the opposite incentives. Together with the difficulty of establishing fair and flexible tariff rates, this tension stokes resistance to distributed solar deployment. Many countries and states are phasing out their net metering and feed-in tariff programmes.

Local energy markets are a next-generation concept that could provide a solution aligning the needs of utilities, the grid and electricity consumers. This article examines two local energy market pilot projects with different implementation models: one that keeps utilities front and centre and one that gives consumers and prosumers a much more active role in the grid system.

DER from the top down: The Cornwall pilot

In 2017, UK utilities Centrica, LO3 Energy, Western Power Distribution, National Grid, and other partners launched the Cornwall Local Energy Market “to revolutionise Cornwall’s energy future.” The project was supported largely by £13 million ($15 million) from the European Regional Development Fund.

The project partners recognised the potential of DER to add flexibility to distribution systems, particularly when they can respond to grid signals as a single aggregated entity (sometimes called a virtual power plant). The partners selected 100 households to receive free solar panels, home battery storage, or a combination of the two in exchange for participating in the pilot programme. The network operators then scheduled pre-planned events in which they would simultaneously request power from the group of DER. The pilot was largely a success. It showed that transmission and distribution operators could reliably procure power and flexibility from networks of DER assets located on the customer site. At the start of Phase 2 in 2018, Centrica reported that the utilities had procured 32MWh of electricity from about 5MW of distributed capacity installed during the programme.

However, the Cornwall pilot (at least in its initial stages) did little to rethink the role of customers, who remained passive pricetakers with only a supporting role in the local energy market. A post-pilot survey showed that participants were pleased with the free equipment and reduced electricity costs but were not sure how they were contributing to a future energy system. They were also frustrated by a lack of visibility into the local energy market’s operations and larger goal.

The top-down design of Cornwall’s local energy market meant that participants were not able to set prices for buying and selling power, purchase power from other participants, or exercise control over the source of the energy that powered their home. In effect, participants simply acted as hosts for distributed assets provided and controlled by their local retailer.

Example user interface elements from the Quartierstrom pilot

Much of the pilot was innovative, but its design left some potential benefits of transactive energy on the table.

Balancing from the bottom up: The Quartierstrom Pilot

The Quartierstrom Local Energy Market in Walenstadt, Switzerland, began as a 1-year project with 37 participating households. The Quartierstrom group is headed by the University of St. Gallen and ETH Zurich, which worked closely with a local utility (Water and Electricity Works Walenstadt, or WEW). Unlike the Cornwall pilot, Quartierstrom’s project focused on building a market from the bottom up.

To achieve this, Quartierstrom established a peer-to-peer marketplace within a local microgrid, where individual DER owners could set the prices at which they were willing to buy and sell electricity. The blockchain-based platform collects bids in a double auction every 15 minutes, orders bids by price, and settles transactions using smart contract logic.

Utilities in the Cornwall pilot requested a specifi c amount of power from their local energy market at pre-planned points in time.

In the Quartierstrom pilot, WEW served as a backstop to address imbalances resulting from the double auction. When the microgrid produces surplus power, the utility buys it back. When DER in the microgrid cannot produce enough power to meet the needs of all participants, the utility discharges a gridscale battery storage system to make up the deficit and is compensated accordingly.

The microgrid also included consumers who had no DER assets of their own. Unlike the Cornwall pilot, these consumers could still benefit from the local energy market by choosing to purchase locally generated power at reduced prices. Both prosumers and consumers were given granular visibility into where their electricity and revenue came from (see the figure left). In its summary of phase one, Quartierstrom noted that its bottom-up design generated enthusiasm among participants and “significantly increased self-consumption” for the microgrid.

Future local energy markets will meet in the middle Cornwall and Quartierstrom highlight the potential of transactive energy platforms to support a distributed and dynamic grid system while rethinking the relationship between utilities and their customers. Cornwall approached the problem from the top-down, focusing on the role of transmission and distribution utilities; Quartierstrom started from the bottom up, putting customer experience first. For future transactive energy pilots, the key challenge is finding a way to meet in the middle and unify these two visions for local energy markets.

Nothing about the bottom-up model requires that the utility or supplier is sidelined. A hybrid approach would enable local markets at the grid edge but enable utilities to send price or control signals to the market to procure power or services. A key design decision then becomes how the local energy market should prioritise and respond to the various local signals (e.g., purchase rates and preferences) and grid signals (e.g., operational constraints or capacity requirements) it receives.

The bottom-up approach has some advantages

Quartierstrom’s market design enables everyone in a local energy market to benefi t from the new market design, since customers that are unable to invest in their own DER still have a chance to purchase power at reduced rates from their prosumer neighbours.

The Quartierstrom framework also creates a foundation for automated pricing (which allows customers to choose their buy/sell prices or ‘set it and forget it’) and the ability for individual households to choose their electricity supplier — features already in development. This platform could be adapted to support demand response and other flexibility programmes managed by a utility.

Both projects show the value of collaboration between academic institutions, technology startups, and utility incumbents. The lessons learned from these pilots will accelerate the development of the 70-plus transactive energy experiments now underway around the world. SEI

About the author

Johnathon de Villier is a research analyst contributing to Guidehouse Insights’ Data Insights solution. He specialises in emerging technologies with the potential to accelerate the clean energy transformation, including energy blockchain applications, microgrids, and future mobility.

De Villier holds a master’s degree in environmental science and policy from Columbia University and a BA from Bowdoin College.