Decentralized energy resources like solar PV, batteries and electric vehicles are transforming how we trade and transfer energy.
The Energy Transformation Has Arrived
James Johnston | Open Utility
The UK is in the midst of an energy transformation, as there is now a real urgency among policy makers, business and the wider public to decarbonize the system.
Decentralized energy resources like solar PV, batteries and electric vehicles are transforming how we trade and transfer energy. The prevalence of solar PV, for example, has increased exponentially in recent years to more than 937,000 installations across the UK, while the number of plug-in cars rose from 3,500 in 2013 to more than 130,000 by the end of 2017.
P2P trading is emerging as a way to employ the benefits of local matching through maximizing value from local networks and DERs, which minimizes the distances the power has to travel and reduces power flows at higher voltage levels of the grid potentially removing the need for costly future improvements to create additional network capacity to meet increased peak demand flows.
P2P trading is an exciting new opportunity to emerge from this rapidly changing energy landscape, but current pricing models may be hindering its potential.
Local Energy Today: How to Create the Missing Financial Incentive
The greatest barrier to local energy is the current lack of financial incentives for local matching, due to the fact that the grid is a centralized, fossil fuel-fed energy system.
While some still sign up for P2P energy because of their commitment to the environment, it is important to make the traditional, money-driven business case in order to scale.
The current pricing system is based on the Common Distribution Charging Methodology, which allocates costs to each network level and charges users based on their assumed use of different network levels along with their contribution to the maximum load on the network as a whole.
But this model does not provide an incentive for participants to shift their demand or generation patterns to maximize local matching, and even through local matching, there is no reward – or price signal – for the savings on network reinforcement costs that occur through matching.
There are two ways to introduce financial incentives:
- By encouraging end-users and/ or generators to shift their energy use/generation to different times of the day so that they are more closely aligned with each other, and therefore maximizing the matching opportunity;
- By encouraging end-users or generators to connect to parts of the network currently dominated by the other, thereby increasing the scope for additional local matching.
The Impact of Alternative Pricing Models
Using a combination of expert interviews, desk-based research and economic modelling, the researchers considered four alternative pricing models intended to incentivize local matching:
- Network Replicating Private Wires (NRPW): A subset of private wires that replicate existing assets owned and maintained by the local DNOs, and are located in areas with spare network capacity.
- Virtual Private Wires (VPW): Similar to NRPWs, VPWs route an allocation of the DNO’s spare capacity over existing, licensed distribution network assets via private leasing arrangements.
- Two versions of Locational Distribution Use of System (DUoS) charges: Customers are charged based on the network levels they were using.
In evaluating each option, it is also necessary to consider their effects on different actors within the energy system:
- DNOs: Distribution network operators
- Participants: End-users and generators directly involved in local matching initiatives
- Wider distribution customer: All other end-users and generators not involved in local matching
From the point of view of the participants, VPWs would be the most favorable option. However, their negative impact on the wider distribution customer raises important questions about fairness and makes the likelihood of getting regulator approval unlikely.
NRPWs are expensive and difficult to setup, and their negative impact on the wider distribution customer is high, meaning that their likely benefit to the UK’s future energy system is severely restricted.
The Locational DUoS charging models are the fairest and, in principle, the most scalable of the alternatives. However, price signals are very low, so it is unclear how much change in behavior would occur.
Key Lessons and Next Steps
There is currently a strong tension between the strength of price signals and fairness. On the one hand, it’s important for the financial incentives to be strong enough to influence behavior, as demonstrated by NRPW and VPW. On the other, however, the mechanism must have low barriers to entry to allow a wide variety of grid customers to participate, as demonstrated by Locational DUoS.
Although all of the models considered have their downsides, Open Utility believes there are ways of incorporating the best elements of both VPW and Locational DUoS, especially when it comes to incorporating a more dynamic price component.
As a next step, Open Utility wants to start testing these and other models by setting up practical demonstrators and trials.
To learn more, download Open Utility’s free whitepaper, “Local Grid Charging: Exploring the Incentivisation of Local Energy.”
About Open Utility
Open Utility is a software company on a mission to make electricity cheap, clean and abundant. We work with partners around the world to deliver user focused solutions to the energy trilemma. Piclo Match gives generators and consumers control over their energy by showing where electricity is generated and sold, what it costs and how those costs change over time. The online platform matches energy supply and demand preferences every half an hour, and trades 100% renewable electricity.
The content & opinions in this article are the author’s and do not necessarily represent the views of AltEnergyMag
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