Energy communities and peer-to-peer energy markets: what can we expect?

There is plenty of technical literature, consultancies firms’ reports and opinion letters about the benefits of developing energy communities with blockchain-based local energy markets, to support domestic energy trading for peer-to-peer buying and selling of energy.

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Empowering consumers with the possibility of participating directly in electricity markets is indeed a very appealing approach, with the romantic feeling of escaping from the big utilities by producing their own energy for auto-consumption and for selling it to their pairs. As David Spence says in The Climate Law Blog of the Columbia Law School (in the entry Blockchain and Electricity Trading: In Praise of -Regulatory- Skepticism), this romantic vision seems to please both progressives and liberals. While progressives see it as green and close to people, and as a mean to democratise energy and escape from traditional utilities, liberals like this way of focusing on the individual rights of producing its own energy and becoming personal entrepreneurs and market agents, in an over-regulated world (something even more patent in the electricity industry) they generally dislike.

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What are the social benefits?

From the electricity wholesale market perspective, traditional demand passivity (and its characteristic inelasticity) is one of its main dysfunctions. A demand that does not reflect in its market bids the real economic value of its utility function, has short and long-term consequences: very high prices in the short-term (very often artificially limited by regulators) at scarcity periods, and the need of regulated capacity mechanism for the long term to guarantee a future supply that the demand could (or should) be contracting by itself.

In this context, involving consumers (or prosumers) into local markets seems a way to locally promote market mechanisms and competition among small players, lowering electricity market barriers. These local market mechanisms can provide the adequate short-term signals to match generation and consumption locally, reducing energy costs and balancing needs, as well as the long-term signals to increase distributed renewable generation capacity investments adapted to the local energy needs (for example considering new distributed energy resources such as electric vehicles), contributing to the global energy decarbonization targets. In addition, flexible market structures such as blockchain-based peer-to-peer markets allow consumers to select their local producers, and the support of smart contracts allows them to elaborate more sophisticated and automated bids to close transactions (with instant payments mechanisms) only if predefined conditions are met, automating an incentivizing their market participation.

From the social perspective, local markets can improve the social cohesion and the sense of community of their members, promoting a more active attitude towards efficient energy consumption, and the creation of collective organizations to fight climate change. Their customer-centered perspective is also a response to the citizens’ willingness to act against monopolies and big utilities by cooperating with their neighbors, increasing their market involvement and their elasticity, helping to mitigate their traditional passivity.

From the grid perspective, local energy markets can increase the distributed micro-generation and contribute to a larger reliability and resiliency of the grid, and under an adequate regulation (although this depends on the grid topology) reduce losses and help to defer investments. These local markets could also provide detailed information of the expected physical energy exchanges to the corresponding grid operators or energy community managers, constituting a valuable input for a more efficient technical grid supervision.

What about the economic benefits for the participants?

Unfortunately, these benefits are very often misunderstood, since they depend very much on a regulation still evolving to deal with the distributed paradigm. In this sense, it is not an easy task to identify the real economic benefits for the participants, if we take into account, as we say later on, that small distributed generation does not profit from the economies of utility scale generation, and thus, its energy production costs are necessarily larger. However, the final electricity bill reveals other concepts, apart from the energy cost (such as the regulated transmission and distribution grid costs, or the costs of environmental or social policies) which could also play an important role. Note that in most European countries, energy costs are less than 30% of the total energy bill.

Energy costs savings appear when the feed-in tariffs of injecting generation to the grid are lower than the energy retail price, since otherwise few would be willing to sell at a price below the retail energy price. In this case, prosumers could sell locally their energy at a higher price, but still lower than the retail price, generating a benefit that could be shared among both producers and consumers. Obviously, tariffs design has a critical impact on this potential saving, since close access tariffs for consuming and for generating energy would reduce or even eliminate the remaining saving in the energy cost. In addition, although access tariffs for distributed feed-in are commonly higher than for consumption, this is very often the reflection of regulators fears to the impact of a massive distributed generation energy injection to the grid. Moreover, as already mentioned, in a competitive wholesale market, energy production costs should be lower than those of distributed generation due to efficiency and economies of scale issues. Finally, with the current metering and billing strategies, this alternative would not be feasible unless the retailer was willing to collaborate in the final settlement by including grid and peer-to-peer exchanges in its settlement procedures, which could make sense, for example if the retailer was also providing the peer-to-peer market platform support to its own customers with the corresponding benefit.

However, there could be structural savings related with the grid operation, since local energy balancing reduces, in most cases, distribution and transmission energy flows, and therefore the corresponding losses and the cost of the energy lost. This cost is usually included in the energy bill separated by voltage level grids. The connection(s) point of the energy community could guarantee the security of supply under local outages or generation scarcity situations, solving internal imbalances, but with lower energy flows under normal operation. Note that, however, a regulatory change is needed to reflect tariffs discounts based on a proper estimation of the variable costs reduction of the grid usage (such as losses), probably discriminated by voltages levels. Research would be needed to properly allocate grid losses to the distribution and transmission grids since, in addition, a large amount is in fact due to fraudulent grid connections (non-technical losses), which would remain unchanged. Metering and billing should also be adapted to verify energy exchanges and account for deviations in the generation or consumption contracted profiles.

Finally, under a smarter grid context, consumers could also provide flexibility services to the transmission (by aggregating local small resources) and to the distribution grid operators, becoming a new source of income for the service providers, and contributing to a secure system operation. Indeed, under a scenario of large distributed resources penetration and the closure of many conventional fossil-fueled plants, system flexibility (for the transmission system) will have to be provided by distributed resources, but also distribution grid management would increase in complexity, requiring existing flexibility for a more efficient grid management.

What does the regulation says?

Indeed, it does not say too much … yet. The European Commission, in its Directive on Common Rules for the Internal Market in Electricity, proposed a vague definition of energy communities as a first attempt to introduce this new concept in the regulatory context, certainly to promote its progressive inclusion into national regulations. It is true however, that a very precise or restrictive definition of a still not well-known organizational entity could entail an excess of regulation, constraining its potential development. The Directive defines an energy community as “an association, a cooperative, a partnership, a non-profit organisation or other legal entity which is effectively controlled by local shareholders or members, generally value rather than profit-driven, involved in distributed generation and in performing activities of a distribution system operator, supplier or aggregator at local level, including across borders”. This definition has raised several concerns from the main stakeholders involved (Eurelectric, Ceer, Edso, Rescoop and Beuc among others). Among these concerns are, for example, the need of refining the definition of energy community, the voluntary participation and members/consumers rights preservation, its democratic governance, the balancing responsibilities, how the participation in network charges should be, and the basic unbundling rules (apparently allowing the concentration of the regulated network operation with the unregulated supply activities).

On the national side, there is still a clear lack of regulation, and the energy communities does not seem to be addressed specifically in most national European regulation. National regulators seem still to be reluctant to promote or even regulate energy communities, and seem to be still debating on very often restrictive auto-consumption regulations.

And the drawbacks?

Is there really a need of putting in place local markets, just to overcome deficient global market regulations, still unable to incorporate or aggregate small distributed prosumers efficiently? In this sense, could a well-designed tariffs structure provide the adequate mechanisms to shape local generation and consumption to the local grid and system’s needs, and promote distributed renewable generation investments?

Many think that the benefits of well-designed tariffs could be similar to those of local markets, but at lower costs. Indeed, it is a common concern to what extent small-distributed generation implies any economic benefit with respect to utility generation, whose size allows for more efficient processes and economies of scale. In this sense it is easy to check, for example, that rooftop solar generation can be four times more costly than utility scale solar on a per unit of energy basis. Economies of scale are lost in small-distributed generation making the decarbonization unnecessarily expensive. In addition, additional costs come from the need of putting in place (local) market platforms, or from the use of cryptocurrencies such as bitcoin, whose total annual energy consumption is estimated to be above 50TWh, larger than the total current electricity consumption of Portugal. Note, however, that there exists alternatives to bitcoins and its blockchain consensus mechanisms to validate transactions, with much lower energy consumption that could also perform well in local networks.

It is sometimes argued that large amounts of distributed renewable generation can also cause problems to the distribution grid, such as voltages transients, bidirectional power flows and protection issues, increased short circuit levels, congestions, etc. However, this is rather a consequence of the distributed paradigm, not exclusively of energy communities, since any tariffs mechanisms incentivizing distributed renewable generation, provided the regulation is not properly designed, could suffer from the same grid problems.

Indeed, inappropriate regulations can even lead to non-clean distributed generation increase, harming the global decarbonization objective, to unfair cross subsidies (as occurs with the net metering mechanism), or to grid-defection problems. Badly designed tariff structures can incentivize consumers to reduce their fixed costs (when the access tariff is computed according to the peak consumption) by installing additional renewable generation, and with storage systems becoming more competitive, to even disconnect from the grid (grid-defection). This leads to a same amount of fixed grid costs to be shared by the remaining customers, which see how their electricity bills increase, being even more incentivized to disconnect from the grid, leading to the so-called death-spiral. A very careful assignment of fixed grid costs is therefore needed to avoid such cross-subsidies, to guarantee that grid costs are recovered, and to reflect the real grid usage to provide the right economic signals to the customers.

What to expect?

The very high increment of renewable generation needed to reach current energy strategy targets will be more easily reached if all available means are used, from centralized to distributed new installed capacity. In this sense, energy communities and local energy markets emerge as an additional way to promote distributed renewable generation, and to involve consumers in the energy markets, providing the adequate signals for a local consumption and supply balancing, and contributing to the grid stability.

In addition, promoted by an increasing municipal control over local energy management or by private initiatives for local energy trading, we are seeing an important increase of energy communities pilots, as can be checked in Rescoop webpage (The European federation of renewable energy cooperatives) that currently federates about 1,500 European energy cooperatives with 1.000.000 citizens involved.

Therefore, a sustained growth of proposals and pilots for energy communities can be expected, which will add pressure to regulators to adapt existing regulations to efficiently integrate these energy communities in the power system structure. On the same time, existing concerns suggest the need of more research to support and accompany regulators in the process of this regulatory framework design for well informed decision making.

In this sense, The Institute for Systems and Computer Engineering, Technology and Science (INESC TEC), in Portugal, is contributing to this research working on several fronts. INESC TEC is currently: 1) analyzing energy communities business models and their regulation; developing a prototype of an energy P2P market platform to test market and grid issues and their interactions; and trying to push ICT infrastructures and architectures further based on interoperability concepts based on communication standards such as SAREF . Results should allow us to improve existing knowledge on technical, economic and regulatory aspects of energy communities, essential for an efficient deployment and regulation of this new paradigm.

This article has been written by Jose Villar, area manager of Electricity Markets at INESC TEC in May 2019.

José Villar is currently Senior Researcher at INESC TEC in its Center for Power and Energy Systems. He has participated in more than 50 research projects with industry and administrations, coordinating more than 20, and his co-author of more than 20 papers in International Journals (most JCR indexed) and more than 60 papers in international conferences. His current areas of interest include operation and strategic planning of power systems, electrical vehicles, renewable generation, distributed generation and smart cities, soft computing and data mining.

INESC TEC is a private non-profit research institution, dedicated to scientific research and technological development.

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