An increased amount of unregulated renewable energy sources has allowed for more direct consumer participation. This, in turn, results in active consumers taking part in local energy markets.
Changing the power system from grey to green
Carbon-intensive electricity production sources are subject to a phase-out in Europe, paving way for more low-emission sources such as solar and wind power. The European Union’s (EU) aim of reducing emissions by 55% by 2030 and 95% by 2050 means that the member countries are facing an enormous challenge to decarbonise the power system. This challenge is only expected to grow, as the power system will play an important role in coupling new sectors, such as transport, industries, and heating, to the electricity grid.
A platform for active consumers
Direct consumer participation in electricity markets has become a core focus area in the EU’s new energy transition strategy. To empower this green transition, price signals and, subsequently, market structure must be adapted to incentivise consumers to participate. Integration of renewables benefit strongly from this, as small-scale solar power generation is expected to represent a considerable share of the power consumption in the future. However, the existing wholesale market for electricity does not allow end-user participation. This calls for a new marketplace where consumers can actively engage in the power system, namely local electricity markets.
Local electricity markets and the consumer-centric era
Historically, the top-down approach in the power system, where large power plants were the primary active market participants, led to the demand side remaining relatively passive. Compared to traditional markets that usually manage large pools of participants over wide areas, local electricity markets usually show smaller pools of participants. In the electricity grid, traditional markets operate at a transmission grid level, whereas local electricity markets operate at a distribution grid level.
Local electricity markets represent a bottom-up revolution in terms of providing market access to small-scale producers, referred to as prosumers. By producing and consuming electricity locally, prosumers can reduce losses in the grid without emissions. In addition, providing prosumers access to the market enables this electricity to be purchased by other consumers who are interested in buying local, green electricity. However, a widespread increase in solar generation at a household level has resulted in voltage and congestion management problems for the distribution system operators, due to a potentially large mismatch in generation and demand.
Due to their very competitive cost, wind and solar power are the most dominant sources of renewable energy. However, they lack the flexibility to adjust to the demand side. Their weather-dependency makes them harder to predict and control, requiring us to think differently about balancing supply and demand in the power market. So, the real question is: if power generation is not flexible, what about demand?
Accessing flexibility in local electricity markets
Because of the ever-growing need for flexibility, integration of demand flexibility is even more important than distributed generation. Matching flexible demand and supply when power generation is highly weather dependent is key for renewable generation to thrive. In addition, flexibility can enable the distribution grid, which is projected to host more and more generation and demand, to postpone or avoid costly grid reinforcements. Therefore, flexible assets such as electric vehicles, batteries, space and water heating are considered to be crucial for dealing with these challenges. Imagine a sunny day when the wind is blowing. Why not use locally generated electricity? In this scenario, you and your neighbour could consume self-procured power directly from your roof-mounted photovoltaic panels rather than transporting it from elsewhere. This is not only efficient use of renewable generation, but also motivates consumers to be active in the green transition.
Furthermore, system operators (the grid owners) can access this demand flexibility by trading in local electricity markets. One example of a flexible product that the consumers can provide is reserve capacity to help the transmission system operators meet their responsibility of maintaining a constant 50-hertz frequency in the power system. On a local level, the distribution grid operators are interested in voltage control and congestion management in order to avoid costly upgrades in the grid. With efficient price signals and flexibility markets, local electricity markets unlock flexibility on the consumer side. This possibility is already there, but prosumers currently have close to no economic incentive to provide the services that they are capable of.
This kind of incentive can mainly be achieved in two ways:
- a static price signal, provided by the grid operators in the form of grid tariffs, or
- a marketplace for local flexibility, where flexibility products are traded explicitly.
In the grid tariff case, the price signals itself will contribute to setting the market price. With flexibility products, the price will be set by supply and demand, which is a more direct approach. Local electricity markets can facilitate trade regardless of which option is used. In the power system, coordination between supply and demand is key, which is exactly what local electricity markets provide.