Regulatory Options for Local Reserve Energy Markets: Implications for Prosumers, Utilities, and other Stakeholders.

• Author: Rosen, Christiane

1. INTRODUCTION

   Addressing the goal and the growing reality of an increasing share of distributed energy generation, many of the recent research efforts in the field concern possible ways of adequately integrating it into the existing energy system. Alternatively, it means adapting the existing system and markets to the requirements of this type of energy provision. In both cases, the approaches can be manifold. They are not only influenced by economic reasoning, political decisions, and regulation on multiple levels (international, national, regional), but also by the latest developments in the areas of electrical and mechanical engineering (e.g. grids, transformers, and turbines), chemistry, geophysics, as well as the information and communication sciences (e.g. grid protocols, smart grids/meters). Above all, there are resourceful entrepreneurs, including big companies from all sectors (e.g. telecommunications) and small start-ups, who constantly come up with fresh ideas and business models that shape the energy landscape.

   In this paper, a novel, market-based approach is taken towards the integration of distributed energy generation. By enabling trading in a local market, a lot more distributed energy generation, whether it is (intermittent and) renewable or not, can be absorbed by giving incentives for adequate balancing and controlling of neighboring devices. The key hereby is the involvement of the owners of these small-scale devices, who can be characterized as "prosumers".

   The term "prosumer" has emerged as a combination of producer and consumer (see Toffler, 1980; Ritzer and Jurgenson, 2010, for a discussion of the historical development). This means that the affected entities not only consume a certain good, but also produce the same good. A prerequisite of this mode of operation is the availability of suitable equipment and knowledge. Moreover, in the case of energy, trading becomes compulsory when the two activities do not happen to coincide.

   Related concepts are discussed in Sauter and Watson (2007). They describe the activity of consumers also producing energy as "co-construction", "co-production", and "co-provision". The latter term was also coined during the 1980s, when the American government had to sharply cut back fiscal spending. With an upcoming discussion about privatization, it became clear that several tasks and services that had formerly been carried out by governmental agencies now had to be delivered by individuals or groups of citizens in the sense of co-provision or co-production (Ferris, 1984; Mattson, 1986; Brudney, 1987). Humphreys and Grayson (2008) add "co-creation" to the list and argue that there is potential for a fundamental change in the economic organization, much along the lines of Toffler (1980), but with a more critical view on capitalism.

   While Karnouskos (2011) sees the residential prosumer as the most important stakeholder in a smart grid and related markets, he also points out the commercial prosumer. According to his definition, these are large facilities, such as factories, that both produce and consume energy. Once a local energy market is operational, these larger players can be allocated to one of the markets for collaboration. There are also more technically oriented definitions of the "prosumer". Kanchev et al. (2011) describe a prosumer as a home application that produces power during some hours of the day and consumes power during others. The home application then consists of a number of individual entities, such as solar panels, storage systems, and controllable loads.

   For the organization of a local market, this paper builds upon the idea of a microgrid which connects private households with and without electricity generation equipment, thus prosumers and consumers. It introduces a local reserve energy auction market, where such self-produced electricity can be traded. While there are studies that discuss the general concept of local markets (see the next section), their implementation and the effects thereof have not been evaluated. This paper aims at filling this gap by shedding light on the regulatory background and the current market framework, and by identifying important links to the latter as well as potentials for amendments. For achieving this purpose, Section 2 gives an overview of the relevant existing concepts in the literature. Section 3 discusses the current market environment and the properties of the envisaged local market. Section 4 analyzes the impacts of the introduction of a local market on the most important stakeholders, while Section 5 concludes.

2. PERCEIVED NEED FOR LOCAL ENERGY MARKETS

   As mentioned above, a primary characteristic of a local energy market is its delimitation, which can be virtual or geographical. An important consequence hereof is the composition of market participants, with a dominant share of small-scale generators. This is in sharp contrast to the central markets, where small-scale producers cannot participate individually, and which fosters the need for local energy markets. Note that this definition only refers to the size of the generators, which in turn can be renewably fueled or not. With a high share of intermittent renewable generation, a system also needs controllable generation for balancing. Whether distributed generation is renewable and countered by large central power plants, or whether it is fossil based and balances large central wind power parks, is a political issue. For the local market, we look at distributed power sources which can take the forms of micro-cogeneration (CHP) plants (with or without fossil fuel), solar panels, storage batteries, and many other technologies.

   The need for local energy markets has previously been expressed in a number of articles. Hvleplund (2006) refers to the situation in Denmark, where wind turbines produce large amounts and shares of renewable, but fluctuating electricity. He suggests introducing a decentralized market system that mirrors the decentralized nature of energy production and consumption, as opposed to the current centralized market system that mirrors the conventional centralized production procedure. In a decentralized system, local generators and consumers should be able to trade directly and without barriers with each other as well as with large renewable energy producers, such as neighboring wind farms.

   Along the same lines, Lund and Munster (2006) model the Danish market for the case of increased investments into wind power. They find that by embedding wind generators in a system of micro-CHP plants, boilers, and heat pumps, the supportable share in total power generation can be significantly increased. Even more interestingly, using this system intelligently to balance supply and demand, profits can be raised, yielding a total rate of return for the system in their study of several hundred percent.

   Cardell (2007) even goes one step further. Her main objective is to enable the involvement of distributed resources in the power system. She proposes a price-based mechanism, which is similar to the traditional load-based demand side management. Hereby, time-variable prices are used to trigger a response in load and thereby to shave peak-load demand. These time-of-use tariffs are discussed in the context of the possibilities that a smart meter can offer upon roll-out (Siderius et al., 2004; Siderius and Dijkstra, 2006).

   Further studies evaluate possible ways of introducing local markets from an administrative point of view. Corn et al. (2014), for example, suggest implementing an internal market within balance groups (1), where the balance group responsible party (BGRP) can control producers and consumers of energy to keep his registered energy schedule in balance. For this purpose, the producers and consumers are assumed to submit flexible offers that cover a certain period of time during which the cheapest are called whenever necessary. A related concept is presented in Ridder et al. (2011), who analyze several business cases to better integrate decentralized energy. They also follow the idea of clustering consumers and producers who trade their demand and supply first among themselves and, subsequently, (if no match can be found) on a higher level market.

   In Europe, the first practical steps in the direction of local markets have been taken by the government of the United Kingdom. The Department of Energy and Climate Change has launched the "Community Energy" strategy (2) which aims for communities to take on more responsibility in energy usage and procurement. There is a [pounds sterling]15 million fund open for rural communities and a [pounds sterling]10 million fund for non-rural communities. Energy projects can take many forms, such as the installation of equipment for renewable energy, building insulation, the use of smart technologies, and collective purchases of energy. But, most importantly, this strategy is also meant to facilitate local trading of energy, thus supporting the ideas delivered in this paper.

   The above-mentioned studies show that local markets have been perceived as a necessary institution for a high share of distributed energy generation. Their implementation in the context...