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Incentivizing Local Energy in the UK

The UK’s energy landscape is changing rapidly. Tumbling renewable energy prices and growing public and political will to decarbonise the system has made the rise of the clean energy sector all but unstoppable.

At the same time, technological innovations and the increasing prevalence of distributed energy resources (DERs) like solar PV, batteries and electric vehicles have opened the door to new – and largely unexplored - ways of energy trading and transfer. Against this backdrop, peer-to-peer (P2P) trading has emerged as a promising way to support DERs whilst helping to take some of the strain off the grid’s higher voltage levels, with significant cost savings implications. The system works by using sophisticated algorithms to match end-users’ electricity demand with a nearby generator.

Despite interest from a wide range of energy industry stakeholders, the growth potential of this local matching is being hindered by legacy network charging mechanisms that offer no financial incentives to either generators or end-users. In response to this, Western Power Distribution (WPD) funded Open Utility and its project partners to explore different grid charging models that might encourage local matching – and to investigate the potential cost savings that could come from that matching. 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)

• Virtual Private Wires (VPW)

• Two versions of Locational Distribution Use of System (DUoS) charges

The research found NRPW, which is the only one of the four alternatives that already exists, provide strong signals for local matching. However, the model has significant barriers to entry, including upfront capital costs, contractual complexities and numerous logistical challenges, and is only a viable option for a very small number of end-users in the UK. And since Distribution Network Operators (DNOs) are largely blind to NRPW arrangements, they cannot plan and manage their networks around them.

By routing electricity over a DNO’s network, VPW would provide similarly powerful signals as NRPW, whilst avoiding any unnecessary duplication, providing better transparency and generating revenue for DNOs through leasing charges. However, regulatory changes would be needed to implement VPW, and these are unlikely to be agreed since participants in VPW arrangements would avoid paying certain policy costs which would then need to be borne by wider electricity customers.

The two Locational DUoS models are based on discounted rates for matched demand and supply, and would allow anyone to participate and benefit. Despite this obvious benefit, however, both models were found to provide far weaker price signals to encourage local matching than NRPW and VPW, meaning it would require significant scaling to deliver any notable system value. Furthermore, there would be significant complexities to implementing the models successfully, including how to share the value of matching fairly between demand and supply participants.

None of the models investigated in the research was found to provide the right mix of encouraging local matching between end-users and generators whilst also being fair to non-participants, highlighting the difficulty of developing a single mechanism to solve all problems. Despite this challenge, Open Utility believes there are ways of incorporating the best elements of both VPW and Locational DUoS into a single pricing model, and now wants to set up practical demonstrators and trials to continue its research.

Written by James Johnston, Co-Founder an CEO, Open Utility

Labels: distributed energy generation,Open Utility,network charging mechanisms,utility

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