Local Energy Markets: How Peer-to-Peer Energy Trading Reduces Overall Network Capital Costs

Significant dollars and effort are being invested to develop more sustainable and resilient electricity grids. Although decarbonization efforts are contributing to the shift away from a centralized architecture to a more decentralized energy system, how policymakers and regulators facilitate this shift remains to be seen. If not aggregated and organized via new digital smart platforms, distributed energy resources (DER) can destabilize electricity grid distribution networks while increasing average prices, as has been the case in Germany.

One way to address grid congestion and voltage management in distribution networks is by introducing a virtual power plant (VPP). However, the configuration of the VPP market still revolves around a centralized scheduling and settlements process, and to that extent, VPPs only solve half of the issues. 

The fully decentralized model, whereby not only production but also prices are set in a distributed way, offers a much more stable arrangement. Congestion and voltage are local effects and you need local markets that can relieve them. Attempts to resolve these problems via centralized approaches always involve CAPEX on items like capacitor banks and other upgrades and increasingly seem to be the less elegant and less satisfactory way of solving the problem.

Local Energy Markets on the Horizon

Guidehouse Insights defines a local energy market (LEM) as:

A local energy market is an automated platform to trade electricity on a peer-to-peer (P2P) basis. The platform comprises a group of geographically proximate consumers and producers of electricity—prosumers—that trade and consume energy with each other from DER. Transactions can take place continuously year-round, usually at prices that are competitive with grid buy rates and feed-in tariffs.

An automated blockchain-based LEM platform, such as that offered by Powerledger and the focus of a new white paper produced by Guidehouse Insights, is used to enable P2P energy trading between multiple buyers and sellers and in doing so balance supply and demand in a particular part of the grid. Under this new paradigm of community energy sharing, the LEM utilizes the existing electricity distribution system to exchange power at a price agreed between sellers and buyers, taking grid considerations into account.

LEMs show promise in reducing systemwide grid costs for stakeholders, including the consumers/prosumers they serve. When coupled with other flexibility markets such as a distribution utility single buyer through VPPs, LEMs drive additional benefits. This is because LEMs create revenue, which in turn creates incentives for investment in exactly the distributed components that are needed, like battery systems and further solar installations. LEMs also tend to create behavior change that flattens peaks and troughs of usage, known as the duck curve. The savings promised by LEMs can occur today without government incentives or a radical restructuring of existing grid hardware or markets.

Experiments Under Way in Australia

Take the case of Endeavour Energy, a distribution network services provider (DNSP) operating in New South Wales, Australia. Endeavour serves Sydney, the largest and one of the fastest growing cities in the nation. “Right now is a great time to explore how LEMs can reduce the costs in managing forecasted DER growth on our networks,” said Peter Langdon, Head of Asset Planning & Performance. 

Distribution network service providers and operators must invest to manage DER growth through infrastructure upgrades as well as alternatives such as LEMs and VPPs. The challenge of excessive voltage in grids is already prevalent in Australia, causing some DNSPs to cap the number of DER assets allowed on the grid or curtail their output. Such an approach could open the door to trading energy between peer groups. How this changes grid architecture is yet to be seen, but the possibilities are something to watch closely.

For further discussion, register for the Guidehouse Insights-hosted webinar, “How Local Energy Markets Benefit Distribution Utilities,” on June 14.