Jeremy Harrison, Principal Analyst, Delta Energy & Environment
The current energy crisis whilst presenting some stark challenges to many in our society, is also an opportunity to rethink how we approach our production and consumption of energy.
In the past when energy bills have risen, the Ofgem mantra was to switch supplier. We all knew this was a zero sum game but went along with it as an inevitable consequence of a “competitive” market.
Now when all suppliers have increased their prices, the new mantra is to subsidise those on lower incomes. Whilst that might solve the short-term problem for a few, it does nothing to address the challenge of higher prices for everyone in the long term.
Some of us chose to insulate ourselves from the volatility of fossil fuel energy by subscribing to renewable tariffs. Or at least that is what we thought. So it is particularly galling that having paid a premium for supposedly green energy, as soon as gas prices went up, so did our green tariff.
The current market has failed to link the financial transaction (our tariff) with the physical reality of the energy we contracted for and has prompted many to consider how they can guarantee longer term price stability by making a direct investment in green energy assets.
What is Transactive Energy?
Transactive energy is seen by many as an effective way to address this disconnect and simultaneously stimulate investment in sustainable energy resources and support local energy systems including energy communities.
The commonly accepted industry definition of transactive energy is:
“A system of economic and control mechanisms that allows the dynamic balance of supply and demand across the entire electrical infrastructure using value as a key operational parameter”
This includes the current, widespread market instruments which have historically supported the centralised energy system (such as flexibility and balancing services) but goes way beyond that. At a community level, it can be implemented using a variety of business models such as Peer to Peer (P2P) trading and Collective Self-Consumption (CSC).
- Peer to Peer trading involves transactions between prosumers, that is consumers who also produce electricity for example from their excess rooftop solar generation, and consumers who have a demand for electricity to power their homes.
- Collective Self-Consumption is a similar concept but involves the virtual sharing of communally owned generation assets. This allows those who cannot invest in their own personal renewable generation, for example those who live in apartments and have no roof space, to participate in local renewable generation.
The significance of transactive energy is that it can, in principle, be the practical catalyst for system optimisation. For those who believe in the power of markets in delivering optimised solutions, then applying direct economic incentives must be the ultimate way of achieving a system which is optimised for efficiency and effectiveness.
P2P trading is also, potentially, a highly disruptive concept as it can disintermediate the prosumer and consumer. That is, the prosumer trades directly with the consumer without the need for a conventional energy supplier to manage the transaction.
It is argued that not only will this reduce transaction costs, it may also make the energy supplier of today, obsolete.
However, the majority of so-called P2P transactions are not disintermediated, but rely on an energy supplier at the very least to provide the balancing power for the consumer supply. After all, it is highly unlikely that your need for electricity will perfectly match my excess production, particularly on a real time basis.
In practical terms, transactive energy captures three general areas of value: energy production and supply, flexibility and resilience.
With regard to the value of energy (kWh) transactions, the maximum benefit is obtained when the entire tariff value of the energy can be captured. That is, when there is no cost in transferring the energy between the buyer and the seller. Usually however, transactions take place over public networks and are thus subject to use of system charges as well as taxes and compliance costs. Until recently this has eroded around two-thirds of the value of the energy transaction. However, as wholesale energy prices have risen, they now represent no more than half the typical residential tariff, providing a significantly more attractive incentive for transactive energy models.
But of course, transactive energy schemes, even those ostensibly based on energy transactions, also seek to capture additional values from the provision of flexibility and other services. This approach is referred to as value stacking.
Flexibility services serve a number of purposes including frequency response, operating reserve and capacity. Historically these services have been provided by generators to the transmission system operator (TSO) who is responsible for managing the overall energy system. More recently distribution system operators (DSO) have begun to contract with generators, storage and demand responsive loads to provide services to better manage the distribution system.
Whilst many of these services are still in their infancy, we are seeing increasing numbers of schemes being promoted in several European markets. In just one of these, the UK, we have seen numerous DSO tenders for distribution level flexibility in addition to the traditional TSO contracts.
Lastly, resilience. Although it is difficult to attribute a precise value to resilience, still less to monetise it recent innovations such as the Resilience as a Service (RaaS) project on the Isle of Skye are exploring just this issue.
Energy Communities and transactive energy
Early community energy schemes often did little more than raise communal investment to develop a local renewable energy resource such as a wind or solar farm. Despite their benefits in generating renewable energy, they often had a negative impact on the energy system as the generation profile, particularly of solar PV, was poorly aligned with demand. Consequently, the distribution system was often unable to cope with the embedded generation for which it had not been designed. In some cases, the result has been that renewable generation is often constrained to avoid overloading the network.
This is where transactive energy comes in for, rather than depending on subsidies which encourage unplanned generation feeding into congested grids, incentives can be designed to overcome constraints, maximise the renewable generation and optimise the system.
How does it work in practice?
One such example is in Cornwall in the South West of England. Here the grid has historically been stressed due to its remoteness from conventional generation resources. However, with the growth of renewable generation such as solar, which would have been expected to support the network, the weak grid has been unable to keep pace with developments. There is still a mismatch between generation and demand, both temporally and geographically.
For this reason, the energy supplier Centrica, in collaboration with the DSO, Western Power Distribution established a platform referred to as a Local Energy Market (LEM), which facilitates P2P trading between prosumers and consumers. in this case prosumers trade both solar PV (with battery storage) and micro CHP generation. On the other side of the transaction are the consumers who have a net demand for electricity to power, for example, their heat pumps. Each side of the P2P transaction is able to shift their supply or demand respectively.
The DSO pays for flexibility services which are also included in the LEM platform. In some instances, the value of DSO flexibility outweighs the use of system costs and thus enhances rather than erodes the P2P transaction operating over the public network.
Whilst it is true that Centrica is not an energy community, but the largest energy supplier in the UK, this project is a useful demonstration of how transactive energy can incentivise an optimised system, facilitating the connection of additional renewable generation, supporting electrification of heat and mobility and engaging households in the energy transition.
However, there are also examples of smaller schemes in more localised areas where energy communities are implementing various features of this kind of scheme. An example of this approach, again in the UK, is Energy Local. This organisation started as a single community scheme at Bethesda in Wales sharing the output of a communal micro-hydro generator amongst its members and is now expanding to replicate the business model in other communities.
A fairer energy system for everyone?
Even before the current energy crisis, Delta-EE research in a number of EU countries identified a willingness by consumers to invest in energy communities. Given the recent dramatic increase in retail electricity prices, the economics now seem significantly more attractive, and we should expect to see a rapid growth in such investments.
Importantly, this is not about cannibalising the existing value chain, but about creating and leveraging additional value.
Unlike earlier initiatives like feed in tariffs (FiT), which unfairly subsidised the rich at the expense of the poor, energy community business models based on transactive energy need not benefit just a small proportion of the energy system. If the economic incentives are related to the system values they create, then everyone should benefit.
Further details of many of these issues including energy communities, peer to peer trading, resilience and flexibility can be found on the Delta-EE website: https://www.delta-ee.com/