17 August 2017

How to pay for local balancing and supply

Local balancing and supply makes sense.

Why not strive to use power close to where it is being produced at the time it is generating? That way we can reduce the losses from transporting power over long distances, we can reduce the amount of power flowing in the opposite direction it was meant to and potentially connect more low carbon generation through more efficient use of the local network.

So why is it so challenging? I have been looking at innovative supply models for domestic customers for over two years now, for example on the Sunshine Tariff trial and advising community groups and local authorities on new business models, and I keep coming up against regulatory or commercial barriers.

A major part of the problem is accessing the value from consumer flexibility in order to provide a price incentive for consumers to a change their behaviour. It is possible for large non-domestic customers to earn an income or make savings from changing their consumption behaviour through: bidding into National Grid’s various flexibility auctions; avoiding peak times and high wholesale costs of electricity; and avoiding the peak bands for network or ‘use of system’ charges. However, these options are not yet widely available to domestic customers.

Instead, domestic customers are too small to participate in current flexibility markets, and the coordination required to aggregate thousands of households to achieve the scale required is complex and costly compared to dealing with one large non-domestic customer. And without widespread smart meters and half hourly settlement for domestic customers, it is not possible to reflect wholesale costs and use of system charges.

But there are some promising changes ahead. All homes will have smart meters by 2020, government is considering mandating half hourly settlement for domestic customers and Distribution Network Operators (DNOs) are required to open up the delivery of network requirements to the market in their move to become Distribution System Operators (DSOs).

Also, some suppliers are starting to recognise the value of trusted third parties, such as local authorities or community groups, providing customer recruitment and retention services. The idea is that trusted organisations are in a much better place to persuade the non-switchers to switch suppliers. This could be particularly effective when promoting a new local supply model.

So, we are starting to see how local balancing and supply for domestic customers may pay for itself.

And despite the challenges, we are starting to see some models emerging. Virtual private networks are interesting. These can take the form of a trading platform where customers choose which generator they buy from, such as Selectricity. Or they can be a more complex arrangement where local generation is pooled and shared between a community of households at an agreed lower price, such as the Energy Local trial in Bethesda.

In both of these cases, the customer has a set price for the local generation and another for any top-up power required. They know when the plant is generating and can time their consumption to match this as best as possible. Currently the main source of value these models can access is the supplier’s profit margin, which it may be willing to give up some in return for a growth in its customer base.

It is also interesting to see that three out of the five regulatory sandbox trials to come out of the Ofgem programme are on peer-to-peer trading. Under current regulations, we are not able to sell excess generation to our neighbours on the public network. So it will be interesting to see how these trials work and whether they can incentivise greater matching between generation and demand.

So although the move towards local balancing and supply has felt challenging, we are making progress. I will be continuing to work with suppliers, communities, DNOs and Ofgem to come up with new and exciting ways that we can make it pay, so that everyone, not just the heavy weights, can play a part in our smart, flexible energy system.

Author: Tamar Bourne

Contact: tbourne@regensw.co.uk