Evolving network pricing will help realise the economic and grid benefits of local trading markets

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Here comes the sun

Consumers are increasingly active in the Australian energy market. As has been extensively documented elsewhere, Australia has the highest proportion of ‘prosumers’ (energy-producing households) in the world, with more than 1.7 million domestic solar photovoltaic installations. There is now around 6GW of systems sized at 100kW and below[1]. By 2050, the ENA and CSIRO envisage up to 45% of all generation coming from customers[2] – but in specific high-solar uptake suburbs this percentage will be experienced much sooner.

More subtly, consumers’ expectations have changed. Uber, Airbnb and various car-sharing services are household names. The concept of sharing of capital-intensive assets is broadly accepted by the public, and particularly where it introduces new revenue streams, so extending the sharing economy to residential solar PV (and battery storage systems) is an obvious opportunity.

Bills that burn

Residential power bills have risen by 63% in real terms in the last 5 years. On average, a 2015-16 residential power bill totalled $1,524 (ex GST)[3]. While there has been variance across the NEM states, network augmentation has made up the largest share of the bill increase, and Australia’s network charges are the highest in the world[4],[5]. The average bill is now made up of:

Figure 1: Components of an average residential electricity bill in 2015-16 (source: https://www.accc.gov.au/publications/accc-retail-electricity-pricing-inquiry-preliminary-report)[6]  

Customers struggle with the simple maths. They cannot reconcile their paying between 25 and 30c/kWh for electricity they buy from the grid, when they only get paid between 7 and 10c/kWh for power they generate. They might not need the electricity at that moment, but couldn’t that power go to their relative or neighbour?

Leaving aside the real-time flows of an interconnected system, retailers are starting to engage in marketing ploys that are based in this public perception. For example, they have introduced products and offers that allow consumers to dedicate their PV-generated electricity altruistically: such as to Sydney’s iconic Opera House (EnergyAustralia)[7], neighbours (Powershop)[8] or locally to their relatives (AGL)[9].

Consumers enjoy service

Caught in the intersection between bill pain and technology-driven opportunities, households are rapidly becoming truly active power market participants who want to generate more value from their investments and prefer control over their distributed energy investments[10]. To do this, customers need to actively make use of the grid – and quite frankly, why shouldn’t they? They are certainly paying for it. But using the grid is not cheap.

Consumers’ 21st-century mindsets do not gel with current electricity network revenue models that rewards these critical infrastructure providers for the value of their assets. The more networks build, the more they are worth. The more networks are worth, the more revenue they can extract from consumers[11].  Network’s understanding of ‘value’ is therefore significantly removed from modern concepts of customer service.
What could ‘service’ entail? For instance, networks could instate incentives for prosumers to supply local markets or work with consumers to help match their personal demand to local PV output[12]. To do so, however, would require addressing current barriers to more equitable cost reflective network tariffs, which include existing tariff assignment policy which predisposes retailers to assign customers to legacy tariffs and the lack of smart meter infrastructure in some jurisdictions to support this transition[13].

Quality in a service or product is not what you put into it. It is what the customer gets out of it.

        – Peter Drucker

‘Thinking local’ ensures supply efficiencies and reduces emissions

In electricity, proximity matters. Losses currently incurred in transmitting electricity from remote thermal power stations to individuals’ homes average 10% across the NEM[14]. The further energy needs to travel, the more of it is lost. At present, any kWh purchased from the grid is obliged to bear the same transmission and distribution charges – even if it comes from the rooftop next door. Moreover, locally-generated electricity is almost always emissions free, helping Australia achieve its climate targets.

Pricing structures should evolve to reflect that the grid is now a two-way energy platform. If network pricing considered the consumer’s proximity to generation sources and the efficiencies DER could provide, new local trading platforms could emerge. In the past, this issue has only been addressed in an inquiry completed by the Essential Services Commission in Victoria, which attempts to reflect the locational value of distributed generation, in addition to its temporal and environmental values. This approach accounts for avoided line losses and for avoided market and ancillary fees in valuing electricity produced by distributed generators and purchased by consumers within proximity[15].

Local trading can help mitigate distribution network impacts

The distribution network is already experiencing the impact of solar PV in specific areas and postcodes. Significant ramp rates in the morning as residential solar energy forces itself into the grid, just after many people have left for school or work. Even more dramatic opposite flows in the late afternoon as solar generation ceases just as people arrive home to chill their homes, cook dinner and catch up on Netflix.

There are material asset degradations through this forceful reversing. As well as increasing wear on assets, it hastens their replacement or augmentation[16]. An evolution of grid pricing structures would encourage prosumers and consumers to use their supply and demand to help smooth out the demand profile and mitigate this damage, working with and for networks to ensure minimum further network expenditure.

MHC’s work with AGL and IBM found evidence that, using peer to peer market pricing, prosumers can be awarded incentives to use their DER investments for systemic and societal benefit. We are contemplating further modelling to quantify the network benefits of avoiding or delaying augmentation or providing voltage regulation services in the distribution network, and would welcome expressions of interest from potential partners.

Helping our back pockets

Finally, local or ‘peer-to-peer’ trading could provide a new revenue stream for prosumers, improving payback on existing and new distributed energy investments. Analysis from our work with AGL and IBM shows that prosumers and consumers benefit from ‘peer-to-peer’ trades, but it is at the expense of networks, retailers or other consumers depending on the scenario tested.  A scenario testing the impact of reduced network charges for peer-to-peer trades (by eliminating TUOS) saw prosumers benefit from a 66% increase in the value of their generation and consumers reducing costs by 2%. However, the network revenues reduce by 9% and as this would need to be recovered from the entire customer base more than offsetting the 2% cost reduction for P2P market consumers and inflicting cross subsidies on non-participating consumers, unless there is evidence of reduced network costs resulting from increased localised generation.

Figure 2: Outcomes (by participant) for P2P market maximising local network benefits scenario (source: https://arena.gov.au/assets/2017/10/Final-Report-MHC-AGL-IBM-P2P-DLT.pdf)

Our conclusions propose grid pricing mechanisms that reflect the true value DER delivers, particularly in terms of system optimisation networks. Our work with AGL and IBM recommends a real-world trial of genuine[17] peer to peer trading to explore the opportunity for equitable and cost-reflective tariffs for all stakeholders, including peers involved in trades and networks[18].

Specifically, this could include trials in a defined area to explore the opportunity for network service providers to offer a reduced network charge for local peer to peer trades. Trialling these in a confined area could allow for practical assessment of the uptake and impact of peer to peer markets and stimulate innovation in products and services, while allowing network service providers to understand how they might approach network pricing to support customers in this transition without cross-subsidising others. These trials could be funded by the Demand Management Incentive Scheme or Demand Management Innovation Allowance, or with support from ARENA.

 

Disclosure: MHC gratefully acknowledges the ARENA funding for the joint MHC-AGL-IBM project to assess the viability of a peer to peer market and the applicability of distributed ledger technologies to enable these market developments. Our collaboration in that project informed many of these views. The final report can be accessed here.

 

[1] https://www.solarchoice.net.au/blog/news/australian-solar-on-track-record-year

[2] CSIRO & ENA 2017, Electricity Network Transformation Roadmap

[3] https://www.accc.gov.au/publications/accc-retail-electricity-pricing-inquiry-preliminary-report

[4] https://www.accc.gov.au/media-release/electricity-report-details-affordability-competition-issues

[5] http://reneweconomy.com.au/why-australia-networks-need-to-slash-asset-values-by-nearly-half-96499/

[6] Retailer gross margins add up to 24%, comprising 16% retail cost component and 8% EBITDA net margin component. The retail cost component includes costs to serve customers (e.g. billing, customer assistance, regulatory compliance costs etc) and costs to compete (e.g. costs to acquire and retain customers through marketing and advertising)

[7] http://www.afr.com/business/energy/electricity/sydney-opera-house-energyaustralia-and-csiro-team-up-20170403-gvckxq

[8] https://onestepoffthegrid.com.au/powershop-launches-p2p-solar-product-victorian-customers/

[9] https://au.news.yahoo.com/video/watch/37760768/new-scheme-allows-home-owners-to-sell-solar-power/

[10] Australia Institute, “Saving Mega Bucks with Negawatts” http://www.tai.org.au/sites/defualt/files/P389%20Saving%20mega%20bucks%20with%20negawatts%20FINAL.pdf

[11] This comprehensive review in The Monthly provides valuable historical background: https://www.themonthly.com.au/issue/2014/july/1404136800/jess-hill/power-corrupts

[12] See several more options at http://www.energynetworks.com.au/sites/default/files/ena_future_network_cost_august_2015.pdf

[13] http://www.energynetworks.com.au/electricity-network-transformation-roadmap

[14] https://www.aemo.com.au/Electricity/National-Electricity-Market-NEM/Security-and-reliability/Loss-factor-and-regional-boundaries

[15] https://www.parliament.vic.gov.au/file_uploads/Essential_Services_Commission_-_The_Energy_Value_of_Distributed_Generation_Distributed_Generation_Inquiry_Stage_1_Final_Report_KPxzvMML.pdf

[16] Chidurala, A, (2016) “High Penetration of PV Systems in Low Voltage Distribution Networks: Investigation of Power Quality Challenges and Mitigation” https://espace.library.uq.edu.au/data/UQ_405798/s4301378_final_thesis.pdf

[17] As distinguished from the marketing exercises described above.

[18] https://arena.gov.au/assets/2017/10/Final-Report-MHC-AGL-IBM-P2P-DLT.pdf