LEMDEx Key Findings

Posted on Jul 23, 2019
LEMDEx Key Findings

A Whitepaper

Swanbarton led the LEMDEx project from January to June 2019. This Whitepaper presents distilled learnings from the project.

LEMDEx (Local Energy Markets in Devon and Exeter) was funded by Innovate UK under the Prospering from the Energy Revolution Programme, within the Smart Local Energy Systems stream. The project was a 6-month feasibility study into deploying Swanbarton’s Local Energy Market (LEM) technology in the South West.

LEMs are a vital component of a future decarbonised energy system but we recognise their adoption presents a multifaceted challenge to today’s energy industry. Our key findings are therefore grouped here into Technical, Commercial and Regulatory. 

Technical

Swanbarton has developed patented Real Time Trading Platform (RTTP) software that automatically negotiates mutually favourable prices in real time to trade locally produced energy. Following several years of development, RTTP was successfully trialled in 2018 in the EMBLEM project on the Scottish Island of Iona, a smaller LEM dominated by domestic consumers and prosumers.

In LEMDEx we have explored and adopted several enhancements to RTTP for an iteration suited to larger LEMs focussed around commercial and industrial prosumers. We have undertaken 1 second monitoring of typical load and generation assets within such a scenario. This authentic monitored data was then used as input for accelerated market simulations with RTTP, giving us further learning about how market parameters and scale influence market dynamics. We have shown that accurate forecasting of both generation and load is an essential component of real time local energy markets and developed new intellectual property to meet this challenge.

We have demonstrated that local energy storage and other demand side flexibility are complementary to LEMs. Local flexibility enables better local matching, whist LEMs provide important revenue for flexible assets, improving their economic viability and reducing investment risk. We showed that storage can reduce peak power flows across the LEM boundary by up to 55%, and average flows by around 34%, and that these figures depend mostly on the storage capacity, rather than its rated power.

We have found that the half hour settlement period, the heartbeat of the GB energy market, is not sufficiently granular to evidence matching at a local level. Analysis showed that the one-minute mean power of a LEM participant is far closer to matching the instantaneous power than when the same asset is dispatched using average power based on half hour energy volumes. Treating our 1 second monitoring data as ‘real’ instantaneous power, we matched energy flows using a 1 minute trading period and then using a half-hour trading period. The 1 minute trading produced an error slightly less than 1%, while the error on half-hourly trading was 7 times greater. Importantly, it’s not possible for total energy matching on the basis of longer-term averages to be more accurate than matching on the basis of shorter-term averages.

RTTP is efficient and scalable enough to coordinate 1 minute trades within a LEM whereas many existing industry systems are not. Our summative technical deliverable for LEMDEx is a detailed specification including metering, data architecture, security requirements in readiness for a full commercial trial.

1 minute market frequency better approximates instantaneous power flow.

Commercial

Swanbarton has met with over a dozen stakeholders, including, BEIS, Ofgem, Elexon, DNOs and large and small energy suppliers.

The central LEM commercial proposition relies on suppliers being able to sell electricity locally at a higher price and consumers to buy locally at a lower price. This requires some re-engineering of the electricity pricing stack. We argue that 50% exemption from distribution charges and 100% exemption from transmission charges is reasonable, because matched power only travels between the source and the sink. Since this local power is not seen by the wider system, and so the wider network benefits from reduced traffic. There is good precedent for this today: for example, electricity consumers connected to the higher voltage tiers in the distribution network do not pay charges associated with the lower voltage tiers. We also argue that it is reasonable for locally traded renewables to be exempt from environmental levies. These reliefs will save the consumer over 35% on locally purchased electricity vs grid electricity, whilst generators were able to increase revenues by 35% above a standard PPA price.

We have extensively investigated how valuable LEM behaviours may also enable participants to access further revenues complementary to local trading. These include providing ancillary ESO system services, shared access connections, local matching during wholesale market events and optimisation of site self-consumption. We have shown that opportunistic trading minute by minute will accelerate the DSO transition. A higher granularity market inherently leads to better matching, reducing flows and balancing the network. In future LEMs will help DSOs better manage constraints by increasing the number of eligible providers through onward trading of CMZ obligations. This will also make DSO services more attractive for flexibility providers: they can access DSO revenues opportunistically without their assets being locked in to low-value availability without guarantee of higher-value utilisation.

The electricity supply sector is an increasingly tough commercial environment. High penetrations of renewables have led to increased imbalance costs and greater volatility in the wholesale market, with periods of very low or negative pricing becoming more common. The Smart Export Guarantee will shift more negative price exposure to suppliers. The retail market is also challenging: On one hand, engaged consumers now use market comparison tools to shop around, accelerating customer churn rates; whilst on the other, obligations to precariat customers are increasingly challenging for suppliers. These pressures are leading to more uncertainty and slimmer margins.

Introducing Local Energy Markets into this context might be perceived by suppliers as further unwanted disruption. Trades within the LEM may cannibalise supplier sales volumes if LEM transactions are handled separately. Moreover, LEMs increase uncertainty in a supplier’s demand forecasts leading to greater imbalance exposure. Despite this, we found that suppliers have been largely supportive in principle, since they rightly recognise LEMs as an inevitable feature of decentralisation and thus an opportunity to be embraced. Within LEMDEx we proposed a range of supplier business models including cross-vector markets into heat and mobility. These demark clear ongoing roles for the supplier, leveraging their market experience and administrative infrastructure, and have thus met with favourable responses. We have worked together to understand how to make LEMs supplier-friendly.

One of our supplier-friendly commercial LEM scenarios

Regulatory

LEMDEx has studied the regulatory changes required to enable Local Energy Markets.

We found the main regulatory obstacles to GB LEMs are, a) a supply license is generally required to sell electricity in the UK, b) no customer may use more than one supplier at any time and the process of switching takes at least  several days c) a supply licensee must adhere to the complex, interlocking web of industry codes d) exemptions from the supply licence are possible in principle, but in reality have restrictions that inhibit their suitability for LEMs.

We see Ofgem as the main gatekeeper to the enabling regulation and we therefore have met with the regulator during LEMDEx. We applied for an Ofgem regulatory sandbox to trial network charge reliefs and were re-directed to the Network access and forward-looking charges consultation, in which we are participating via the Challenge Group. We continue to work with Ofgem, both inside and outside this consultation to promote more innovative charging mechanisms and seek a route to a trial of a LEM applying reduced network charges to local trades. We have also met with ELEXON who are now entertaining changes to the balancing and settlement code, under proposal P379, that will allow customers to have multiple suppliers, a potentially transformative step towards LEM adoption.

Conclusion

The LEMDEx project has shown that local energy markets will be a transformative step towards a de-carbonised energy system. As well as clear savings to consumers and producers, LEMs embrace the trend of decentralisation driven by local renewable generation and nurture further low carbon investment. They alleviate stress on existing infrastructure through favourable price signals and reduce long term network reinforcement by unlocking the value of local flexibility. LEMDEx has brought stakeholders together to define the commercial opportunity and laid out the enabling regulatory steps. We have been able to quantify the benefits of a higher frequency market, and shown how Swanbarton’s RTTP technical solution can realise this vision.