Locally matched electricity networks – what are the benefits?

Lux Nova Partners recently completed work for Western Power Distribution in collaboration with Regen SW, Open Utility, and Reckon, examining different models of peer-to-peer trading and local energy markets as a way to maximise value from generating and consuming electricity within the same local networks.

View the full report.

There is increasing interest from a wide range of energy industry stakeholders in local matching of demand and generation, one of the drivers being the rapid growth in distributed energy resources such as solar PV, batteries and electric vehicles. As renewable subsidies are being reduced, customers and generators are looking for other ways to maximise their revenue potential.

The research looks at two key questions:

  • what network savings from local matching of demand and supply can be realised;
  • what models of local matching could be utilised to access the value in these savings.

Three models were examined:

  • Network Replicating Private Wires (NRPWs)
  • Virtual Private Wires (VPWs)
  • Locational Distribution Use of System Charges

Of the three models, only NRPWs are currently operating in the market, as VPWs and Locational Distribution Use of System Charges would require regulatory, legislative or industry code changes.

NRPWs directly connect supply and demand by way of private wires and currently have a number of economic advantages to the generator and customer, as the parties are not subject to environmental charges levied on licensed electricity supplies (eg FiT levy, CfD levy, Climate Change Levy, etc) and network charges for the use of the transmission and distribution systems.  NRPWs can, however, deliver dis-benefits to others due to duplication of network assets and higher residual taxation, which is then shared around remaining customers.

Theoretically, VPWs could provide a good alternative model to encourage local matching which would be available to more participants (those unable to invest in their own generation or private wire) and would avoid the duplication of assets. For the purposes of the study, VPWs were defined as a similar arrangement to a NRPW, but using licensed distribution network assets in place of investment in a physical private wire. Two key features are the use of licensed distribution network assets (by allocating spare capacity through, for example, a leasing arrangement) and a bespoke Electricity Distribution Licence exemption, exempting the DNO from aspects of their license.

Locational Distribution Use of System Charges formed the final model, which would see local Distribution Use of System (DUOS) tariffs set to provide an economic signal for local matching. Though the price signals in DUOS could be quite small, they would theoretically provide a price incentive across a defined area to change behaviour. Options could be that DUOS savings are applied retrospectively to bills or aggregated and given to a local or community fund. However, this model could prove to be complex to administer and like NRPWs and VPWs, if the DUOS charges were to be based on current cost recovery targets, there would be no net savings across the system, with savings by some, borne as costs by others.

All models of local matching examined had challenges. The VPW model, though appealing, has cost avoidance and regulatory issues. The locational DUOS charges may provide only small price signals and may be a complex way of reducing system peaks (and like VPW also requires regulatory changes).

Quoting Regen SW: “Matching supply and demand at a local level is going to be a key feature of a decentralised and democratic energy system.”

This research shows that there is value available, but we need changes in regulations and charging models to enable these new models to emerge.