Barriers to Local Energy Markets in GB

By Rachel Bray, Energy Policy Group, 10th May 2018*

The need to decarbonise the GB electricity system, alongside the falling costs of renewable technologies and developments in IT capabilities, provides us with an opportunity for systemic change in the way that electricity is generated and traded, creating potential for new flexibility markets at the local level.  However, for this to be realised, the current regulatory environment has to be changed, and commitment is needed from BEIS and Ofgem to adopting a whole systems approach to managing the energy transformation. This currently appears to be lacking.

Our new report ‘Policy and Regulatory Barriers to Local Energy Markets in GB’ highlights a range of regulatory and policy barriers to one particular innovative market model approach, the Local Energy Market (LEM). The report analyses barriers to LEMs in general, but also focuses on barriers facing Centrica’s Cornwall LEM project.

The Cornwall LEM project is a three-year trial from 2017 to 2020 jointly funded through the European Regional Development Fund and Centrica. The project is led by Centrica in association with project partners Western Power Distribution, National Grid, the University of Exeter and Imperial College London. The trial will test the role of flexible demand, generation and storage via a new virtual marketplace. This will be supported by the installation of new low carbon technologies into over 150 homes and businesses.

The LEM model of electricity trading differs significantly from the way in which the electricity system currently operates. Markets have historically been designed to reflect the ‘conventional’ centralised configuration of the system, rather than supporting smaller scale, more active local participation.  Current policies and regulations therefore act as barriers to the development of a model which enables local trading of power and flexibility.

For LEMs to be realised, BEIS and Ofgem need to provide overarching regulatory change. This has not happened to date. Although projects, strategies and consultations are aplenty, many of these appear to be happening in a disjointed piecemeal fashion, instead of being part of a whole systems approach to achieving transformation. Somewhat like undertaking a jigsaw puzzle without seeing the box.

In the absence of a clear strategy and implementation roadmap, we are now in the position where renewable technologies are viewed by system operators as troublesome and the primary cause of network balancing and constraint issues.  Indeed, network operators have been slow in acknowledging the system benefits which distributed energy resources (DER) could bring if managed intelligently; leading to a situation where much of the change occurring at the network and market levels at present is reactive rather than proactive.

The transition from DNOs to DSOs should be the biggest enabler for LEMs. A fully functioning energy market at the distribution level would allow for a wide range of services, adding value to the system through more intelligent management of renewables; in turn enabling more renewable connections to be made. However, BEIS and Ofgem have left many transition decisions to be made by the network operators themselves, through the Energy Networks Association (ENA), rather than prescribing a long-term strategic vision and timeline for future network development and operation. This arguably allows the DNOs to set their own timescales and to decide for themselves what can and can’t be achieved on individual networks. This brings uncertainty for any local market solutions.

Current policies and regulations therefore discourage LEMs from being realised. Only the most adventurous explorers would undertake a mammoth journey without knowing in advance their mode of transport, their direction of travel, the terrain to be encountered and the distance to be covered in order to reach their destination.  But this is what LEM developers are currently required to do.

Therefore, if BEIS and Ofgem are serious about wanting to transform the GB energy system to meet decarbonisation targets and create markets that work flexibly, the Government need to articulate a clear strategic vision now.

 

Disclaimer

This blog contains the views of the University of Exeter’s Energy Policy Group only and does not in any way represent the views of Centrica plc

* this blog was updated with minor changes on 11th May 2018.

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