Layered Energy System

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Harry Rose
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1 Layered Energy System Sustainable energy and flex for everyone Summary May 2017 Stedin: Energy21: Jan Pellis Michiel Dorresteijn

2 Stedin and Energy21 have designed the layered energy system, which offers a solution to a variety of existing and future energy system problems resulting from energy transition. The layered energy system: o uses a tax alternative for the Dutch netting scheme which makes sharing flexibility attractive o is scalable, can be applied in the existing nationwide market model and improves access to flexibility for all market players o leads to lower system costs o involves customers in the energy system and consequently increases commitment to energy transition and the support base for changes Blockchain technology is used to give shape efficiently to the layered energy system. Stedin and Energy21 s approach distinguishes itself from other projects in the energy sector where blockchain technology is applied because it is based on an open market rather than on peer-topeer energy supply. Introduction Energy transition leads to problems with grid congestion, voltage quality and system balance. To a great extent, the answer to those problems lies in providing access to and utilising decentral flexibility. Only some of this flexibility will become available if the netting scheme is abolished. For the most part, prosumers will work on balancing their own generation and consumption behind the meter, as that will yield greater benefits. This may create a self-reinforcing effect which will make the grid increasingly less attractive and more expensive, which is also known as grid defection or the death spiral. Blockchain technology is often mentioned as the overall solution for the complexity of a smarter energy system. However, the process often becomes a goal in and of itself. Stedin and Energy21 first and foremost examined the concept of open local energy markets as a solution to challenges the energy sector is facing, which resulted in the design of their layered energy system. Only after that was the applicability of blockchain technology examined in the context of that concept. Layered market model requirements A sustainable energy market model that can handle the challenges of energy transition, satisfies customers wishes and stabilises and

3 develops itself to the lowest possible costs, consists of the following elements: Prices in the local market are lower than energy prices beyond the local market. To that end, a different form of the energy tax regime is used, which also serves as an alternative for the netting scheme. Incentives are provided by the grid manager to prevent grid congestion. In the preferred scenario, the grid manager acts as a party seeking flexibility on the market in order to perform congestion management locally. Both the local market and the nationwide wholesale and imbalance markets (and possibly adjacent and underlying markets) are linked through a gateway. Because of this layered structure, the sustainable local energy market model was named layered energy system. On the gateway, the local market constitutes a single entity and acts in accordance with the rules of the nationwide market. Behind the gateway, the arrangements in the local market apply. This allows the local market to operate within the existing nationwide market: o The reliability and the existing liquidity in the nationwide market continue to be secure and accessible o There is no need for far-reaching changes in the nationwide market o New market model variations grow in the 'protected' environment of the local market (see also figure 1) The local market is in a geographically connected area. This is necessary to make congestion management possible and is furthermore in line with the Dutch postal code rose concept. The local market model is adaptable. The first design can be based on the Universal Smart Energy Framework (USEF) principles, in such a way that the facilitating system is flexible to such an extent that learning experiences and customers wishes can quickly be translated into improvements of the system.

4 Figure 1: Schematic representation of the links between local markets and the nationwide market. System approach versus peer-to-peer supply This layered energy system distinguishes itself from other energy sector projects that apply blockchain because it is premised on a market rather than on peer-to-peer energy supply. It is precisely because of this system approach that supply, grid capacity and flexibility can be taken into account, making it possible to use the lowest possible system costs as an important driver in the local market model. This is a second significant distinction compared with other local market initiatives. Linking a local market to the nationwide market A bidding system based on a merit-order principle is used to bring together supply and demand on the local market. This bidding system combines the local market prices with the wholesale market prices. As soon as there is a surplus or deficit on the local market, the wholesale market is accessed through the gateway. Supply and sale in the local market are not subject to energy tax. Energy purchased from the wholesale market is subject to energy tax, which is allocated to all purchase orders made in the local market. This system enhances the possibility to purchase energy generated locally at the lower local price. Therefore, local energy will at all times be used first, making it attractive to offer flexibility in the local market. Where grid congestion is imminent in or adjacent to the local market, the grid manager will also act as the party seeking flexibility, creating an extra incentive for making flexibility available. It will remain attractive to stay connected to the nationwide market and the nationwide grid to be able to trade in surpluses and deficits without having to invest in highcost assets.

This local market design stimulates the contribution of flexibility to locations suffering from a flexibility deficit and discourages the expansion of flexibility to locations that already have

5 This local market design stimulates the contribution of flexibility to locations suffering from a flexibility deficit and discourages the expansion of flexibility to locations that already have sufficient flexibility. Figure 2: Example of bringing supply and demand together on a local market. Market process and blockchain application The market process in the layered energy system follows the USEF steps: PLAN OPERATE SETTLE. The process has been outlined. The applicability of blockchain was tested based on that process. Moreover, the technical aspects of the local market model can be given shape in various ways and its applicability is not contingent solely on blockchain technology. However, this technology does have a number of aspects that may offer major benefits in terms of flexibility, privacy and security. The type of blockchain (private blockchain, consortium blockchain or public blockchain) is important in that regard. A consortium blockchain was chosen for this market model. One of the advantages of this type is that it is less energy intensive and easier to regulate. A preliminary cost comparison of a market facilitation based on blockchain versus server-client technology yields an outcome of 0.20 versus 2.00 per user per month in the local market. Proof of Concept In addition to the above-referenced benefits of our layered energy system, using blockchain offers a unique platform to gain accelerated

6 learning experience with the renewal of the energy system and to explore the partnership between new parties. Stedin and Energy21 have fleshed out the functional design for this market model and translated it into a rudimentary preliminary version of a working blockchain plus accompanying front application, which confirms the applicability, but currently does not allow for extensive testing and scenarios. The next step is a stakeholder round intended to explain the model and to get feedback on the layered energy system. After that, the proof of concept will be developed in more detail based on pilots based on market needs. The premise in this respect is that this will be done in partnership with parties in the energy sector, but also with the necessary external parties, such as local energy cooperatives, consumers, banks and technology suppliers.

Spreading Innovation for the Power Sector Transformation Globally. Amsterdam, 3 October 2017

Spreading Innovation for the Power Sector Transformation Globally Amsterdam, 3 October 2017 1 About IRENA Inter-governmental agency established in 2011 Headquarters in Abu Dhabi, UAE IRENA Innovation and