Developers of local energy markets (LEMs) should take steps to future proof them in light of regulatory changes, the Energy Systems Catapult (ESC) said.
The ESC's latest policy review, commissioned by the Energy Revolution Integration Service (ERIS) programme, outlines various regulatory and market changes that could effect ongoing trials and future large-scale LEM projects.
Whilst many of the changes cited in the report could have positive impacts on LEMs - for instance the transition of DNOs to DSOs, market-wide half-hourly settlement reform and potential changes to the supplier hub model which currently restricts peer-to-peer trading - the report has issued a series of key considerations for the design of future LEMs:
- Interoperability with future electricity system operator (ESO) and distribution system operator (DSO) platforms and other markets, with technical capabilities to “speak” to other platforms.
- Revenue stacking opportunities, including outside of the LEM. The availability of multiple revenue streams is likely to increase the viability of their business models, the report suggested.
- Maintenance and coordination of price signals to manage conflicts in market demands and signals that could arise due to there being multiple potential purchasers of energy and flexibility services.
- The balancing and settlement processes within the LEMs, as well as how the LEMs would interact with system-wide settlement processes and requirements.
Other considerations include how smart meter data, how data would be managed in line with data protection requirements and how LEMs contract with customers in the short term to enable trade.
The report suggests several options could be possible for that, such as a licensing agreement, a partnership with licence suppliers or the possibility of the market being solely open for licensed entities.
It also pointed to the impact reforms of network charges and access arrangement might have on price signals for consumers, meaning the interactions should be carefully assessed when evaluating the business case for LEMs.
Other challenges to LEMs include the slow uptake of smart meters, limiting the use of half-hourly metering which could unlock domestic flexibility for trading in an LEM, the restricted access to the wholesale, ancillary, balancing and capacity markets and the complex regulatory and administrative requirements that disproportionately impact new, smaller actors.
Eva Gromadzki, director of the ERIS, said the challenge is to develop LEM trials with "an eye on wider, simultaneous sector changes".
"With reforms in network charging arrangements, market settlement and retail supply, and continuous changes in the way the electricity system is operated, it is key for stakeholders entering the local energy market space to consider how to future-proof projects and design them in a way that allows successful integration in the wider system."
The report also pointed to the Smart Export Guarantee (SEG) for small-scale solar, which would offer a competing source of revenue for local resources and could have a potential impact on the number of participants in a LEM.
The uncertainty surrounding future policy to support small-scale renewable generation and other DSR and generation and storage technologies could also have a detrimental impact on the investment case for local assets, potentially affecting LEM liquidity and market prices.
However, LEMs could support the creation of a transparent reference price for local energy for suppliers participating in the SEG.