Deregulation and Decentralisation for the transformation of the energy sector.

Deregulation and Decentralisation for the transformation of the energy sector. You have the chance to do it right and set an example.

It was always obvious that deregulation or rather re-regulation or liberalisation would be required to enable renewable energy. It's exciting to see that the energy transition has finally reached the point in its evolution where legislation is to be examined in detail. 

It is the right time for the legal experts and other stakeholders to work together in the structuring of future deregulation, as it is so critical for a good long-term outcome.

But first, a disclaimer. This essay isn’t intended by any means to be exhaustive and complete. This is an initial introduction to my thinking on the subject. 

There’s much to learn from looking at how the telecommunications act transformed the landscape in 1997. 

The first task for deregulation: In front of the meter

But first things first. At the most basic level, the job of deregulation is to allow two apartment blocks, say, situated a couple of miles away from each other, to trade electricity ‘beyond the meter’.  This is peer-to-peer energy sharing.

The current legislation (pretty much around the globe) at present prohibits this, but it’s vital if peer-to-peer energy communities are to evolve.

If Block A has a surplus and Block B has a shortage, these two should be able to trade using the short amount of grid connection needed without paying a prohibitive price for the privilege.

If a prohibitive price is charged, the two will keep their behaviour the same to create a more efficient system, and the old centralised world will prevail. Plenty of short-order fossil fuel will continue to be needed to plug the gaps to ensure stability.

Liberalising or de-prohibiting power trading activity in front of the meter is the first and simplest step that needs to be taken. That alone would transform the future and uptake of peer-to-peer energy markets or local energy markets (LEMs).

There’s another concept that may fall outside the realm of legislation, but it is the background concept that needs to be enabled by the legislation and of which legislators need to be aware. It is the notion of decentralisation. Most of the existing electrical legislation and infrastructure has been built around the concept that a single central trusted paternalistic authority controls pricing and standards for the whole system. P2P, by necessity, challenges that.

What model to use:  Central, decentralised and hybrid.

The level of centralization is an important concept and, like a fractal of a cloud or piece of rock or organisational behaviour, can be seen at all levels of scale in the system. For this discussion, we will concentrate on trading within an apartment block.

But by extension, the same thinking applies outside the apartment block, which, in a post in front of the metered world, is simply an enlarged macro version of the self-similar micro components. Producers, consumers, generation, and energy storage.

To understand how decentralised markets work, let’s take a concrete example from real life or what could be real life right now.

Let us imagine we have an apartment block, often called a condominium in the US or a Strata in Australia, which houses ten households with room for parking and charging 15 electric vehicles. There may be X square meters of roof space capable of generating Y watts on a sunny day. 

Let us imagine the apartment block is called Everlast and houses average-income families, neither poor nor particularly affluent. Being set in the year 2025 post-regulation, they all consume their energy behind the meter in an embedded network solution.

The following demonstrates the kinds of issues that flow from different ownership and (de)centralisation models, considering a hypothetical Everlast apartment block that could be anywhere.

Examples of strata with solar panels: Solar Power for Strata Buildings: Complete Guide | Solar Choice

The centralised model

In the first model, which we could call centralised, a rather Paternalistic model, the Everlast apartment block owners own the solar panels on its rooftop and is responsible for setting the prices and buying and selling the solar electricity.

If it chooses, it could set a competitively low price for its rooftop electricity and thus create a really good discount spot for charging its residents’ cars. This might have the effect of persuading everyone in the block to change over to electric from petrol and diesel cars and help create an upmarket feel to the apartment block. This, in turn, might create a property price increase that benefits all the residents.

The cost of discount electricity could also be balanced by an uplift in property maintenance costs.

So far, so good, and everyone is reasonably happy. However, some residents who don’t own a car but do own equity in the solar panels feel the electricity prices for charging are too low and campaign for higher prices. This ongoing debate means that the facilities manager, Jean Louis, wants to subcontract the task now so that he’s not in the middle of a tedious exchange of emails.

As a result, Jean Louis finds a woman called Amelie at Electroeze who specialises in running embedded network concessions at places just like Everlast. It’s an appealing move: Jean Louis drops the responsibility and time commitment of running the embedded network, and there is also a quick buck to be made as Amelie pays a leasing fee for the rights to this. Amelie can now run the unit as a for-profit and choose her pricing policy; the block gets a healthy leasing fee for renovations.

Semi centralised

This means Everlast will now have two profit centres because Amelie at Electroeze is interested in maximising her profits rather than providing cheap electricity.

Amelie starts to raise the prices because she sees no need for discounted electricity. She runs the pricing through her optimisation software and concludes it could easily sustain a 40% price hike to be parity with the grid electricity price. Furthermore, it could even be higher because he has a captive audience in Everlast.

Soon the residents complain about the prices and start charging their electric cars at their offices instead of at home.

Amelie is still profitable, but the property prices at the Everlast apartment block come down substantially as the lack of convenient electricity kicks in and gives the place a poor reputation. The residents complain about the expensive electricity made from their rooftops, but since they no longer own the rights to the electricity, Amelie turns a deaf ear to their pleading. 

Some of the apartments become difficult to sell, and the car park gradually reverts to fossil-fuel-based cars. The excess solar, of which there is plenty, get fed to the grid at the feed-in lowish tariff. Amelie may be unable to sustain his Electroeze business, and the apartment block and its residents don't feel well served. Amelie’s greed has killed her own business and the well-being of the block. Still, she acted in an entirely rational way, given the economic structure and the forecast of his trading future.

Fully decentralised

A similar apartment block down the road called Freelast sees these problems and chooses a third economic model. Theirs is fully decentralised.

Different tenants have various amounts of electricity to buy and sell at various prices. They would want to sell above a feed-in tariff and buy below the grid’s price, but everything in between is up to them and fair game.

They effectively use a double auction system just like the stock market, and theoretically, it should be the most efficient and stable model of the three.

Prices go up and down based on times of day and local needs and supplies. It becomes a highly granular agile Local Energy Market, and because of its responsiveness,  helps stabilise the grid.

From this discussion, it should now be clear that the choice of model is quite important for the way the system evolves and how stable it is electrically and economically.

It should also be clear that the fully decentralised model is, in many ways the best. Still, while the centralised model can work as well, there is difficulty in establishing a fair price, which can lead to a multitude of other problems.

The model also determines the relationship between the electric vehicles, EVs, the building and the grid and the viability of the partnership in the future.

So what’s the catch?

It is evident that fully decentralised energy trading is the best, most stable model, and legislation in the future must be designed to allow for it. Failure to decentralise fully could lead to one market cannibalising a dependent market. This issue is common in airport parking pricing, where there is a dual cost centre. 

Let's make sure that the electrical energy system is also fully decentralised. This is an appeal to the regulators and legislators; if we get it right in your jurisdiction, others will look to you as a benchmark of how to do it well. You would set an example by empowering the citizens to use fully decentralised and democratised Power.