DSOs and communities: the next disruptors?27 February 2020
The power sector is undergoing major disruption with the rise of distributed energy resources, and a new trend that is seeing them increasingly managed within local energy systems. Distribution system operators are assuming a central, pivotal position, deploying demand-side flexibility to decrease network costs and manage congestion.
Reflecting upon what could be seen as a simple change, from high-carbon centralised generation assets to low-carbon distributed assets, the energy transition brings many technical and deep economic and socio-cultural challenges. From a field mostly dominated by incumbents, the energy sector now finds other industries knocking at its door. It is becoming the scene of many innovative business models and, at last, we see individuals, small organisations and players from other sectors forming energy communities to accelerate the pace of change, wanting to own part of the transition and to locally retain benefits from this revolution.
The increased deployment of distributed energy resources (DERs) – such as in the Nordics where DER installed capacity increased by ~46% between 2005 and 2017 – is changing the nature of interactions between buildings, districts, cities, and the overarching energy system. The impact and control level of distributed assets on the grid varies depending on their nature and connection type. At the medium-voltage level, we see assets such as CHP and wind turbines, whereas at low-voltage levels, there is the emergence of residential assets such as heat-pumps, solar PV and electric vehicles (EVs).
While the higher penetration of DERs may have positive impacts on the grid, with reduction in energy losses and possible lessening of voltage fluctuations, it can also create new congestion problems. We have seen such an issue in the Netherlands, where after a successful campaign to incentivise the uptake of solar PV, the grid did not have enough capacity to cope with the extra electricity generation. Now, while Dutch operators struggle to connect new generation assets, grid reinforcement deferral (copper in the ground) is seen as a temporary solution. By using the GOPACS platform, flexibility providers can place orders on an energy trading platform. By including their location data, GOPACS checks whether an order can meet DSO requirements for addressing a congestion issue. The platform uses existing intraday energy markets, and co-ordinates with the TSO to reduce congestion problems.
New flexibility markets
The pace of change in European decarbonisation creates new problems of network management for system operators. As the GOPACS example illustrates, among proactive solutions is the development of new ways of using demand-response, with a trend towards employing a bottom-up approach to procuring flexibility. We see the emergence of three levels of demand- side flexibility (DSF) – turning down demand loads, using batteries for example to provide short-term power boosts, dispatching local generators, etc – to manage the grid: at the transmission level with voltage and frequency management; at the distribution level with congestion management; and at the local level with local grid management and support to the distribution network.
Indeed, we see a trend towards DERs becoming increasingly managed within local energy systems (LES). The use of DSF at these three levels will necessitate better TSO–DSO co-ordination and better DSO–LES co-ordination. This clearly puts DSOs at a central pivotal point, using DSF as a strategy to decrease network management costs, investment costs, and working in co-ordination with local energy systems to minimise the creation of new congestions, ideally using them as one flexible asset.
At Delta-EE, whilst exploring the uptake of DSOs procuring commercial solutions for DSF across different countries in Europe, it became clear that the competitive dynamics of flexibility markets are being completely transformed.
The new EU ‘Clean Energy for All Europeans’ legislative package sets new rules for DSOs, encouraging them to procure flexibility as one of the cost-effective solutions to solving grid issues. The member states must translate this into their own regulatory frameworks. The final national regulations and the pace of implementation are key drivers which can provide commercial advantages and opportunities. DSOs and other flexibility stakeholders such as aggregators and suppliers, by being ahead of the learning curve in their home market could seize interesting market shares from this new value stream and be ready to penetrate other markets with the strong advantage of being established. Meanwhile, smaller and less innovative DSOs may not rest on their laurels, operating in business-as-usual mode.
On the one hand, there are already many lessons to be learnt from early movers. On the other hand, DSOs may be accountable to new stakeholder types who could threaten concession renewals, for example in Germany where concession contracts are typically granted to grid operators, while local authorities retain ownership of the grid. We have seen such a case, when, back in 2013 in Berlin, the BuergerEnergie Berlin (Citizen Energy Berlin) co-operative, unsatisfied with the Vattenfall subsidiary Stromnetz Berlin, which was criticised for not embracing the energy transition fast enough, decided to compete against the DSO for control of the grid. Finally, in 2019, Stromnetz lost the grid concession rights for Berlin for a period of 20 years. From our study of DSO flexibility, it seems clear that DSOs that are on board and ready to embark on the innovative journey of delivering DSF solutions commercially have unique opportunities to develop new flexibility markets, ensure better margins, and secure concession renewals.
Challenges and opportunities
Coming back to local energy systems, it is a term that encompasses many types of local structures, such as, for example, systems with energy generation owned and managed by energy communities, systems functioning under specific models such as the Collective Self-Consumption model found in France, Belgium or Spain, the Mieterstrom model in Germany, but also including some smart-grids, local energy markets, and microgrids with islanding capacity, to name just some of the varied local systems developing in Europe.
The soaring number of DERs connected to networks is accompanied by a growth in LES creation with several drivers: lower capex with improved performance and falling costs of assets; innovative platforms for balancing and optimising
LES; innovative trading platforms; increasing range of investment sources, eg, crowdfunding platforms; and the ‘Clean Energy Package’, which is providing a positive legal framework for energy communities, currently being translated into national regulations.
Depending on the nature of the projects included within it, a variety of other factors may influence the creation of a local energy system. For instance, some industrial players may struggle with high electricity grid connection costs and aim to mitigate them by requesting a lower capacity grid connection and integrate DERs onsite, while some developers may want
to get round the problem of long lead times for getting grid connection approval by creating their own microgrid.
The term ‘local energy systems’ covers a wide diversity of local systems in terms of architectures, ownership and business models, at both local and national levels. Looking at the full range of local energy systems allows us to draw comparisons and provide analysis of market dynamics. From our research across different types of LES, we see three general trends in Europe:
- A rise in energy communities and their influence as European stakeholders.
- A race amongst industry stakeholders to find profitable and replicable local energy systems business models. This comes after the withdrawal of support mechanisms in Europe such as feed-in tariffs.
- An increased number of industry stakeholders seeking to shift their business models to new paradigms involving energy communities.
Navigating and succeeding in the complex world of LES requires an understanding of the many challenges and opportunities. These include the relationship with network operators, the legal aspects, such as in France with the overly complex creation of an entity (Personne Morale Organisatrice – PMO) to create the Collective Self-Consumption project, and also the different stakeholders’ motivations. Regarding the latter, industry stakeholders should not underestimate the importance of grasping and adapting new driver types, not necessarily based on what might seem like ‘logical thinking’. Energy communities can be composed of individuals, SMEs and local authorities including municipalities. Within one community, conflicting motivations may be found. While the point of one participant could be to internalise environmental and climate change costs, for another the motive could be to source their energy locally and hence retain the benefits locally.
The fragmented nature of LES and their stakeholders explains why finding replicable and profitable business models is proving to be such a difficult task. However, it represents a fantastic field of opportunities, for energy communities (eg, wanting to procure flexibility at the DSO level), as well as for other stakeholders, including DSOs, utilities and aggregators, seeking to adopt un-siloed approaches to the creation of effective and fair business models.
Author: Rita Desmyter Delta-EE
Main Image: PV in the Netherlands, a recent growth area (photo: Belectric)