Local electricity markets bring supply and demand together locally

Local electricity markets bring supply and demand together locally
30. March 2021 | The electricity system in Germany is undergoing structural change. Decentralized energy systems gain in importance. The Institute of Energy Economics (EWI) analyses the benefits of local electricity markets.

Decarbonised, decentralized and digital: The German electricity system is undergoing structural change as part of the energy transition and climate targets. Local markets are a new approach to decentralized energy supply. These coordinate demand and supply directly on site – for example, if someone wants to draw electricity from the photovoltaic system in the neighborhood or if local flexibility is to be used. Due to the expansion of renewable energies and the increasing number of new consumers such as heat pumps and electric vehicles, decentralized solutions are becoming more important.

How local coordination mechanisms can, on the one hand, serve the demand for locally generated electricity and, on the other hand, avoid grid bottlenecks by using decentralized flexibilities, was investigated by a team from the Institute of Energy Economics (EWI) at the University of Cologne in the study “Economic evaluation of the benefits of local coordination mechanisms” commissioned by Siemens AG and Allgäuer Überlandwerk GmbH.

The amount of additional willingness to pay for locally generated electricity is still an open question

“The economic benefit of local markets results from the coordination of local supply and demand, for example for electricity generation or flexibility,” says EWI Manager Dr. Johannes Wagner, who wrote the analysis together with Nils Namockel and Konstantin Gruber. The study looks at whether people are willing to spend extra money if their electricity is generated locally. Furthermore, local markets can reduce the expansion of distribution grids by using decentralized flexibility.

A decisive factor is consumers’ willingness to pay for locally generated electricity. Empirical studies provide evidence that such willingness to pay exists. However, quantifying the economic benefits of local coordination is only possible to a limited extent with the existing database, so that important contributions can be made here by future research. Also, marginal willingness to pay is difficult to interpret, as the maximum marginal willingness to pay (for green electricity, for example) can rarely actually be realized.

Decentralized flexibility could reduce the need for grid expansion

Furthermore, decentralized flexibility can reduce the expansion of the distribution grids. According to a meta-analysis, the total costs can be reduced by up to 57 percent or up to 2.4 billion euros per year through the avoided grid expansion. However, the considered studies forecast different requirements for expanding the distribution grids, depending on assumptions, for example, on the number of electric vehicles and heat pumps. In most of the studies considered, how the flexibility options are made usable remains open. In principle, various mechanisms are available for this; a local market for flexibility would be one option.

The current regulatory framework limits the potential of local electricity markets

Local market mechanisms are currently difficult to implement due to the regulatory framework. The analysis of the impact of the current regulatory framework on local coordination mechanisms’ potential shows that there is little incentive to participate in local markets.

On the part of the distribution system operators, the incentive regulation and the unbundling regulations inhibit the procurement of decentralized flexibilities and thus the participation in local electricity markets. Households or prosumers who receive support for renewable electricity through the EEG have little incentive to market their electricity elsewhere, e.g. due to the ban on double marketing. “After the end of the EEG funding period, there is the possibility to do so, but the current levy and surcharge system privileges own consumption over alternative forms of usage,” says Dr. Wagner. “Also, the grid fees should be reformed in order to raise the potential of local electricity markets.”