VISE Policy Brief: How does regulation affect business models of regional virtual power plants?
April 23, 2020 | In principle, regional virtual power plants can be operated economically. However, the existing regulatory framework has a considerable impact on which business models are possible at all and how profitable they may be. This is the result of the new VISE Policy Letter No. 9 written by Max Schönfisch, Arne Lilienkamp and Dominic Titze (all EWI).
Regional Virtual Power Plants (RVPPs) are located below a distribution grid node and market the flexibility of households by integrating and controlling their generation facilities and consumption devices into the distribution grid. Such generators and consumers can be, for example, PV systems with battery home storage, heat pumps or micro-CHP systems with thermal storage and electric vehicles with “intelligent” charging devices. Operators of RVPPs can aggregate these units and market them on the wholesale market for electricity and, if applicable, the balancing power market. In the best case, this will then pay off for operators and individual households. However, the current regulatory framework makes marketing difficult.
Double charging of taxes, fees and surcharges makes grid-oriented operation of home storage systems unprofitable
The integration of generators, battery storage and consumer appliances at the household level into a RVPP is made more difficult by the classification of households as “end consumers” by the German Energy Industry Act (EnWG). Along with it comes a substantial tally of taxes, fees and levies, which account for up to three quarters of the household electricity price. The way these levies are charged is particularly problematic for the operation of household-based battery storage systems. These could theoretically store electricity at a time when the price is low (e.g. when there is a lot of wind or PV electricity in the grid) and then release it at a later time when the price is higher. The RVPP would thus engage in “intertemporal arbitrage”, i.e. exploit price differences over time to generate revenue.
The levies, charges and taxes associated with the end consumer status are incurred not only when electricity is purchased from the grid but, to some extent, when it is fed back into the grid as well. To use a home storage system to engage in arbitrage on the electricity market would thus not be advantageous for the household, as the additional withdrawals from and injections into the grid would lead to additional costs for them. Only a complete elimination of this so called double charging by netting out all taxes, charges and levies incurred during injection and withdrawal would remove this hurdle.
Business models that rely on load shifting are possible
However, so-called “contracting models” are possible. These are based on households making their load shifting potential available to a RVPP. In this case, a household would not incur any more taxes, levies and fees than would otherwise be the case, since household electricity tariffs generally do not vary over time and the household would not withdraw any additional electricity from the grid under such a model. Only the timing of withdrawal would change. The flexibility thus created could be offered by the RVPP on the electricity or balancing power markets. To do this, the household would have to allow the RVPP to assume at least partial control over shiftable loads such as electric car chargers, washing machines or heat pumps, and also any of its own electricity generation and storage devices.
Large minimum product sizes on the balancing power market
Some of the rules on the markets it would be active on also creates hurdles for RVPP business models. This applies in particular to the minimum product sizes required to provide balancing power. These are 1 MW for all balancing power qualities. It is uncertain whether a RVPP located below a distribution grid node can pool enough power to be able to offer the required minimum bid quantities over the entire product time slice with the necessary reliability. This will be investigated in the further course of this VISE sub-project with the help of numerical models.
RVPPs as marketers of renewable or combined heat and power electricity
The support mechanisms for electricity generation from renewables and combined heat and power generation (CHP) established through the Renewable Energy Sources Act (EEG) and the Combined Heat and Power Act (KWKG) in Germany also play an important role. The subsidy mechanisms defined in the aforementioned provide top ups for operators of small-scale renewables or CHP that use third-party marketers to sell their electricity on the wholesale power market. RVPPs could serve as such third-party marketers.
Lack of profitable opportunities for providing flexibility in distribution networks
A RVPP as defined by this project bundles a large number of plants within a single distribution network. It would therefore be ideally placed to provide grid stability and congestion management services, especially at the local level. Here, however, both the legal and, in part, the technical prerequisites to make this a reality are lacking. There a currently no commercial and technical mechanisms to market this flexibility, either through direct agreements with the distribution network operator or through a kind of local market for flexibility.
The Virtual Institute Smart Energy (VISE)
The Virtual Institute Smart Energy (VISE) is a research association and a centre of competence dedicated to the topic of digitalization of the energy industry. In addition to the EWI, it currently consists of researchers from the WWU Münster, the TH Köln, the Bergische Universität Wuppertal, the Forschungszentrum Jülich, the Wuppertal Institute and the University of Duisburg-Essen. In terms of content, the VISE is divided into four sub-projects with different research foci. One of these sub-projects investigates regional virtual power plants.