When I first entered the electricity industry, the then-general manager of transmission at Western Power (an Australian utility) patted me on the head and said, “Son, this industry is about scale. The bigger our power stations, the lower our unit cost. The higher the voltage, the more efficient the supply¹…”

That epithet no longer rings true; with small, even micro-scale Distributed Energy Resources (DERs) presenting a fundamental shift in the way we produce and use energy.

Given their small scale, relatively low cost and predominantly renewable nature, DERs may also present the best solution available to address the dual challenge of meeting carbon reduction targets (such as they are in Australia) and alleviating electricity poverty, providing low-cost, low-carbon energy anywhere in the world.

But DERs are a challenge to most of the things we think we know about running the industry. From concepts of scale, system security and market operation, to tariff design and data management, the prevalence of DERs means we now need to re-imagine the electricity industry.

As a use case, this article addresses the issues that centralized energy production Australia has experienced, and that can be applied to most jurisdictions across the globe.

During the past 30 years, Australian states undertook a series of reforms that variously privatized and disaggregated traditional state-owned power utilities. In the early 1990s, vertically-integrated businesses began to devolve into separate businesses and authorities responsible for various elements of the electricity supply value chain.

Competition was introduced, but so was a new era of regulation that was intended to maintain the secure, coordinated and efficient development of energy systems in a disaggregated industry; reflecting what still was a very linear energy supply model. Generators generated and consumers consumed. Energy flowed from transmission and distribution networks to hungry customers.

Fast-forward to today, and our energy system is no-longer simply linear.

Working with consumers is no longer a “one-way street.” Today’s consumers expect a satisfying relationship with their energy providers through a combination of supply and demand, using the technological advances that are already available.

Generators aren’t just distant, heavy, spinning machines providing dispatchable gigawatts, inertia and emissions – they’re increasingly the roofs of the homes and businesses that are the basis of demand.

Prosumers – so called because they produce and consume energy – represent a quarter of all households in Western Australia and a third of households in South Australia. Increasingly, new generation sources across the country are non-dispatchable, often community-scaled and connec-ted at distribution voltages. Yet energy regulation, market rules, tariff designs and data management legislation still largely reflect the historical “command and control” centralized power generation models previously used by vertically-integrated utilities.

In an environment where it is increasingly possible and cost-effective for prosumers to efficiently generate and store the bulk of their energy needs themselves, and where service industries are springing up to make energy self-sufficiency an achievable reality, DERs are taking what began as disaggregation of energy utilities closer to the distribution of energy systems.

Worryingly though, if we can’t present an attractive scenario to the owners of DERs to stay connected, we could reach the ultimate (and illogical) conclusion with the disintegration of power systems.

New Competition – Hearts and Minds and Kilowatts

Competition between generators and retailers that has delivered lower prices and better services to consumers is now experiencing a new pressure, and networks that have, until now, existed in a regulatory bubble, are also experiencing a competitive threat – the possibility for consumers to go it alone.

The regulatory frameworks that have been designed to protect consumers who previously had no control over how their energy needs were met, increasingly need to present a compelling reason for consumers to stay connected to traditional energy systems. Otherwise, they face a future of falling demand, falling revenues and failing relevance.The best way to do this without heavy-handed compulsion is to facilitate the development of an economic model that values the contribution of DERs to creating a low-cost, low-carbon energy future.

The industry needs to reconsider the long-held view of itself as a centrally-controlled and operated market to reflect the emerging physical reality of the industry – it being a series of dynamic, integrated and distributed energy markets, with DERs playing an increasingly important and value-creating role at a distribution level.

Technological changes, particularly the emergence of digital, transactive technologies like blockchain, create the possibility to redesign the way we buy and sell energy. This changes the nature of the agreements between consumers and retailers through supporting secure commercial transactions; thus unlocking layers of value made available through the integration of DERs.

A New Energy Paradigm

In a distributed market, agreements won’t be bilateral only; there will be multilateral agreements of varying temporal nature, sometimes occurring simultaneously, sometimes moving seamlessly from one set of counterparties to another. For example, a residence with both solar PV and a battery could be trading their excess solar to their neighbour through a trading platform one minute, while providing power quality management services to the network through an aggregator the next.

Blockchain, a distributed ledger technology, can help manage this complex multiplicity of agreements, whether it be trading renewable energy, or providing voltage support for the network.

Current settlement and payment systems used by energy markets are characterised by a latency that will likely act to discourage DER owners from participating in Virtual Power Plant (VPP) arrangements, or in one other emerging markets. To participate in the National Electricity Market (NEM) and the Wholesale Energy Market (WEM), and in these multiple, usually temporary trading relationships, DER owners will need clear financial incentives and a frictionless settlement process.

Blockchain is the only technology we have found that is capable of facilitating such a complex transactive environment, in close to real-time. Within a VPP scenario, blockchain software can act as the transactive layer between the various functions of the VPP, providing for settlement between generators, distribution network operators, retailers, the wholesale market - if required- and consumers.

These multi-party agreements may cease to persist after a service is provided or a trade is completed. Smart contracts allow for the trustless, instantaneous settlement of these agreements.

Participation in the wholesale and Frequency Control Ancillary Services (FCAS) markets, or agreements outside of Australia’s NEM, can be facilitated using the same transactive platform for instantaneous, autonomous financial settlement, creating the most value for all participants and maximizing utilization of network assets.

The value case for blockchain, and for peer-to-peer platforms, is that they can be utilized to help manage the transition towards emerging distributed markets, in a relatively seamless way. They can function through the provision of data from advanced metering infrastructure (AMI) and other sources. If implemented correctly, the platform could contribute to the visibility of behind-the-meter DER installations. Using close-to-real-time data from smart meters and other sensing devices, each transaction that occurs between the layers of services in a distributed market can be immutably recorded on the blockchain, and the information relayed to the Australian Energy Market Operator (AEMO) or the Distribution System Operator for system planning purposes.

For emerging economies, DERs will deliver even bigger changes. Access to reliable, clean and affordable electricity is an inalienable human right. Since 2008, and for the first time in our history, more than half of the world’s population now lives in metropolitan areas; with a constant, reliable and secure electricity supply of which 80 percent comes from burning fossil fuels.

For the remainder, and in terms of electrification rates, 2.7 billion people have no access to electricity for cooking or heating and are required to use emission intensive fuels such as wood or coal. Of those living in electricity poverty, almost half (approximately 1.2 billion, or 16 percent of the population) have no access to electricity at all. These people suffer the burden of reliance on traditional, time-consuming fuel supplies such as firewood, restricting time that could otherwise be spent generating an income or gaining an education.

The Real Challenge

The challenge for traditional energy systems now is not technology change; the electricity system has been developing and incorporating new technologies for more than a century. The challenge faced today is a cognitive one. Can the industry change the way it sees itself after decades of a relatively consistent operating model?

For DERs to flourish and for billions of dollars in system assets to remain viable, the energy sector needs to acknowledge it no longer operates as one homogenous system. Instead, the energy sector comprises a number of dynamic, integrated and distributed energy markets that, when operating in concert, will encourage small-scale, low-cost and zero carbon distributed energy technologies to take us towards the energy future we need.
 

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1. To paraphrase very badly – it was a long time ago….