July 24, 2023

Electrical Retail is Going to Have to Rethink

A new report released by India Smart Grid Forum, Indian Energy Exchange and Powerledger explores what opportunities lay ahead as a result of regulatory reforms within the Indian energy market.

As the world wrestles with heat pumps and hydrogen and carbon sequestration, there’s a much more down-to-earth debate going on that will decide the future of renewable energy.

In India, there are trials taking place to explore transactive energy. Namely, what happens when neighbours sell their surplus rooftop solar energy to each other? Right now there is a thousand-household (meter) project going on in Kolkata. It’s the largest energy trading project of its kind, and the aim is to explore pricing structures.

Exchanging energy between neighbours is now well understood from the technical and grid standpoint. We know it works and it may even be a solution to a more efficient grid, by creating a local energy market, or LEM. 

When considering the obligations for DSOs or DISCOMs to buy renewable energy, the LEM is an elegant solution, because all rooftop solar is, of course, renewable, so buying your customer’s rooftop solar automatically ticks that box. But what is less well understood is the behaviour change that happens when neighbours transact energy. 

A new report on peer-to-peer (P2P) energy trading has been released by India Smart Grid Forum (ISGF), Indian Energy Exchange (IEX), and Powerledger. The report explores the opportunities that can be gained from energy market regulatory reforms taking place within India. It also answers many questions surrounding P2P energy trading.

How do people modify their consumption patterns, and how exactly does this affect the grid? How altruistic do people become – do they seek to maximise their electrical surplus income, or do they enjoy gifting it to their less well-off neighbour? Will people notice time-of-day price differentials that favour investing in batteries, and if so, will they begin to buy BESS (battery energy storage systems)?

Of particular interest; who wins and loses in the new energy marketplace when people sell to their neighbours? Or, given that pricing is something that can be controlled by a regulator, who should win or lose in this new landscape?

This has created an ongoing debate.

At the centre of this discussion is the exact price that a prosumer should sell their electricity for. 

On one hand, we have the rate that favours the retailers and recognises the cost of transmission and distribution, even when it’s not being directly used in the production of that power. 

That rate is often known as the feed-in-tariff (FiT) rate or gross-metering rate, and it is characteristically low. On the other hand there is the net-metering rate, which recognises the high cost of energy, favours the prosumer and is characteristically at the top-end of pricing. This rate often asks the taxpayer to reach into their pocket.

This debate always misses a superior option.

Rather than a fixed price that retailers, regulators and property owners wrangle over, there is the third option of dynamic pricing. Dynamic pricing answers to the level of surplus, or shortage, via the mechanism of price. This has a huge potential to do some of the work of stabilising the grid, a function that has always resided in the centralised capabilities of a DSO and generator.

Dynamic pricing has many pros, and while it requires quite sophisticated accounting, none of that now presents any real problems given the new era of blockchain.

Selling it to retail

The greatest challenge will be selling the concept to retailers, or DISCOMs with a big retail component. This is because, in almost all the modelling, whatever price systems are employed, all the indications are that the retailers will lose out as people trade with one another.

In this new world of electricity pricing, it’s clear a lot of new ideas and concepts are going to come into being. One way to restore the loss of revenue for retailers might be to rethink the basis they get paid.

Up until now, they have had a percentage of the energy that is being transacted. But they can never claim to own a share of electricity that two neighbours transact with each other.

What they could do is make a charge per energy trade. Recent modelling suggests that this could make up for lost revenue at the same time as encouraging good system behaviour.

After all, if they got paid per transaction, the role of the retailer would effectively shift from keeper of energy to facilitator of transactions. They would have the incentive to create more connections between more prosumers, facilitate hire purchase of batteries and generally function as a promoter of all things distributed.

Such a future might be difficult for some retailers to contemplate. But it would be a radical step that would genuinely set us on a path to a deeper level of sustainability.

Of course, energy retailers might oppose this new role, and if they have enough clout with the regulatory authorities, there could be a roadblock.

But the nature of change and disruption is that it always requires a shift, and usually a seismic one in established interests.

The late and very great Clayton Christenson, Professor at Harvard Business School, observed how professional and commercial networks always resist changes brought upon them, sometimes delaying changes by as much as twenty years.

Christensen observed that for this reason disruption always starts at the lowest profit end of any business, where the established players can’t be bothered to fight for market share.

Disruption only happens when products that are very expensive and require great amounts of skill and resources, are made available to people who wouldn't usually have the monetary means to acquire them.

Christensen’s examples here are numerous, but the famous cases are mini-mills and bar steel, Toyota, smartphones and mainframes. In each case, the disruption came from a wave of customers new to the product who couldn't have otherwise afforded it.

India has just such a population in the countryside: A large number of people outside the electricity grid who could become electricity customers in the future if the price was low enough. There are many households that don’t have electricity at all. For them, a diesel generator and perhaps a solar panel or two is all they can hope for. 

In the environment of rural India, there is no centralised network to fight against distributed electricity.

There is also a very forward-thinking electrical retailer in Tata Power and a regulator keen to make waves.

With a perfectly placed regulator and power company, within a very populous region, the current peer-to-peer energy trading trails along with regulatory changes on the cards, we should see some ground-breaking moves in the coming months.

To read the full report, “Opportunity from energy market regulatory reform in India”, click here

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