May 12, 2023

Powering a Sustainable Future: The Third Way to Pricing Renewable Energy

Traditional pricing models for renewable energy are no longer sustainable. Dynamic pricing is a new approach that adjusts prices based on real-time supply and demand.

In recent months, the European Union has been facing energy instability caused by the ongoing conflict between Ukraine and Russia. This has led to a sharp increase in energy prices, sparking debates about the fairest pricing for the electricity that prosumers produce. Prosumers are individuals or businesses that both produce and consume energy, often through the use of renewable sources like solar panels. As the demand for renewable energy sources continues to grow, it's becoming increasingly important to determine fair compensation for those who generate their own electricity. The debate over prosumer pricing has become a key issue in energy policy, with implications for both consumers and the wider energy industry. 

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 rate (FiT) 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 and favours the prosumer and it is characteristically at the top end of pricing. This rate often asks the taxpayer to reach into their pocket.

One example of a country that has struggled with finding the right balance of rates for solar PV is Japan. In 2009, the country introduced a generous FiT that sparked a solar energy boom. However, by 2019, almost a decade later, the Japanese government decided to end the FiT program due to its high cost and the impact on the country's utilities. While the program did help promote the growth of solar PV, it also resulted in congestion and curtailment of renewable energy, ultimately hindering the growth of battery energy storage systems (BESS) which are essential for a distributed network. The lesson learned from Japan's experience is that finding the right balance for FiT is crucial, with rates that are too low or too high hindering the growth of a sustainable and efficient renewable energy network. Neither encourages the growth of BESS or battery systems which will over time become the lifeblood of a distributed network.

At Powerledger we believe there is a much better way than either of these choices. Actually there are several better ways and we offer them all; But most of all it’s important to recognise what we all are trying to achieve: A market that grows in a sustainable, healthy way, to increase the resources that are necessary without creating the ones that end up being shut down or curtailed.

Finding the third way

What sophisticated software allows us now to do is offer a much more nuanced approach with a third way of pricing.  

Sophisticated software now allows for a more nuanced approach to pricing, offering a third option that caters to the individual needs of buyers. This may include paying a slight premium for a specific source of energy at a particular time, or accepting dynamic pricing that reflects the instantaneous local supply and demand of any type of renewable energy.

Dynamic pricing is a pricing strategy that involves the adjustment of prices based on real-time supply and demand. This approach is commonly used in stock markets, where buyers and sellers come together to negotiate a bid price and a sell price. However, dynamic pricing is also increasingly being used by businesses, including startups, to offer personalised pricing to customers. For example, ride-sharing apps such as Uber and Lyft use dynamic pricing to adjust fares based on demand and supply. Similarly, Airbnb adjusts its rental rates based on factors such as location, time of year, and demand. Dynamic pricing allows businesses to optimise revenue and provide personalised pricing to customers while also responding to market conditions in real-time. While some customers may benefit from lower prices during off-peak hours, others may be willing to pay a premium for products or services during high-demand periods. The reason it’s used in the world’s great bourses is that it combines transparency with fairness and flexibility, and creates the best markets in the short, medium and long term. The best markets create the best sustainable growth.

At Powerledger we have been testing our software to create a pricing structure that benefits all stakeholders in the energy market. Through past and future pilots, we have developed a blueprint that has attracted the attention of regulators. An example of this success can be seen in Uttar Pradesh, India. Where the state government partnered with Powerledger to launch a peer-to-peer solar energy trading trial. This trial allowed consumers with rooftop solar panels to sell excess energy to their neighbours using blockchain technology. The Powerledger platform enabled transparent and secure transactions, and dynamic pricing ensured a fair market price for both buyers and sellers. The trial was successful, and the state government has since launched a larger initiative to expand peer-to-peer solar trading across the state. Powerledger's success in Uttar Pradesh demonstrates the potential of their software to revolutionise the energy market and create a fair and efficient system for all stakeholders involved. Most importantly it will be a pricing that stimulates healthy behaviour and appropriate future choices, leading to a growth of the resources that make a distributed energy system continually improve. 

As an energy trading company, we have no particular interest in making the consumer better off at the expense of the retailer, utility  or vice versa. Neither do we see this problem as a zero sum game.

For us the best pricing is the price system that  induces good market behaviour. In other words behaviour that will help the entire system improve over time and support the attainment of  national renewable energy objectives.

At Powerledger, we understand that energy provenance and transparency is important to participants in energy trading systems. Unlike other systems where excess energy is pooled together, our platform enables participants to know about the energy's source and destination. Moreover, we have observed that participants are willing to support businesses, organisations, and entities that align with their values. For instance, they may prefer to sell their energy to a business aspiring to be 100% green and looking to procure green energy from known local sources. In this regard, we have created a two-way market that connects businesses and individuals with similar values, creating an ecosystem of sustainability. Our platform's ability to cater to the values and preferences of energy traders has made us a preferred choice for regulators looking to guide the industry towards a more transparent and sustainable future.

So as an energy trading company we offer a choice of market logic for retailers and DSOs to experiment with. This is still a new area of economics and one that is undergoing numerous pilot studies. Ultimately it’s for the market participants to choose the system they would like to operate by.

Here are some of the options:

 Fixed price trading 

Preferential trading

  • Prosumers can enter into agreement with consumers within the community and sell their excess energy at the prices they select and set 
  • The trading agreements have  a start and end date/time
  • The selling rates can be set at €0 to gift the energy to family or friends, charity or for crowdfunding purposes
  • Deployed and tested in Europe

Use cases - Ekwateur, France, UPPCL India and TATA Power India

Auction pool (dynamic trading)

  • Buyers and sellers set the prices at which they want to trade 
  • This includes floor and cap
  • The buy/sell offers are cleared based buyer price, seller price, volumetric average and mid-point price
  • Supports time of use pricing (peak/off-peak prices)
  • Deployed and tested in Europe

Use-cases - Renew Nexus Australia, UPPCL India, KEPCO Japan, E-Next Austria

Loyalty trading (Solar Swap)

  • Prosumers can trade their excess energy with a business to redeem rewards points or other type of customer loyalty rewards (bonus systems)
  • This can include the retailer  with their loyalty program or other partners providing goods or services, e.g. supermarkets, breweries, farmers etc. 
  • Use cases -  Carlton & United Breweries

When you work with a Powerledger system, you can experiment with all of the different pricing structures and arrive at the conclusion that suits your intended market best. This tailor made approach is the best way to solve the problems that have been troubling the energy industry for so long.

Happy trading.

Rongon Mehdi (Product Owner)

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