Retail companies, whether independent or integrated with distribution or generation, may wish to provide aggregation services for a number of uses, such as ancillary service provision and reduction in imbalance costs. In this case, such companies may have easier access to a preexisting customer base and be able to pass on savings through bill reductions. In liberalised markets, retail companies’ access to the wholesale market may also enable them to obtain additional resources for arbitrage. These advantages, however, need to be balanced against the impact this may have on competition or the engagement of a broader pool of resources.

One particularly important point regarding the participation of aggregation in the market relates to the allocation of balancing responsibilities. In markets where balancing responsibility is assigned only to market participants, independent aggregators may be exempt from any imbalances caused during ancillary service dispatch. By contrast, retailers would be responsible for imbalances within their control area. The perception of unfair allocation of additional cost may be a cause of concern for established market participants in the absence of a clear procedure for imbalance settlement. In this case, policy makers and regulators should engage in stakeholder discussions to appropriately gauge the magnitude of such potential imbalances and the potential settlement procedures.

Role of ISOs

The emergence of an ISO is becoming more common outside the liberalised North American markets. In recent years, both the Danish and British power systems have unbundled their TSO into a separate network operator and an ISO, also known as an electricity system operator. This results, in part, from the increasingly active role of the system operation in managing a wider array of flexibility requirements and products for procuring flexibility, in the context of nondiscriminatory network access and cost efficiency.

At the distribution level, the most important development entails the emergence of DSOs who, rather than simply owning and maintaining the grid, intend to play an active role in managing the increasing load from DER. As distribution network operators (DNOs) transition to DSOs, they may be able to procure specific ancillary services locally, such as balancing or voltage regulation, either to facilitate wider system operation or to defer the need for local network reinforcements. Distribution network ownership and distribution system operation are softlinked within the same box as they are typically still bundled within the same company.42 This, however, may not necessarily be the case. Similarly, at the transmission level, a TSO that also makes a profit from building new transmission lines may face a conflict of interest when making proposals for planning flexibility enhancements.

Centralised and decentralised platforms for DER engagement

When looking at local markets for flexibility, one very important aspect is the procurement mechanism of choice and how this influences liquidity. As with typical wholesale markets, liquidity is important to ensure that there are enough physical assets, with the appropriate dispatch parameters, to meet the local system’s needs cost-effectively.

Centralised, single-buyer flexibility markets take on a variety of shapes. For example, while utilities in New York State rely on directly contracting projects and implicit demand response; in Spain ENDESA’s proposed model relies on regular day-ahead auctions, where aggregators and loads bid their capacity to meet the DSO’s profile balancing requirements. UK Power Networks offers an additional interesting example of identifying the need for local flexibility and opting

42 Note that in some liberalised markets, the function of metering has been recognised as a separate activity from retail and distribution, but is still typically housed within the same company.

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for either competitive procurement of DER, bilateral contracting for demand response, or capital investment in new infrastructure depending on the ratio of local DER liquidity to investment costs at their three voltage levels.

Interest is growing in decentralised peer-to-peer exchanges, enabling direct interaction between local producers and consumers of energy. This field has seen increased attention in recent years, driven by technologies such as blockchain, and is often referred to as transactive energy or the “energy Internet of things”. The models vary widely, from optimising and aggregating the consumption of single appliances for demand response to enabling secure decentralised transactions between individuals, while providing critical visibility to grid operators. At their core, many transactive energy systems build on the understanding of standardised data exchanges to provide a common structure to energy exchanges happening throughout the grid and at vastly different scales.

Elements of structural reform

Regulators and policy makers are beginning to grapple with the challenge of capturing the various changes happening as a result of DER and are setting up institutional structures that are fit for purpose. Many stakeholders – from grid operators to aggregators – are arguing that the changing needs and technical possibilities of local grids require the identification and assigning of new roles. Often, however, they do not agree on what form the preferred new arrangements should take.

For example, digitalisation introduces a new role into the structure of electricity markets, related to the ownership and management of data. The creation of a forum for data exchange represents a key challenge for successful power system transformation. If the ownership and management of data flows are centralised, one party would be designated to ensure the provision of a safe depository for metered customer data and data on network operations and constraints. This party ensures that eligible third parties enjoy non-discriminatory access to this data, and facilitates communication of information to end customers about their energy use and production (MIT, 2016).

The assignment of this vital task in future power systems will be a key decision for policy makers in the process of power system transformation. In Denmark, the TSO (Energinet.dk) was designated this role, whereas in the United Kingdom and Australia an accredited third party is responsible for data management. An alternative, decentralised solution could circumvent the need for a single “data hub operator” and instead rely on a network of computers to secure and verify data flows and transactions.

Many reform initiatives focus on evolution of the role of local grid companies. In the European context, regulatory reforms aim to transform local grid operators into neutral facilitators of electricity markets at the local grid level, where DER can offer energy and system services on a level playing field (European Commission, 2017). A similar approach is being taken as part of the “Reforming the Energy Vision” process in the state of New York. Integrating a revised institutional structure for local grids into an overall governance framework for the energy system remains a field of active research.

The scope and depth of such institutional reconfigurations are substantial. The interdependent nature of various elements of reform implies that delays in one area may reverberate throughout the overall transformation process. Indeed, rates of progress on various reform programmes demonstrate the difficulty of aligning the interests of a wide number of stakeholders, while also supporting grid operators and utilities as they evolve towards their projected new roles in future energy systems.

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