How to Monetize Microgrids Running on the National Grid?
Episode 2 of ‘How to Monetize a Microgrid?” : on-grid microgrids on existing infrastructure
Almost all of us are connected to the national grid using the lines of grid operators. Virtual microgrids, so continuing to use these lines physically, has been a booming field with a variety of business models taking full advantage of new technologies such as smart metering, storage, renewables, electric vehicles (EV) and many more. It is for sure one of the biggest markets in the energy space with plenty of burgeoning innovation.
On-grid microgrids are built on a layer on top of existing grid lines, and therefore you could consider all of them somewhat virtual. There is no real control of the power flow on the grid. Locality matters less too. In this context, it can be quite challenging to draw lines between microgrids and virtual power plants (VPP), or clearly define P2P trading. So instead, since it is all virtual anyway, let’s not be too purist about a microgrid’s definition. Instead, let’s look at it from a customer point of view, because that is all that really matters. How can you best monetize the energy needs of end users, both consumers and prosumers?
Given the proliferation of renewables and locally distributed energy, there are many new approaches that strive to create profit from this shifting infrastructure, enabled by technologies such as remote metering or intelligent control. I will analyse them with a customer-centric framework: looking at energy as a (1) commodity or (2) service.
But before diving deeper into the two approaches, a brief summary on the specifics and challenges of on-grid microgrids:
Hurdles linked to the existing grid
Two main regulations have driven the shift from a highly centralised and subsidised industry to a more market competition driven one:
(1) The liberalisation of energy markets in most developed countries has allowed new players in to the market and,
(2) the decrease in subsidies like Feed-In-Tariffs (FIT) has resulted in new local suppliers of renewables looking for ways to monetize their energy.
So a new local, distributed market seems to be the most straight-forward. However, when the national grid is used as the underlying infrastructure, any connected household or microgrid needs to comply with strict regulations and standardisation, and pricing models are strongly dependent on wholesale prices and grid fees (such as connection, transmission and distribution fees).
Regulations made to protect the grid and the customers often prohibit certain business models. Moreover, due to market inertia and complexity of the industry, commercial pilots have yet to mature into real business.
Since the existing grid lines are used, resilience and availability is typically not the issue to be addressed, as these are dealt with by the grid operator. Business models are mostly virtual, aimed at matching demand and supply according to proximity and price. This localised optimisation should be more efficient and provide better rewards for green energy, which will then lead to more renewables investments. As renewable penetration increases it will have a network effect, requiring more infrastructure and business models to balance the demand and supply.
Types of Energy businesses
Instead of focusing on the difference between microgrids, virtual power plants (VPP) or other concepts that are often vaguely defined, I propose to look at it from the customer’s viewpoint. Two main directions are observable: on one side, energy is sold as a commodity, meaning priced by kWh, but the newly gained flexibility and choices are given to the customer. On the other side, we start seeing service-oriented offers, where energy is sold as a service, often packaged together with other services with a flat price that doesn’t depend much on the kWh of energy anymore.
I will present some of the commodity-oriented offers, which represent the big bulk of approaches, and then will briefly talk about the service-based approaches.
1) Commodity-oriented offer (Give flexibility and choice to customer):
▶️ Wholesale Market Access
Give customer access to the wholesale price to buy and sometimes sell energy. Examples: Grid+, Griddy.
How it is monetized: A margin for the retailer
▶️ P2P Matching Platforms
Provide a matching platform where consumers can choose their own supplier from a list of local producers (at a fixed price similar to a Power Purchase Agreement PPA). Examples: Enyway
How it is monetized: Often this is simply an access fee for the platform
▶️ P2P Market Approaches
The closest we can get to pure microgrid on-grid: reproduce an energy market at a local level, similar to what exists for the wholesale market. Often referred to as P2P trading.
Call Auction: Receive all bids and calculate Market Clearing Price (MCP) that maximises trading. This is generally deemed as fair and has less risk and less fluctuations than continuous trading (below), and therefore is often the preferred option for commercial applications.
Examples: Lition Energy, Quartierstrom.
Continuous Trading: Match bids as they come in, different prices for every deal. There is more liquidity, but with that it is risky and difficult to predict prices, and thus constitutes a high entry barriers for customers (or agents to trade).
Examples: Digital Grid, TRENDE PoC.
[great working paper on the two approaches here].
How it is monetized: Various fee structures exist (transaction fees, subscription fees).
Deep dive into P2P market approaches:
P2P Market approaches have rightfully received a great deal of attention (especially by media and investors) as a potential solution to allow peers to trade with each other and manage their own supply and demand. They are probably the purest form of virtual microgrids, which is why I want to dive deeper.
Rather than going into deeper explanations of the trading or matching algorithms, which I am sure you can find elsewhere, I’d like to highlight some pitfalls in terms of the business model of market approaches applied to on-grid microgrids: First of all, market mechanisms just don’t work that well for small, closed communities.
Obviously, it is not humans who will bid for energy for every 15- or 30-minute timeslot, but intelligent software agents. No matter how intelligent bidding agents are, predictions for single households are inherently inaccurate so you can’t just outsource the energy balancing to your local agents. You will still need to adjust for discrepancies in the predicted amount of energy versus the actual amount of energy sent, a technical challenge of pre-execution trading that is not always acknowledged, but I won’t go in depth on this here.
Also, the imposed grid fees often constitute more than ⅓ of the retail price and must be paid for each kWh regardless of the distance travelled. Selling to your neighbour Vicky next door would cost the same as to your distant uncle across the country, so there is no financial incentive to sell locally.
Finally, and most importantly, these kinds of markets are often simply not allowed under the current legal frameworks. PV owners, for example, can only sell their surplus energy to utilities, not individuals. However it is worth pointing out that in some places legal frameworks are evolving: in Switzerland and Germany concepts like Nachbarschaftstrom or Quatierstrom (neighbourhood electricity) are appearing. For instance, it is possible in Switzerland to connect a group of adjacent houses and exchange locally generated energy P2P (“Zusammenschluss des Eigenverbrauchs, ZEV”). However, even in this case, the lines must be privately owned and the bottom-up tariff model is not yet supported by the regulation scheme [source].
It is worth adding a quick comment on blockchain, as blockchain solutions are often presented as a natural solution for decentralised markets. Blockchain is indeed a powerful implementation tool to implement a distributed ledger in a transparent way, but it adds complexity and does not solve the business model itself. Blockchain solutions have been hyped because the technology sits well theoretically with P2P, having an immutable and transparent nature that can also include payments. These are great features but in no way do they solve the business/legal problem (it rather obscures it). Once that is solved, Blockchain will be an amazing tool. Meanwhile it has helped to increase awareness on the importance of decentralisation.
So, for market approaches to work commercially in microgrids, both the technology and the legal framework including grid fee structures will need to evolve. But given the importance of local microgrids in reaching self-sustainability, this has been an incredibly active field and each pilot contributes in getting closer to economic viability. I am sure we will hear more as regulations change, and technologies and markets mature.
Meanwhile, if you want to look at a concrete proof of concept (PoC) that has been launched and is trying out a whole bunch of these technologies, including EVs, I invite you to check out the PoC we launched in Japan (this is where I stumbled on many pitfalls and worked on their solutions).
2) Service-based offer (Give risk free option to customer, optimise aggregated customers):
Until now, we talked about electricity being sold or bought by kWh (with varying prices throughout the day). However, since the marginal cost of solar is virtually zero, you might now start to think of other business models that don’t sell electricity per kWh, but instead as a service or subscription to manage your energy. These models make most sense when renewables are abundant and storage is available. Let’s say Vicky has a large PV, battery and EV. She is mostly energy self-sufficient, but sometimes the weather is really British and her batteries discharge fully. On other days she might end up having full batteries. She could buy (resp. sell) energy during this time, but chances are that prices are not very attractive. Instead, clever Vicky would optimise the batteries and EV to preemptively buy energy when its cheaper, or she could even offer her battery’s spare capacity on the flexibility market. Now, these optimisations are not local but grid/market-wide, and even clever Vicky can’t do that on her own. Wouldn’t it be easier if she pays for someone to optimise it for her? Ideally for a constant service to avoid headaches.
Here are some examples:
▶️ Flat tariffs
This is the opposite of energy trading, but just as interesting. In more mature markets like the UK or Germany, flat tariffs are taking off, especially — but not only — for prosumers with batteries. For customers with an annual net consumption around zero, the idea is that customers only pay a constant grid or service fee per month independent from their actual generated or consumed energy in kWh (within thresholds). The company will create a pool of these customers, and optimise and exchange power between them on their behalf.
▶️ Rewards for stabilising the grid
Batteries are currently mostly used for increasing self-consumption, allowing customers to make the most of their solar energy. It is rare to use them to play on wholesale markets. The main reason for this is using battery arbitrage on electricity prices is not viable because of the transmission fee.
However, there is a second revenue stream beyond self consumption: battery providers with a retail licence such as Sonnen or Moixa have started to pool battery capacity and play in the flexibility market. This was the result of long negotiations with grid operators who will now pay for the flexibility provided by the batteries to help stabilise the grid. In the case of Moixa, a small reward is given to battery owners (50 pounds a year) for providing this service to the grid. Sonnen provides a full service for a flat tariff of zero monthly cost which ensures 100% energy for PV and battery owners (even during rainy British days) and additionally pays 116 euros annually for being able to remotely control the battery.
▶️ Bundling with other service
Once you set up a subscription model for energy, you can easily envisage adding your gas bill, phone bill, EV, internet or Netflix to the bundle. This explains the increasing presence of telecoms, trading companies and others in the energy space (think Rakuten, Mitsui etc). I could imagine a lot of new business models appearing in this area, some totally detached from the energy business.
Conclusion
The business models to promote distributed renewables on-grid have been flourishing and they go way beyond the original concept of microgrids. With so many applications and hybrids it is easy to get confused, so it helped to look at the business models from a customer perspective and observe the two approaches:
(1) commodity-oriented — where the customer gets to play on the market for the kWh he/she needs or offers (giving customer more choices)
(2) service-oriented — where the customer pays a simple tariff and lets the utility take care of all the complexity and optimisation.
Personally, I like the simplicity of the service-oriented one. Which do you think will win? Will local markets with P2P trading take over once regulations allow? Which approach best monetizes an on-grid microgrid? I honestly don’t know the answer, maybe there is not ONE best approach. What do you think? I would love to hear your opinion or comments on this, please leave feedback!
One last thing to remember is that none of these examples allow controlling the grid or letting the microgrid disconnect from it (“islanding”) because they are superposed onto the existing grid. For islanding, additional hardware and grid lines are needed. More about this topic in the next article.
[Eagerly authored by Annette, relentlessly hammered by Vicky. We work together to choose the best content and elevate each other’s work. More on us and our approach here]
*** Update ***
The article-series is complete now! Here are the quick links:
- A Quick Overview of Microgrids (and How to Monetize Them) — Episode 1 of “How to Monetize a Microgrid?” : Introduction the world of microgrids
- (Current one) How to Monetize Microgrids Running on the National Grid? — Episode 2 of ‘How to Monetize a Microgrid?” : on-grid microgrids on existing infrastructure
- Why Pay for Private Infrastructure with an On-Grid Microgrid? — Episode 3 of “How to Monetize a Microgrid?” : on-grid microgrids with private infrastructure
- A Little Primer for Off-Grid Microgrids — Episode 4a of “How to monetize a microgrid?” building a grid from the bottom-up
- Designing an Off-Grid Microgrid 101 — Episode 4b of ‘How to monetize a microgrid?”: building a grid from the bottom up
