The day of reckoning approaches for local energy markets

Dec. 16, 2022
State and utility regulations make it difficult to create local energy markets — facilitated by microgrids — and regulators and utilities need to find ways to innovate.

Microgrids play an important role in local energy markets – the term for a market platform made up of physically close consumers and producers of electricity who trade electricity. 

Many of the grid benefits of local energy markets are the byproduct of microgrid controls at the local level that reduce the number of interactions between distribution and transmission networks, said Christopher Cooper, senior research analyst for microgrids and power market regulation and finance in Energy, Sustainability and Infrastructure at Guidehouse Insights.

“Local energy markets operate like a microgrid,” said Cooper. “You have to have some control technology that defines the boundaries of the local energy market and be able to manage the flow of electricity.” There’s only a semantic difference between local energy markets and microgrids, he said.

When microgrids are islanded or grid-connected, they can help balance supply and demand within the local network. When they do this, operators of the utility grid don’t have to worry about balancing that particular segment of their network, he said.

These local markets can boost grid flexibility and stability, allow for increased integration of clean distributed energy resources and lower electricity costs, according to a new study by Guidehouse Insights.

In addition, local energy markets can optimize the use of distribution infrastructure by reducing voltage instability. And they can eliminate the need for utilities and system operators to invest in system upgrades for meeting new demand, according to the report.

Old ways versus new

State and utility regulations make it difficult to create these local markets, but, in the near future, regulators and utilities will need to find ways to make them happen, said Cooper. 

“At some point there will be a day of reckoning, very soon. Regulators have to handle this and decide to abandon the legacy regulatory schemes for something new or tweak them around the edges to permit minor reforms,” he said. In the meantime, some players are using pilot programs and “regulatory sandboxes” to demonstrate the viability of local energy markets.

Regulatory sandboxes are experiments, approved by regulators, that allow for real-life testing of new products, services or business models. They allow for pilot-level changes to existing rules while continuing to protect energy consumers. The outcome of these pilot programs can affect regulation.

“Almost universally the outcome of these experiments indicates you can feasibly develop and operate a local area market without those regulations and be confident the local energy markets won’t affect the distribution market,” said Cooper.

Until recently, it was difficult to establish these local energy markets because distribution utilities needed better tools for identifying when the local markets were connected to or disconnected from the larger network. Software is now available that provides for this function, and this has created some movement toward establishing more local energy markets.

But even with new software and the ability to tweak regulations through pilot programs, proponents of these markets face opposition. 

California's microutilities

For example, Sunnova Energy’s proposal to let new communities in California create microgrid-driven microutilities has prompted blowback. Microutilities are basically local energy markets with a central authority.

Even though microutilities can expand community access to microgrids, they can also threaten conventional electricity business models.

Specifically, Sunnova Energy is seeking regulatory approval in California to act as a utility that owns and operates community microgrids. Under the proposal, a microutility would serve fewer than 2,000 customers under lightened regulation.

“With the microutility movement, you can start to put together these interconnected and locally controlled areas of the network that link into energy communities that are not subject to the same regulations as the distribution utility,” said Cooper.

Brooklyn's peer-to-peer experiment

Another test of local energy markets is taking place in Brooklyn, New York, with positive results.

The Brooklyn Microgrid operates as a local energy market that made use of a regulatory sandbox.

LO3 Energy began operating the Brooklyn Microgrid as a test project in 2016. The project began in the Park Slope neighborhood of Brooklyn as a way for tenants in a group of apartment buildings with solar power panels to track the production of their solar and swap energy among participants.

New York State regulations, however, were a hurdle to expanding the program because only utilities and retail service providers are allowed to buy and sell energy under the state’s regulations. But the regulatory sandbox helped get around those regulations.

“This was simple to do and successful. The major problems were the result of regulatory pushback,” Cooper said. The Brooklyn Microgrid organizers developed a unique benefits corporation under New York State law that allowed them to bypass some of the regulations that would have been put in by the state,” said Cooper.

Regulators tend to oppose local energy markets because they create an advantage for local area markets that can get around regulation. Local area markets are also more competitive than interconnecting to the grid because costs are often lower, said Cooper. And the local area markets reduce demand for power from the regulated utilities.

Utility perspective

The utilities have reason to oppose their customers leaving for local energy markets. The local energy markets depend on utility power as backup; they’re not completely off grid and should pay for reliability, he said.

“If the local energy markets rely on superstructure and will take a chunk of customers out of the system, it’s a legitimate issue. But we shouldn’t allow this to stand in the way of good ideas,” said Cooper.

To help solve some of these issues, legacy utilities could establish energy-as-a-service programs under which they charge people in local energy markets for the backup service the legacy utilities provide, he said.

 In a world where local energy markets could reap big benefits, regulatory innovation is essential. The energy-as-a-service solution could be a win-win for both legacy utilities and energy communities that take advantage of local energy markets. 

“This would allow the system to innovate without being unfair to the regulated utilities,” said Cooper.

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About the Author

Lisa Cohn | Contributing Editor

I focus on the West Coast and Midwest. Email me at [email protected]

I’ve been writing about energy for more than 20 years, and my stories have appeared in EnergyBiz, SNL Financial, Mother Earth News, Natural Home Magazine, Horizon Air Magazine, Oregon Business, Open Spaces, the Portland Tribune, The Oregonian, Renewable Energy World, Windpower Monthly and other publications. I’m also a former stringer for the Platts/McGraw-Hill energy publications. I began my career covering energy and environment for The Cape Cod Times, where Elisa Wood also was a reporter. I’ve received numerous writing awards from national, regional and local organizations, including Pacific Northwest Writers Association, Willamette Writers, Associated Oregon Industries, and the Voice of Youth Advocates. I first became interested in energy as a student at Wesleyan University, Middletown, Connecticut, where I helped design and build a solar house.

Twitter: @LisaECohn

Linkedin: LisaEllenCohn

Facebook: Energy Efficiency Markets

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