This blog is the first in a two-part series on the challenges around consumers being more active in the energy transition.
Traditionally, electricity consumers have been, well, just consumers.Electricity was generated in large power plants, transmitted and distributed via the grid, and then flowed to power homes, businesses, and more. However, with the Clean Energy Package (CEP) that the European Commission unveiled in 2019, the advent of the active consumer – aka “prosumer” – has begun.
Prosumers challenge the conventional power flow. Instead of it only flowing one way, prosumers may also be involved with bidirectional power flow. This means that they are equipped with some sort of small-scale generation or storage asset, such as a home with rooftop solar photovoltaic (PV) panels, residential energy storage in the form of a lithium-ion battery, or an electric vehicle (EV) that allows vehicle to grid access – or a combination of these!
Challenges and opportunities
While this system contributes to a clean energy future, it also challenges the traditional system. As such, new challenges arise. In my Master’s in Smart Electrical Networks and Systems (SENSE), we often learned about, discussed, and debated solutions to precisely these challenges.
For example, in Belgium, we listened to Distribution System Operators (DSOs) share with us how in each spring and each fall they must manually recalibrate voltage settings on transformers, to compensate for the differences in summer (with high residential solar power generation) and winter (with low residential solar power generation). While on a field trip in Barcelona, we visited a substation and learned which components help balance these bidirectional power flows while ensuring safe and efficient operation.
However, the challenges that prosumers pose to the conventional electricity system are not only technical. In fact, they also provide new opportunities for innovation in suppliers’ business models and the retail electricity market. After all, many active consumers made the decision to invest in their assets after considering their financial benefits.
Active consumers
As such, over the past several years, two main methods have been implemented to incentivise consumers to become more active in their electricity consumption. These methods have mostly encouraged the installation of rooftop solar PV panels, as this technology is in the most mature stage.
The first is called Net Energy Metering (NEM): between electricity that is consumed and injected into the grid, the net energy flow is calculated and the prosumers get compensated for the injected electricity at the fixed retail electricity rate. The second, more popular, is called the Feed-In-Tariff (FIT): unlike the former, self-generation and consumption are separated. Energy consumed from the grid is priced at the retail electricity rate, while excess energy injected into the grid is priced at a different, predetermined Feed-In-Tariff rate. These FIT rates can be even higher than retail electricity rates, to incentivise the installation of rooftop solar PV. Over time, these rates may be decreased.
Although these systems worked well to incentivise installation – which is why rooftop solar PV is abundant across Europe these days – there are a few challenges with these methods. First, both the NEM and FIT models do not reflect the cost of electricity at the time of injection; for example, wholesale electricity costs are higher in peak load hours, reflecting higher demand. Furthermore, retail electricity rates – in addition to the energy component – also contain network charges, taxes and other fees, which are not subtracted out of the compensation paid to the consumer.
What’s next?
Therefore many countries, especially in Europe, are now phasing out the FIT system in favor of a more mature, market-based pricing mechanism called Net Billing (NB). Under this model, the prosumer is only compensated based on the market value of the energy that is consumed or injected into the grid. Variations of this method also account for the geographic location of the prosumer, different time-of-use rates, and/or the avoided cost of generating additional electricity. This also supports the case for consumers with battery energy storage or electric vehicles, which can discharge their stored electricity during periods of high prices and reap a reflective profit.
To this regard, the EIT InnoEnergy Master School opened my eyes to the challenges in making consumers more active in the energy transition and has given me the tools to help tackle it. There are no set standards yet, so the field is open for young engineers to innovate and come up with solutions that can accelerate the energy transition!