Local Energy Markets and Fairness: Insights for Smart Local Energy Systems

A major challenge when trying to explore fairness relates to how it is defined, with certain SLES stakeholders highlighting that it should be considered in terms of fairness of outcomes, process and treatment. In particular with regards to energy equity, stakeholders have highlighted that the scope should go beyond simply considering affordability or fair distribution of costs, and also include ensuring access to benefits and opportunity which will require a wide range of different products and services being available (i.e. not a ‘one size fits all’ approach). This paper has adopted this broader scope for consideration of fairness issues relating to development of local energy.

Numerous policy and regulatory activities are already underway highlighting the Government is becoming increasingly concerned about the potential of certain market participants avoiding paying their ‘fair’ share for relevant policy and network costs. The Government’s Energy White Paper highlighted that the government is “mindful” of how the rise new technologies such as roof-top solar and home energy storage can affect how consumers pay for their energy in a way which is “unfair to others.” BEIS launched a call for evidence in late 2020 examining licence exemptions to consider whether changes to the exemptions regime are needed “to reflect policy aims, in particular, the Government’s objectives to ensure that all market participants (including those who are exempt from licence requirements) pay their fair share of policy and network costs and achieving its Net Zero commitment.”

Closer attention is also being paid to the distributional impacts of energy policy and the question of what is fair and equitable because of the need to introduce cost-reflective pricing in order to:

  • shift demand to zero carbon energy vectors;
  • efficiently integrate weather-dependent generation; and
  • efficiently integrate distributed energy resources (DER) such as electric vehicles (EVs) and heat pumps (HPs).

As part of this, is the consideration of fair and equal treatment of energy resources that can deliver net zero.

Key points

Competition has always been seen by the Government and Ofgem as a means of achieving good outcomes for consumers, with focus on encouraging consumers to switch between energy companies. For various reasons these efforts have achieved limited success. Rebalancing the playing field for energy resources, however, holds considerable potential to deliver value for consumers and communities. It can be argued that consumers’ energy resources – for example, permanent demand reduction through improvements to the efficiency of building fabric; flexibility through electrically heated hot water, EVs, HPs – have typically been marginalised relative to supply-side resources.

To keep bills down for consumers, energy resources that can deliver net zero must be treated fairly and enabled to compete against one another.

In power markets, consumers’ resources can help reduce bills for all consumers due to their impact on price formation in wholesale power markets. To effectively impact price formation,  however, it is crucial that the price signals and are temporally and spatially granular and accurate, and that the response to those price signals is accurate.

The significant potential to reduce total power system costs comes with reducing the size of the winter peak, particularly heating load, and by accurately matching the availability of weather-dependent generation and system stress events. Many PFER projects are looking at different ways to achieve this through new concepts for market design, system operation and data architecture, which combined with coherent policy reforms, could give rise to new business models and solutions.

Read the Insight Paper

Local Energy Markets and Fairness: Insights for Smart Local Energy Systems

Markets, Policy and Regulation

The Markets, Policy and Regulation team is our centre of excellence for energy policy and regulatory knowledge. Offering independent and technology-agnostic evidence, analysis and thought leadership to tackle the hardest problems on the way to Net Zero.

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