The move towards increasingly decentralised, distributed generation assets poses challenges for the existing governance, regulatory, and commercial structures. In the UK and elsewhere in Europe, Local Energy Markets (LEMs) are emerging as one solution to the issue of coordinating this increasingly complex system.

LEM concepts are still in initial stages of development in the UK and vary greatly in their design and functionality. The value, costs and benefits of different market arrangements are yet be tested and evaluated in detail, however ongoing reforms to network charging arrangements, market settlement and retail supply will impact the implementation and success of LEMs.

It is key for stakeholders entering the local energy market space to consider how to future-proof projects and design them in a way that allows successful integration in the wider system by considering current and future policy and regulatory arrangements.

Energy Systems Catapult’s policy review: The policy and regulatory context for new Local Energy Markets, was commissioned by the Energy Revolution Integration Service (ERIS) programme for concept design projects participating in the Prospering from the Energy Revolution (PFER) challenge. It was written by the Catapult’s Markets, Policy and Regulation team, and has been published to assist stakeholders interested in developing and participating in local energy market initiatives to understand how the policy and regulatory future might evolve, including any potential risks and benefits.

Key points

It is likely that ongoing trials and potential future large-scale projects will be profoundly impacted by changes in the electricity system policy and regulation.

This edition of the policy and regulatory review focuses on electricity networks and markets in the UK. It provides a summary of existing electricity sector arrangements, exploring how they function to support and constrain the use of distributed energy sources, and discusses the role and key market design aspects for Local Energy Markets (LEMs). The review also outlines medium-term policy and regulatory changes expected to take place across electricity networks and markets and highlights ongoing developments.

In the context of these wider system developments, the review outlines the following key aspects that should be considered by all local energy market projects:

• Interoperability with future distribution and/or electricity system operator platforms and other markets
• Consumer protection mechanisms within the LEM
• Cyber security, data privacy and data protection risk mitigation and management
• Balancing and settlement processes within LEMs and how the LEMs would interact with system-wide processes and requirements
• Managing conflicts in market demands and signals in the context of multiple potential purchasers of energy and flexibility services in future
• Revenue stacking opportunities and potential for LEM participants to access multiple revenue streams, including outside the individual local energy market
• Impacts of future network charges and access arrangements on price signals for consumers and how they will interact will LEM design and decisions for asset owners
• Serving as point of contact to customers and potential future access for multiple supplier to a single user
• Impact of existing and future renewable energy incentives on LEM market liquidity and participation
• Impacts of smart meter roll-out, flexible energy tariffs and future data access and communication requirements

A Local Energy Market is the term used to describe initiatives to establish a marketplace to coordinate the generation, supply, storage, transport, and consumption of energy from decentralised energy resources (e.g. renewable energy generators, storage and demand-side response providers) within a confined geographical area.