A decentralized microgrid is a localized group of multiple electricity sources (usually solar panels) that can operate in either a grid-connected system, connected to the wider energy grid, or as a standalone system. Grid-connected microgrids can detach from the wider grid as required to operate autonomously in an ‘island mode’.
Microgrids function on a principle of community collaboration and enable individuals to be able to function as producer-consumers (dubbed ‘prosumers’) or just as consumers.
There are three types of microgrids: (1) a fully decentralized market, (2) a community-based market and (3) a composite market. A fully decentralized market sees participating prosumers operating independently and directly with one another to determine trading parameters without any centralized supervision. A community-based market can be applied to a specific community where the members share common interests and goals, where trading activities are managed by a community manager who also acts as an intermediary between the community and the wider energy grid. A composite market is a combination of a fully decentralized and community-based market. This use case will focus on fully decentralized microgrids that do not require centralization or intermediaries.
In a fully decentralized microgrid, prosumers participate in peer-to-peer (P2P) trading, which is a next-generation energy management technique that enables prosumers to transact their surplus energy. A P2P network is divided into two layers: the virtual layer and the physical layer. The virtual layer is the secured connection between prosumers within which all information passes. It provides equal access to all participants, facilitates buy and sell orders and carries out transactions. The physical layer refers to the physical network that facilitates the transfer of electricity from sellers to buyers once the transaction is completed in the virtual layer.
Distributed ledger technologies facilitate decentralized systems, by maintaining a digital record of transactions which is shared across multiple computers that are linked in a P2P network. This “digital ledger” is not new technology, but its use within the energy sector to facilitate energy transactions is new. One key benefit of distributed ledger technology is its security, thereby creating a trustworthy system for participants to engage in.
There are similarities between microgrids and Virtual Power Plants (see also the Virtual Power Plant use case). Where they differ is that a microgrid has a defined network boundary that can disconnect from the larger grid to create a power island. Virtual Power Plants can extend over a much wider geographical region and can expand or shrink in response to real time market conditions.
Recently there has been a growth in the small-scale distribution of energy resources. This is particularly apparent in the installation of solar panels in the residential housing sector, which is expected to increase worldwide by 11% between 2020 and 2026. Residential storage systems are also expected to increase from 95 MW in 2016 to 3700 MW by 2025. P2P trading has emerged to offer prosumers more control in setting the terms of transactions.
The demand for electricity is rising in line with population increases around the world as well as with other factors, such as technological advances which require more electricity. Increasing demand and increasing reliance on renewable intermittent sources of energy are straining centralized energy grids, which are experiencing an increased number of power outages and disruptions. Microgrids can respond to this issue by decentralizing control over the microgrid and enabling it to connect to or disengage from the wider grid as required. For example, when the electricity supply within the microgrid is not enough to meet the demand, additional energy can be purchased from the wider grid. Conversely, when the supply in the microgrid exceeds demand, the microgrid can feed the additional energy supply to the wider grid. Furthermore, should the wider grid experience an outage, the microgrid can disengage and function undisrupted in isolation mode, thereby ensuring a reliable energy source for users. P2P transactions can also help to reduce the demand on the wider energy grid, particularly during peak periods
P2P transactions within microgrids can reduce the cost of energy for participants as prosumers are able to sell electricity at a cheaper rate than that of the traditional market. This is in part possible due to the reduction in electricity transportation costs, as the energy is generated within a set geographical location in which sellers and buyers are in proximity to each other. It is estimated that 41.1% of electricity costs from major electricity suppliers go towards managing and maintaining the infrastructure that delivers power from generators to customers premises.
This system has the added benefit of giving the consumers more choice. They can deal directly with prosumers, thereby cutting out the middleman and by dealing with individuals rather than energy companies, the balance of power is levelled. Individuals can choose to purchase energy from their neighbours or friends, or give energy to their family and friends for free or at a discount. Furthermore, consumers have more control over the energy they use and its origins. This enables them to opt for sustainable sources in comparison to the wider grid that can be made up of multiple sources including fossil fuels. It enables private business and industries to include clean energy production and distribution initiatives in their projects (e.g. residential development) and public authorities to encourage sustainability by incentivising such initiatives.
Ultimately, P2P trading in a decentralized microgrid environment will respond to several challenges facing the energy sector today and increasingly in the future. They will reduce the cost of energy for consumers, increase and enable the sustainable use of renewable energy, enhance the engagement of prosumers in the network, and reduce the demand on the centralized grid.
Improving efficiency and reducing costs:
- Accessible to all people in the outlined community even those not producing energy, so all participants are able to access electricity at a reasonable price.
- Reduce cost of energy for consumers in part by reducing the associated cost of transmitting the energy across large geographical areas - 41.1% of electricity costs relate to managing and maintaining the infrastructure needed to deliver power from generators to customer premises.
- Reduce the cost associated with energy lost through transmission – an estimated 5% of electricity created in the US is lost in transit.
Enhancing economic, social and environmental value:
- Incentivize individuals and industry to include sustainable renewable energy production and distribution systems into residential and commercial building projects and incentivise individuals and businesses to participate in the system while minimizing pressure on central grids.
- Enable greater transparency for users over a distributed ledger.
- Provide a reliable energy source that is protected from outages in the wider energy grid.
POLICY TOOLS AND LEVERS
Legislation and regulation: The success of P2P trading in the future will be largely dependent on local government regulation and energy policy. Government will need to allow this type of market design to be implemented and determine how taxes and fees will be distributed. They will need to understand how this new market will interact and affect the existing energy market.
Transition of workforce capabilities: Market restructuring is required to move to a system in which Distributed Energy Resources from microgrids are valued and fairly compensated by the electricity grid, rather than being viewed as a threat to existing providers. Electricity regulators should unbundle generation, transmission and distribution of electricity services to allow for independent producers to compete in markets.
Funding and financing: Government grants and clean energy incentives can be utilized to minimize the cost of implementing a microgrid system. For example, many states in the US are providing grants for microgrid development or other resiliency projects. Tax credits for renewable energy may also be applicable to microgrid projects.
Procurement and contract management: Energy-as-a-service contracts are becoming more commonplace, in which there is little or no upfront capital cost to the customer. They instead pay a fee for their energy on an ongoing basis in much the same way as if they purchased the energy from a traditional utility provider.
RISKS AND MITIGATIONS
Risk: In such a system there may be multiple stakeholders who request prosumer energy, with competing objectives.
Mitigation: Pricing scheme innovation should be explored to determine a means of prioritizing competing demand in order to ensure a non-congested service and minimizing network loss.
Risk: Prosumers are vital to ensure the success of microgrid systems. Without a sufficient supply of energy, communities will need to access energy from the centralized grid, thereby reducing the benefits associated with microgrid usage.
Mitigation: To engage and incentivize prosumers to participate in the system, the system must be prosumer centric.
Safety and (Cyber)security risk
Risk: The digital trading platform will hold significant sensitive data concerning user’s personal information, financial information, transaction history amongst other information. There is a risk that the system will be vulnerable to cyberattack, and that user data would be compromised.
Mitigation: To ensure participation from prosumers and consumers, the trading platform must be secure. Distributed ledger technologies have been shown to be particularly secure..
Example: Brooklyn Microgrid
Implementation: The first recorded P2P energy trade pilot in 2016.
Timeframe: First tested in 2016 on one street. Through 2017 it expanded into Brooklyn’s Gowanus and Park Slope neighbourhoods.
Example: Bangkok T77 Precinct
Implementation: Power Ledger have 24 active projects across 9 countries.
Cost: An estimated 2.8MWh solar energy generated daily with an average 10MWh P2P energy transacted per month. Power Ledger estimates this amounts toAUD 1,500in monthly proceeds from P2P transactions.
Timeframe: On successful completion of the trial, Power Ledger and BCPG will be looking to deploy the solution across 31 new projects in Thailand, with total power generation capacity of 2 megawatts over a three-year period.
Example: Hackney, Banister House Estate
Implementation: The UK’s first P2P energy trade using blockchain.
Cost: The trial was shortlisted for the Ofgem Regulatory Sandbox and received a significant grant from Innovate UK.
Timeframe: Phase 1 began in 2018. UK energy giant Centrica (British Gas) joined the trial in 2019 to explore the impact of P2P energy trading on customer bills.