Blog #22

Local electricity markets bring together supply and demand locally

Johannes Wagner, Nils Namockel and Konstantin Gruber
Institute of Energy Economics (EWI) at the University of Cologne


Decarbonized, decentralized and digital: The German electricity system is undergoing structural change as part of the energy transition and climate targets. A new approach to decentralized energy supply are local electricity markets. These coordinate demand and supply directly locally – for example, if someone wants to draw electricity from the photovoltaic system in the neighborhood or if local flexibility is to be used. The expansion of renewable energies and the growing number of new consumers such as heat pumps and electric vehicles are making decentralized solutions increasingly important.
How local coordination mechanisms can, on the one hand, serve the demand for locally generated electricity and, on the other hand, avoid grid bottlenecks by using decentralized flexibilities was investigated by a team from the Institute of Energy Economics (EWI) at the University of Cologne in the study “Economic Evaluation of the Benefits of Local Coordination Mechanisms” commissioned by Siemens AG and Allgäuer Überlandwerk GmbH.

The amount of additional willingness to pay for locally generated electricity is still open

“The economic benefits of local markets result from the coordination of local supply and demand, for example for electricity generation or flexibility,” says EWI manager Dr. Johannes Wagner, who co-authored the analysis with Nils Namockel and Konstantin Gruber. The study looks at whether people are willing to spend extra money if their electricity is generated locally. In addition, local markets can reduce the expansion of distribution grids by using decentralized flexibility.
A crucial factor is consumers’ willingness to pay for locally generated electricity. Empirical studies provide evidence that such willingness to pay exists. However, quantifying the economic benefits of local coordination is limited with the existing database, so important contributions can be made here by future research. In addition, marginal willingness to pay is difficult to interpret, as it is rarely the case that the maximum marginal willingness to pay (for green electricity, for example) can be realized.

Decentralized flexibility could reduce the need for grid expansion

In addition, decentralized flexibility can reduce the expansion of distribution grids required as part of the energy transition. According to a meta-analysis, the total costs can be reduced by up to 57 percent or up to 2.4 billion euros per year through avoided grid expansion. However, the considered studies forecast different requirements for the expansion of the distribution networks, depending on assumptions, for example, on the number of electric vehicles and heat pumps. In most studies considered, it remains open how the flexibility options are to be made usable. In principle, various mechanisms are available for this purpose; a local market for flexibility would be one option.

The current regulatory framework limits the potential of local electricity markets

However, local market mechanisms are currently difficult to implement in Germany due to the regulatory framework. The analysis of the impact of the current regulatory framework on the potential of local coordination mechanisms shows that there is little incentive to participate in local markets.
On the part of distribution system operators, the incentive regulation as well as the unbundling regulations inhibit the procurement of decentralized flexibilities and thus the participation in local electricity markets. Also, households or prosumers that receive EEG subsidies for their RE systems have little incentive to market their electricity elsewhere, in part because of the ban on double marketing. “After the end of the subsidy period, there is the possibility to do so, but the current levy and surcharge system privileges own consumption over alternative forms of marketing,” says Dr. Wagner. “In addition, grid fees should be reformed to leverage the potential of local electricity markets.”
The study reveals how regulatory settings may or may not encourage the implementation of new concepts on the way to a more sustainable and digitalized energy sector. By bringing together academia, industry, and politics, EDDIE contributes to building bridges between theory and practices. This allows identifying and eliminating problems on our path to sustainable energy systems.