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29 September 2022

Layered Energy System: sustainable energy and flex for everyone

Stedin and Energy21 further explored the new market model concept and designed a solution to a variety of existing and future system problems due to the energy transition. Our solution is based on an open market rather than peer-to-peer energy supply. It encourages end-users to produce and consume local energy from peer-to-peer connections and at the same time is connected to the regular energy grid.

That is why we call our solution the layered energy system (LES).

Advantages of this layered energy system

  • It uses a tax alternative for the Dutch netting scheme. This which makes sharing flexibility attractive.
  • Scalability without disruption: It can be applied in the existing market model and improves access to flexibility for all market players.
  • Lower system costs.
  • Commitment: It involves customers in the energy system. LES increases commitment to energy transition and the support base for changes.

The Layered Energy System solves current problems by opening up the energy market for local initiatives

Decentral flexibility solves overload of the current system

Energy transition leads to problems with grid congestion, voltage quality and system balance. To a great extent, the answer to those problems lies in providing access to and utilizing decentral flexibility.

Prosumers are encouraged to exchange their flexibility instead of private consumption

Only some of this flexibility will become available if the netting scheme is abolished. For the most part, prosumers will work on balancing their own generation and consumption “behind the meter”, as that will yield greater benefits. This may create a self-reinforcing effect which will make the grid increasingly less attractive and more expensive, which is also known as “grid defection” or “the death spiral”.

Blockchain technology is used for opening local energy markets

Blockchain technology is often mentioned as the overall solution for the complexity of a smarter energy system. However, the process often becomes the goal. Stedin and Energy21 first examined the concept of open local energy markets as a solution to challenges the energy sector is facing, which resulted in the design of their layered energy system. The applicability of blockchain technology was examined in the context of the design.

Requirements for a sustainable layered market model

Stedin and Energy21 wanted to develop a sustainable energy market model that can handle the challenges of energy transition, satisfies customers’ wishes and stabilises and develops itself to the lowest possible costs.

Therefore the layered energy model consists of the following elements:

  • Lower energy prices Prices in the local market are lower than energy prices beyond the local market. To that end, a different form of the energy tax regime is used, which also serves as an alternative for the netting scheme.
  • Local markets are connected through a gateway Both the local market and the nationwide wholesale and imbalance markets (and possibly adjacent and underlying markets) are linked through a gateway. Because of this layered structure, the sustainable local energy market model was named ‘layered energy system’.On the gateway, the local market constitutes a single entity and acts in accordance with the rules of the nationwide market.
  • Local markets can operate safely Behind the gateway, the arrangements in the local market apply. This allows the local market to operate within the existing nationwide market: The reliability and the existing liquidity in the national market continue to be secure and accessible.
  • The current energy system remains intact There is no need for far-reaching changes in the current energy market model.
  • Other market model variations are possible New market model variations grow in the ‘protected’ environment of the local market (see also figure 1).
  • The local market is a geographically connected area  This is necessary to make congestion management possible and is furthermore in line with the Dutch ‘postal code rose’ concept.
  • The local market model is adaptable This model design is based on the Universal Smart Energy Framework (USEF) principles: in such a way that the facilitating system is flexible to such an extent that learning experiences and customers’ wishes can quickly be translated into improvements of the system.

Figure 1: Schematic representation of the links between local markets and the national market.

Advantages of the layered energy system compared to other initiatives

Compared to other local initiatives the layered energy system as designed by Stedin and Energy21 has some markable differences and advantages:

  • The solution is an inclusive system, not isolated peer-to-peer initiatives
  • The model drives on lowest possible system costs
  • A smart bidding system supports local and national energy trading
  • Local markets are integrated in the national energy market
  • Problems of congestion will be solved without affecting the current energy market
  • Blockchain technology ensures a flexible market process at low costs

Energy system approach versus peer-to-peer supply

This layered energy system distinguishes itself from other energy sector projects that apply blockchain. It is premised on a market rather than on peer-to-peer energy supply.

Drives on lowest possible system costs

It is precisely because of this system approach that supply, grid capacity and flexibility can be taken into account. Which makes it possible to use the ‘lowest possible system costs’ as an important driver in the local market model. This is a second significant distinction compared with other local market initiatives.

Linking a local market to the national market by a smart bidding system

A bidding system based on a merit-order principle is used to bring together supply and demand on the local market. This bidding system combines the local market prices with the wholesale market prices. As soon as there is a surplus or deficit on the local market, the wholesale market is accessed through the gateway.

Supply and sale in the local market are not subject to energy tax. Energy purchased from the wholesale market is subject to energy tax, which is allocated to all purchase orders made in the local market.

This system enhances the possibility to purchase energy generated locally at the lower local price. Therefore, local energy will at all times be used first, making it attractive to offer flexibility in the local market.

Incentives and flexibility resolves grid congestion without affecting the national market

Where grid congestion is imminent in or adjacent to the local market, the grid manager will also act as the party seeking flexibility, creating an extra incentive for making flexibility available. It will remain attractive to stay connected to the nationwide market and the nationwide grid to be able to trade in surpluses and deficits without having to invest in high-cost assets.

This local market design stimulates the contribution of flexibility to locations suffering from a flexibility deficit and discourages the expansion of flexibility to locations that already have sufficient flexibility.

Figure 2: Example of bringing supply and demand together on a local market.

Blockchain technology ensures a flexible market process at low cost

The market process in the layered energy system follows the USEF steps: PLAN > OPERATE > SETTLE. The process has been outlined. The applicability of blockchain was tested based on that process. Moreover, the technical aspects of the local market model can be given shape in various ways and its applicability is not contingent solely on blockchain technology. However, this technology does have a number of aspects that may offer major benefits in terms of flexibility, privacy and security. The type of blockchain (private blockchain, consortium blockchain or public blockchain) is important in that regard.

A consortium blockchain was chosen for this market model. One of the advantages of this type is that it is less energy intensive and easier to regulate. A preliminary cost comparison of a market facilitation based on blockchain versus server-client technology yields an outcome of €0.20 versus €2.00 per user per month in the local market.

In addition to the above-referenced benefits of our layered energy system, using blockchain offers a unique platform to gain accelerated learning experience with the renewal of the energy system and to explore the partnership between new parties.

The next step for the layered energy system: proof of concept

Stedin and Energy21 worked out the functional design of this layered market model. Together we described the mechanics and roled of stakeholders. And we translated it into a rudimentary preliminary version of a working blockchain plus accompanying front application. This confirms the applicability, but currently does not allow for extensive testing and scenarios.

The next step is a stakeholder round intended to explain the model and to get feedback on the layered energy system. After that, the proof of concept will be developed in more detail based on pilots based on market needs. The premise in this respect is that this will be done in partnership with parties in the energy sector, but also with the necessary external parties, such as local energy cooperatives, consumers, banks and technology suppliers.

More about new concepts

New and innovative energy concepts are needed to respond and anticipate the energy transition. Our practice New Energy Concepts (Energy21) guides larger energy stakeholders to create, design or implement sustainable energy concepts. Our energy expertise, experience and data management solutions offer the fundament to bring a concept to life. For more information about this project, please contact Michiel Dorresteijn (Project lead Market Analysis & Blockchain Technology) via +31 6 11716927.