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31 May 2017

Towards a new energy market model

Blockchain startup Quantoz and Energy21 present the first outlines of a new energy market model applying blockchain technology.

Aiming to go beyond the level of individual business cases, blockchain startup Quantoz Technology was invited by :agile, the corporate accelerator and incubator program of E.ON, to explore a blockchain-based market model. Energy21 on its turn, supported Quantoz with energy market expertise. In a 3-month project, we researched and created a local market model concept that is supported by blockchain technology.

The constraints of our market model to transition

The increasing use of renewable energy sources requires more flexibility of both demand and supply in order to balance the energy system. Our market is moving towards a new reality in which local demand and supply play an important role. Smart metering, issued by the European Union, is an important first step in this development. But smart metering alone is not the answer to the problems that occur. The current energy market model (pre-renewables era) was not never designed to facilitate local production and flexibility.

In fact, the model shows an extreme asymmetry when it comes to the balance between the residential price that can be received for production on the one hand and the residential price for consumption on the other hand. The prosumers are stimulated to use their flexibility to minimize the dependency on the public grid.

Now that market design bug leads to lower grid operator revenue and excessively increasing balancing and re-dispatching costs for the system. As these costs are socialized with all grid users, prosumers will be motivated to reduce grid dependency even further.

This will not only create a reduction in grid use, but more important, also decimate the availability of the distributed residential flexibility for the system. To maintain system balance, all kind of non-market based measures will be introduced to control production and consumption. That on its turn may lead to strict regulation of the retail energy market, decreasing system efficiency and overall increased energy costs.

A new market model in spe

The adoption of more renewable sources goes hand in hand with the need for flexibility in the energy system. The only way forward is to create a flexible market with the right incentives so there is a decentral demand side that can actively anticipate to scarcity and a surplus of energy.

After analyzing the pricing mechanisms, market processes and actors of the current energy market, a concept model was designed. A model with new market rules and a framework at community level running on USEF‘s Plan–Operate–Settle-cycle, in which:

  • Prosumers are core actors and have full control over their energy
  • The market responds to energy availability (reactive energy use)
  • Flexibility is monetized and traded on the market

Blockchain technology as an enabler for local energy communities

Prosumers should have incentives to share their energy flexibility within the community and at the same time maintain grid connectivity services. This allows the overall energy system to absorb an increasing amount of renewable energy production while operating at the lowest total social costs.

Such a market model will use transaction intensive, near-real-time energy and flexibility auctions. It will be difficult to keep a low cost-to-serve when local system operators will stick to their traditional financial settlement processes and applications.

Therefore a blockchain solution is proposed that fulfills a local system operator role and settles the local market transactions. A distributed permissioned blockchain solution can run at very low operating costs while performing at high availability and security levels.

Moving towards a new local market model based on blockchain technology will lead to an energy market in which:

1. Prosumers benefit from (active and passive) flexibility and keep grid connectivity services 2. Grid operators keep servicing all prosumers for affordable fees (grid and new local system services) 3. Energy suppliers can create new services for prosumers 4. Increasing availability of flexibility for system operators and lowest possible social costs of the renewable power system.

From design to concept

The development of this local model design was initiated in December 2016 and brought to life with help of :agile accelerator GmbH, Quantoz and Energy21. The next steps will be taken with grid operator, DSO, Stedin, to further explore business opportunities and set up a proof of concept.

The new energy market model will be based on several USEF (Universal Smart Energy Framework) principles, like the three-axis model and the plan-operate-settle cycle.

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 solution offer the fundament to bring a concept to life.

For more information about this project, please contact Michiel Dorresteijn (Projectlead Market Analysis & Blockchain Technology) via +31 6 11716927.