Chapter 18
Integrated Community-Based Energy Systems: Aligning Technology, Incentives, and Regulations
Binod Koirala
Rudi Hakvoort TU Delft, Delft, The Netherlands
Abstract
Integrated Community Energy Systems (ICESs) allow simultaneous integration of distributed energy resources (DERs) and engagement of local communities. The value of such local energy initiatives is not only impacted by local consumption patterns and weather conditions but also by the institutional settings both internal and external to the system. In this context, technologies and institutions should be aligned to ensure the emergence of ICESs. The institutional design of ICESs from technoeconomic perspective is presented to achieve economic efficiency and fairness for all the actors, as well as to ensure sustainability of these local energy initiatives.
Keywords
distributed energy resources
energy communities
smart grids
institutions
local energy exchange
the Netherlands and Germany
1. Introduction
As described in other chapters of this volume, technological advancement, falling costs, as well as support schemes for renewables, distributed self-generation, energy efficiency, and demand response has resulted in the rapid deployment of distributed energy resources (DERs) throughout the world, especially in Europe. DERs, by definition, not only include distributed generation but also energy storage, such as in the form of batteries, electric vehicles, and heat storage, as well as demand response. With increasing DERs penetration, the role of households and local communities is changing from passive consumers to active prosumers (van der Schoor and Scholtens, 2015). Accordingly, clusters of residential and community level DERs, in the form of local energy initiatives, such as integrated community energy systems (ICESs), capable of providing a viable alternative to the present centralized energy supply system are emerging. The future energy system is expected to be a combination of the centralized, large-scale system and the local distributed system. The interaction between central and local system will be determined by the ongoing innovation and the way energy market parties handle these developments.
In Europe, there are more than 2800 such initiatives in the form of energy cooperatives of which around 1000 are in Germany and around 350 are in the Netherlands, Fig. 18.1 ( 2016; Morris and Pehnt, 2016; Hier Opgewekt, 2016). This has forced several energy utilities to develop new customer-centric business models for managing energy (Energy Post, 2013; E.ON, 2014; Burger and Weinmann, 2013; 2016). The important role of citizens and communities in the energy system has been highlighted also in the recent energy union package of the European union (Energy Union, 2015, 2016).
Figure 18.1 Energy cooperatives in the Netherlands (A) and in Germany (B).
Although the local energy initiatives are rapidly emerging, the motivation so far has mainly been economic incentives. For example, the lucrative feed-in-tariffs in Germany attracted local investment in DERs through energy cooperatives. As a result, more than half of the renewables installed in Germany are now owned by local citizens and communities (Morris and Pehnt, 2016). However, the market conditions and support incentives in terms of feed-in tariffs have changed resulting in stagnation of the growth of energy cooperatives in Germany (DGRV, 2015). These cooperatives are now in dilemma on how to make most out of the locally generated energy. This means household and community generation have to compete with the centralized generation with economies of scale, highlighting further the need of higher local self-consumption of local generation. In addition, alternative business models, such as local balancing and ancillary services are needed to continue their growth.
A comprehensive and integrated approach for local energy systems where communities can take complete control of their energy system and capture all the benefits of energy system integration is still lacking. Many challenges, such as split-incentive problems, financing, operation, and complexity in decision-making remain for this new type of community energy organization (Koirala et al., 2016b). Would central community energy planning or market mechanisms better serve the objectives of ICESs? How can pricing and incentive schemes be structured to encourage DERs investments in ICESs? Which operational strategies lead to a reduction of peak demand? How can cost and revenue be fairly distributed to benefit the whole community and other stakeholders? In this chapter, we precisely address these issues for local energy systems, such as ICESs, which could also be applicable for broader solutions in the grid’s edge.
Availability of numerous technologies, actors, institutions, as well as market mechanisms, further complicates the development of ICESs. Such complexity demands new mechanisms and institutional arrangements to optimally integrate generation and demand at a local level. New initiatives, such as reforming the energy vision in New York (NY REV) with goals to reduce 40% greenhouse gas emissions, to generate 50% electricity from renewables and to reduce energy consumptions of building by 23%, as well as its focus on sustainable and resilient communities can help further emergence of ICESs (NY REV, 2016), as further discussed in chapter by Baak in this volume.
This chapter consists of four sections in addition to the introduction. Section 2 provides new thinking for local energy systems and introduces the concept of ICESs. Section 3 covers the necessary institutional precursors of ICESs. Section 4 examines the institutional design of ICESs from technoeconomic perspective followed by the chapter’s conclusions.
2. Rethinking local energy systems
The technological and institutional changes in present energy system are rapid. In addition to aging infrastructures, these transformations have resulted in technical and economic changes in the power system as summarized in Table 18.1. The energy system is at the crossroad, providing a tremendous opportunity for the reorganization and transformation toward the more sustainable system. The key challenge of the future energy system is a seamless integration of increasing penetration of DERs. One of the prominent solutions lies in increasing self-consumption and matching supply and demand at the local level, such as in ICESs.
Table 18.1
Technoeconomic Changes in the Energy Landscape
| Traditional power system | Future power system | |
| Technical | Centralized | Centralized and decentralized |
| Schedule supply to meet demand | Match both supply and demand | |
| Base load, off-peak, and peak power plants meet the demand | Decouple supply and demand with flexibility—grid expansion, demand-side management, storage and flexible back-up, low capacity factor for some technologies | |
| Passive network management | Active network management | |
| Flexibility from ramping-up and down, peak power plants, interruptible loads, interconnection | Flexibility market, demand response, storage, interconnection, curtailment | |
| Economic | Centralized day-ahead, intraday, and balancing market | Centralized markets for energy and other services and decentralized market for local flexibility |
| CO2 emissions are external | CO2 emission is internalized through carbon tax, carbon pricing | |
| Retail prices are in proportion to wholesale prices | Mismatch between wholesale and retail prices due to increasing fixed costs | |
| Volumetric network tariffs | Advanced network tariffs | |
| Price inelastic consumers | Price elastic consumers |
2.1. Integrated Community Energy Systems Concept and Definition
Local communities have started to respond to the challenges posed by unsustainable production and consumption practices in the energy sector. These communities are well-placed to identify local energy needs, take proper initiatives, and bring people together to achieve common goals, such as self-sufficiency, resiliency, and autonomy. Local energy projects are inclusive, democratic, and sustainable and might lead to job creation and economic growth (Lazaropoulos and Lazaropoulos, 2015). These initiatives can further the transition to a low-carbon energy system, help build consumer engagement and trust, as well as provide valuable flexibility in the market.
Bottom-up solutions are desired to capture all the benefits allotted by DERs. Recently, the interest of households and communities in generating, supplying, managing energy, as well as improving energy efficiency collectively has also increased and thereby local energy systems are being formed. Recent research also focuses on community energy system where citizens can jointly invest and operate the local energy systems (Rogers et al., 2008; Walker et al., 2010; Bradley and Rae, 2012; Walker and Simcock, 2012; Wirth, 2014). In a liberalized market, it is possible to establish local producer/prosumer—consumer energy commons enabling them to cocreate commons-based smart energy system at the local level (Lambing, 2013).
In this context, ICESs are multifaceted smart energy system, which optimizes the use of all local DERs, dealing effectively with a changing local energy landscape. ICESs are capable of effectively integrating energy systems through a variety of local generation inclusive of heat and electricity, flexible demand, e-mobility, as well as energy storage. Such integrated approach at the local level helps in the efficient matching of local supply and demand, impacting the existing system architecture and influencing the way the energy systems evolve. The concept of ICESs, as building blocks for the smart grids, is further elaborated in detail (Koirala et al., 2016b; Mendes et al., 2011; Xu et al., 2015). ICESs also represent planning, design, implementation, and governance of energy systems at the community level to maximize energy performance while cutting costs and reducing environmental impacts (Harcourt et al., 2012).
ICESs should have defined system boundaries. Specifically, ICESs can integrate DERs at building and neighborhood scale. Typically, a cluster of households within a distribution transformer can be part of ICESs. The advantage of extending to multiple buildings lies in the variation of demand profiles and availability of multiple generation sources, increasing the flexibility of the system as well as economies of scale but is limited by the complexity of collective decision-making process.
2.2. ICESs as Sociotechnical System
ICESs are complex sociotechnical systems with a strong degree of complementarity enabled through physical and social network relationship, Fig. 18.2 (Künneke et al., 2010). The physical system consists of generation, distribution, storage, and energy management technologies to manage the commodities flow. The social system with different actors, such as consumers, prosumers, aggregators, energy suppliers, and system operators ensures efficient economic operation at minimum environmental effects at the same time providing consumers with different choice options. These systems are complex in the sense that they consist of different decision-making entities and technological artifacts that are governed by energy policy in a multilevel institutional space.
Figure 18.2 ICESs as complex adaptive sociotechnical systems.
2.2.1. Actors
The energy system comprises a great variety of public and private actors with different interest and functionalities within a specific institutional environment. The roles and responsibilities of these actors change in the context of ICESs as presented in Fig. 18.3. ICESs are community-based, providing more roles to them in investing, using, producing, selling, and purchasing energy. The complex technical operation in ICESs often needs the engagement of third-party actors, such as system operator or service provider.
Figure 18.3 Various actors in ICESs.
2.2.2. Technologies
ICESs consist of households and community level DERs as shown in Fig. 18.4. Several DERs with flexible and intermittent generation, as well as demand- and supply-side management technologies are increasingly becoming available. The technology invested and topologies chosen by local communities is expected to substantially influence future energy system pathways. New services can be driven by information and communication technologies (ICTs) through advancement in the smart grids, for example, to align local demand and supply in time and location or to provide flexibility, as further discussed in the chapter by Knieps in this volume (Clastres, 2011; Järventausta et al., 2010). ICES can provide necessary local infrastructures for an efficient match between demand and supply complementing further development of smart grids. Development of smart-grid technologies and demand-side management technologies facilitate an increase in reliability and efficiency of such local energy systems.
Figure 18.4 Few examples of available technologies for ICESs.
2.3. Added Value of Integrated Approach
ICESs combine energy system integration and community engagement, Fig. 18.5. In this way, ICESs are capable of embracing technical and social innovation, cocreating sustainable and affordable local energy system.
Figure 18.5 Technical and socioeconomic integration in ICESs.
The interactions and complementarities between the different energy carriers are increasing (Lund and Muenster, 2003; 2006; Lund and Kempton, 2014). Different energy carriers can work in synergies leading to a more sustainable and integrated energy system (Lund and Muenster, 2003; 2006; Lund et al., 2010; 2015; Orehounig et al., 2015). The advancement in ICTs as well as smart-grid technologies will further facilitate such integrated operation (Lobaccaro et al., 2016; Lund and Muenster, 2006; Orehounig et al., 2015). ICESs might provide cost-effective solutions to local congestions and help avoid or defer grid reinforcement foreseen with increasing penetration of local renewables.
ICES stand out from other energy system integration options due to engagement of the local communities. The engagement of citizens and communities increases the acceptance of new energy systems. ICESs also help to keep the local money for the local economy and help fight energy poverty. It not only creates more jobs at the local level but also increases values, such as trust, identity, and sense of community, helping to build stronger communities.
2.4. Benefits and Challenges of ICESs
2.4.1. Benefits of ICESs
The benefits of ICESs include reducing energy cost, CO2 emissions, and dependence on the national grid, as well as (self-) governance. ICESs help to increase penetration of intermittent renewables and bring new roles for local communities, such as flexibility and ancillary services (Howard, 2014). ICESs provide opportunities for citizens and communities to decide about their energy future, thereby ensuring strong local support and social acceptance. Other benefits of ICESs include increased awareness, reduced energy poverty, affordable energy for all, as well as increased sense of community, pride, and achievement. The benefits of ICESs for communities, system operators, and policymakers are summarized in Table 18.2.
Table 18.2
Benefits of ICESs
| Community | System operators | Policymakers |
Hedging against price fluctuations Modular in development Reliability Resiliency Economic benefits—savings and revenue generations Grid support within ICESs Higher efficiency Integrated Improved power quality Sense of community |
Improved reliability of the energy system Grid support—ancillary services and flexibility Occasional roles as service provider Investment deferrals |
Higher energy efficiency Higher renewables penetration Local economic growth Increased energy security Environmental benefits Sustainability |
2.4.2. Challenges of ICESs
The main challenge for implementation of ICESs comes from the centralized design and regulation of present energy systems, which do not always provide level playing field for ICESs. In a centralized system, the energy and information flow are unidirectional. However, successful implementation of ICESs needs interaction among several actors of the energy system. For example, selling electricity to neighbors is not allowed and affordable grid access for community generation can be long, complex, and costly.
Although the technologies for ICESs are ubiquitous, there are major challenges in its institutional organization, which must be satisfactorily resolved before they can be successfully deployed and integrated. As highlighted in Table 18.3, these challenges include financing, operation, revenue adequacy, community participation, as well as the fair allocation of costs and benefits.
Table 18.3
Challenges of ICESs
| Challenges | Description |
| Operation | Need a service provider or expert companies for complex technical operation beyond its technical capabilities |
| Financing | Access to private finance, microfinance, and loans for ICESs |
| Cost–benefit sharing | Fair allocation of costs incurred and revenue generated among actors |
| Business case | New business model for flexibility and ancillary services |
| Monetization of services | Monetization of essential community as well as other ICESs services |
| Managing utility relations or grid issues | Network access and cost recovery of network investment especially when energy networks are a natural monopoly |
3. Institutional precursors for ICESs
3.1. Regulation
Energy laws and policies around the world have been built to support centralized energy systems. Accordingly, there are legal barriers to the implementation of ICESs. One of the most prominent ones is EU energy market legislation, the third energy package (EU, 2009). According to this package, generation, distribution, and retail should be unbundled. With the engagement of citizens and community, ICESs are likely to control the local energy system and take over all these roles as a single entity, demanding rebundling.
In the Netherlands, there are similar obligations to both small and large producers in terms of the license of supply (Avelino et al., 2014). As also discussed in the chapter by Löbbe and Hackbarth in this volume, in Germany, after 2014 amendment to the renewable energy law (EEG), small- and medium-sized producers have to compete with large producers (BMWI, 2014).
As also discussed in chapters by Pelegry and by Haro et al. in this volume, recent self-consumption regulation in Spain discourages self-generation as well as ICESs (MIET, 2015). Moreover, administrative hurdles for renewable energy installation, legislative uncertainty, disincentive for self-consumption and production, as well as ineffective unbundling of integrated energy companies inhibit ICESs implementation in Spain. Similarly, in Portugal, the Decreto Lei n. 153/2014, a net-metering law despite allowing self-consumption and trading with 10% contribution going to network maintenance, still does not encourage local energy exchange. Similar issues in the United States and Australia are covered in chapters by Baak, Jones et al., and Mountain & Harris, respectively, in this volume.
For the emergence of ICESs, space for innovation, often introduced by new actors is a necessary precondition. As ICESs might take different forms based on local conditions, the legislation should keep open space for as much as possible options for the development of local models. Experiments should be encouraged so that the effects of different models can be assessed. Legal frameworks should promote a wide range of models for community ownership, participation, and investment in ICESs. Several countries in the world, such as Germany, Denmark, the Netherlands, the United Kingdom, and the USA already have policy incentives to promote community-based energy systems.
3.2. Support Incentives
As the focus is shifting to auction/tendering process to support future renewable energy development, the community participation should nevertheless be safeguarded. To speed up low-carbon transition, ICESs should also be given access to national support policies for renewable energy mainly designed for households and large investors, such as feed-in tariffs, tax incentives, grants, low-interest loans, grid access, guaranteed power purchase, and virtual net metering.
The implementation and success of these support incentives differ among countries, which again is affected by several institutional factors. Rather than a one-size-fits-all approach, support schemes designed and tailored to local conditions might prove beneficial in long-run. At the same time, support and mentoring of these local energy initiatives through dedicated intermediary organizations has been proven successful in the United Kingdom and Scotland (Seyfang and Smith, 2007; CES, 2016). At European level, European Federation for Renewable Energy Cooperatives (RESCOOP) is playing this role through networking and knowledge exchange among European renewable energy cooperatives (RESCOOP, 2016).
Few examples of the support incentives addressing community-based energy systems are postcode regulation for local energy exchange in the Netherlands; community net-metering in New York; priority access to the grid in Germany; government grants in Germany, the United Kingdom, and Scotland; as well as low-interest loans in Germany. In the United States, several states, such as New York through reforming the energy vision (REV), California through its community-based renewable energy self-generation program (SB 843), as well as several other states are pushing all sorts of opportunities for community energy (NY REV, 2016; Community Solar, 2012). Similarly, Australia is also expecting high shares of community solar (C4CE, 2016).
3.2.1. Postcode Regulation in The Netherlands
Since 2013, the Dutch postcode (postcoderoosregeling) regulation supports local generation and promotes DER penetration. Local entities, such as Energy cooperatives and housing corporation can jointly invest in community energy. Participants get a heavy discount in energy tax up to 10,000 kWh per members. For example, in 2016, the locally exchanged energy is exempted from energy tax. For details on Dutch postcode regulation, see Visbeek (2016).
3.2.2. Community Net Metering in New York
In July 2015, the New York Public Service Commission established a community net-metering in New York state (DOE, 2015). To qualify, the energy community should have a minimum of 10 members and maximum installed capacity of 2 MW. The energy community can have an individual member having a demand of more than 25 kW (with the generation from this member limited to 40% of the energy community output) whereas all other members should have less than 25 kW demand. Moreover, 60% of the generation from the energy community should be self-consumed. This policy enables renters, low-income citizens, and homeowners to engage in energy community. The sponsor of such energy community could be facility developers, energy services companies, municipal entities, and civic association who will be also responsible for building and operating such energy community.
3.3. Grid Access and Local Balancing
There can be resistance from the incumbent grid operator to transfer the ownership or lease the network to the community as seen in Feldheim and Schönau in Germany (EWS, 2015; NEFF, 2016). Feldheim had to build a parallel grid and Schönau had to buy back the local grid to realize the local energy system. As private utilities are often biased toward incumbent energy suppliers, increasing number of formally privatized distribution grids, including Hamburg, are remunicipalized and further 20% are planning such a step in Germany (Wagner and Berlo, 2015; Nikogosian and Veith, 2012).
Moreover, local energy exchange among ICESs members should be enabled and incentivized. The community can be connected directly to the national grid through a point of common coupling. As shown in Fig. 18.6, the local energy exchange might not always be straightforward. It might involve changing the point of delivery of energy, building a physical interconnection between households across the street or utilizing higher level network infrastructure. In each case, the rules for access to technologies and networks should be well-defined to prevent the opportunistic behavior.
Figure 18.6 Grid access issues in ICESs.
Increased incentive to follow load or to integrate renewables might improve local balancing and reduce stress on the grid during hours of peak generation. Moreover, although time netting of solar PV generation through net metering has proven beneficial for Dutch households, it might be counterproductive for the operation of energy storage. Location-based netting promotes cooperation among households through local exchange and might be beneficial for the emergence of ICESs. Moreover, ICESs should be provided with right incentives to collaborate with system operator on storage, energy management, and grid issues.
3.4. Aligning Institutions and Technology
Following the sociotechnical system perspective, ICESs should be seen as a combination of technical elements, characteristics, and links (Wolsink, 2012). Although technologies to realize such local energy system are widespread, the institutions to govern these energy systems are still lagging behind. “Institutions” are the systems of established and prevalent social rules that structure the social interaction (Hodgson, 2006). They are often considered to be the result of enduring interaction processes by which actors have developed ways to reconcile their conflicting interests (Klijn and Koppenjan, 2006).
The current centralized institutional arrangement does not always provide enough incentives for ICESs as the latter were not foreseen during the development of these institutions. New Institutional arrangements are needed to coordinate and shape collective action, thereby leading to further innovation through value-sensitive design and cocreation (Klijn and Koppenjan, 2006).
The institutions and technologies surrounding ICESs also need to be adapted and aligned to each other for optimal performance. The institutions should be established, (re-)designed or adapted, to enforce the necessary roles, responsibilities, control, and intervention. New models of partnerships between the energy distribution networks, utilities, private developers, and communities need to be allowed and examined. In addition, performance expectations, such as sustainability, flexibility, and cost minimization also play an important role in shaping technology and institutions in ICESs.
4. Institutional design of ICES through technoeconomic perspective
New energy systems, such as ICESs are not without technical and operational challenges. The technical design ensures commodity flow through reliable and robust system whereas market design ensures monetary flow through the efficient allocation of goods and services according to the community needs (Scholten et al., 2015). These two essential design approach although complementary may sometimes be in odds. A comprehensive design, called institutional design, is necessary which combines the technoeconomic perspectives in the design of institutions for ICESs. Moreover, Due to the involvement of multiple stakeholders and technologies, the institutional design of ICES is complex. For example, collective decisions have to be made to meet the individual needs. Different institutional arrangements for physical and financial administration are necessary for well functioning of these systems.
4.1. Technical Perspective
4.1.1. Flexibility
In recent years, technological change has enabled households and business to fine tune their energy consumption, as well as higher penetration of renewables and disruptive technologies, such as electric vehicles. The variations in electricity demand and supply can be forecasted but an unexpected mismatch might still occur and the system must ensure that supply and demand are always equal (Strbac et al., 2012). This feature of an energy system is called flexibility (Denholm and Hand, 2011).
ICESs are capable of decreasing or aligning the production and consumption depending on the requirement of the larger energy system. The technical and socioeconomic integration make ICESs more flexible. For example, excess PV generation could be stored as heat through heat pumps or in the electricity storage. Similarly, when electricity demand is higher, combined heat and power units can continue to produce electricity storing the excess heat in thermal storage. At the same time, members of ICESs are more energy cautious allowing higher demand-side flexibility.
The flexibility provision, however, should be carefully designed to incorporate multiple households and communities as well as to avoid possible rebound effects. A clear, transparent, and reliable pricing mechanism, such as the one proposed by Universal Smart Energy Framework (USEF), for the trading of flexible energy might be beneficial (USEF, 2016). The energy markets itself should also be more flexible allowing trade close to the real time.
4.1.2. Storage
Energy storage is not only the great source of flexibility but also an enabler of integrated operation as illustrated in Table 18.4. Energy storage is vital to balance supply and demand at household and community level. Storage type and size differ based on seasonal, weekly, daily, or hourly demand to store energy. Long-term energy storage is still technologically challenging. Moreover, integrated operation of heat and electricity storage is desirable. The energy storage can enable location-based netting, ensuring local energy balance and overall higher energy system performance.
Table 18.4
Different Functionalities of Storage in ICESs
| Functionalities | Community-level storage | Household-level storage |
| Balancing demand and supply | Seasonal/weekly/daily and hourly variations, peak shaving, integrated electricity and heat storage | Managing daily variations, peak shaving, integrated operation of electricity and heat storage |
| Grid management | Voltage and frequency regulation, ancillary services, participation in balancing markets | Aggregation of household storage for grid services |
| Energy efficiency | Demand-side management, better efficiency of ICESs minimize energy losses | Local production and consumption, behavior change, increase value of local generation, integrated operation |
4.1.3. Energy Services
The increasing penetration of intermittent renewables and DERs in the energy systems is forcing a debate on new energy services as well as their pricing and provision (Perez-Arriaga et al., 2015). As presented in Table 18.5, these energy services will also be relevant for ICESs; some of these services are internal to ICESs whereas others are system services. For more details on energy- and network-related services of the energy systems, see Perez-Arriaga et al. (2015).
Table 18.5
Energy Services Within ICESs and to the Larger Energy System
| Services | Description | |
| Energy-related services | Electrical energy | Electricity sold or purchased at given location and time within the ICESs and to the system |
| Flexibility | Upward and downward flexibility to the system | |
| Operating reserve | Primary: immediate, automatic, decentralized response to system imbalances stabilizing system frequency. For example, Feldheim energy community in Germany provides primary reserves for TSOs through its 10 MWh storage (NEFF, 2016) Secondary: up- or downregulation service to accommodate normal, random variations in system frequency, and normal variability and uncertainty of load and generation balance |
|
| Firm capacity | A guaranteed amount of installed capacity that is committed to producing when called upon under system-stress conditions | |
| Black-start capability | The availability of resources to restore ICESs to normal conditions after black out | |
| Network-related services | Network connection | Physical connection between the households, to the electricity distribution network and access to the associated services |
| Voltage control | Maintenance of voltage within regulated limits throughout ICESs | |
| Power quality | Minimum voltage disturbance in delivered power | |
| Congestion management | Overcoming local congestion through network reconfiguration, redispatch/utilization of generators, modifications to load or generation, utilization of flexibility from ICES members | |
| Energy loss reduction | Local consumption reduces energy losses |
4.1.4. Autarkic Design
The decreasing costs of DERs and the rising retail prices are creating an enabling environment for customers to optimize the planning and operation of the local energy system with the national grid or to get out of the national grid to manage their own local grid (Chaves-Ávila et al., 2016). ICESs might redefine the relation between production and consumption as they enable resiliency through coproduction. This helps to reduce or substitute the industrial production of energy at centralized power plants by decentralized local production. The excess energy can be sold directly to the grid. The residual demand should be met by the industrial production until large-scale storage becomes financially viable.
Accordingly, ICESs can take different architecture: grid-integrated and grid-defected or autarkic ICES as demonstrated in Fig. 18.7. The most optimal solution is the hybrid system with a combination of the grid and the ICES. Such system can also be islanded during emergency situations to provide critical community functions. The driving forces for the grid defection are independence from the national grid, CO2 emissions reduction at higher levels than the centralized system, self-governance, and other local preferences.
Figure 18.7 Trade-offs in autarkic design of an ICES.
Under the current system of prices and charges and DER economics, grid-defected ICESs are not economically rationale (Koirala et al., 2016a). As also discussed in the chapters by Steiniger and Sioshansi in this volume, aggregation of the diversity of demand as well as generation profiles among the households within ICES might make community grid defection less expensive than individual grid defection. However, higher reliability needs lead to an oversized system with a very high unused energy to be curtailed and dumped. Nevertheless, it is important to identify the conditions under which such autarkic system can already be a policy option. The cost of an autarkic ICES should be estimated after considering the price of emergency service and the cost of avoided grid reinforcement.
4.2. Economic Perspective
4.2.1. Collective Financing
ICESs may require funding from a variety of sources, such as individuals, municipalities, local cooperatives, and banks. Each ICESs projects will require a customized approach for financing considering both costs and revenue streams. The willingness to invest in local energy initiatives again depends on several institutional factors and local conditions. For example, with long traditions of local energy and opposition to the nuclear energy, German citizens exhibit higher willingness to invest in local energy projects (Kalkbrenner and Roosen, 2016). ICESs can bring much-needed investment and financing to the local energy system through citizens’ engagement.
4.2.2. Mismatch Between Wholesale and Retail Price
The current retail electricity price includes wholesale price, regulated costs, such as network costs and other surcharges, as well as taxes. Although the wholesale price might decrease with the high penetration of renewable, the retail price is expected to increase in future due to increasing fixed costs for network reenforcement, grid expansion, balancing costs, as well as other surcharges. ICESs enable local communities to hedge against fluctuating energy prices.
4.2.3. Business Case for ICESs
As the main technologies for ICESs, such as DERs, storage, and energy management systems are gaining maturity, the next step is to create the enabling environment for business model innovation through flexibility in regulation as well as energy policy. The success of ICESs depends on the business model adopted and its flexibility. These business model should reflect self-provision of energy, local exchange, as well as different energy services to the system.
4.3. Institutional Design of ICESs
In this section, institutional design recommendations are provided considering the technoeconomic perspective. ICESs should be managed in a flexible manner adapting to capabilities and interests of the community involved. This translates to efficient (self-) governance, lower transaction costs, fair cost–benefit allocation, and simplified legal requirements.
4.3.1. Roles and Responsibilities
In ICESs, the role and responsibilities of the actors will change. For example, the domestic consumers can have a more active role as prosumers. Local communities can have new roles as flexibility providers. The function of “aggregators” which is so far only exercised by the suppliers can also be performed by ICESs through aggregation of small consumers, similar to the virtual power plants concept elaborated in the chapters by Steiniger and Sioshansi in this volume. Installers can finance as well as operate the installations themselves ensuring consumers “comfort” rather than just supplying equipment. The emergence of new roles and new interpretation of existing functions can ensure efficient development of ICESs.
4.3.2. Design and Coordination of Local Exchange
The local exchange can take several forms, such as peer–peer exchange and prosumer community groups (Giotitsas et al., 2015; Rathnayaka et al., 2015; Brooklyn Microgrid, 2016). Using a well-known blockchain technology, a new community microgrid project in Brooklyn, New York is providing a platform of peer–peer, transactive energy trading among neighbors in a local neighborhood (Brooklyn Microgrid, 2016).
Suitable institutional arrangements should be designed to prevent local energy exchange from being a monopolist. The commodities and suppliers should be well defined, ensuring efficiency, fair allocation of costs and benefits, right prices for participation, and preventing the opportunistic behavior. The local energy price should reflect all the capital costs, operation costs, as well as local network costs.
There is no single best organizational model applicable for ICESs but it should be based on the available sources, types of participants, as well as their needs and expertise. The technical and operational complexity of ICESs might require the involvement of the service provider. The service provider could be energy service companies (ESCOs), distribution system operators (DSOs), or private company with expertise in ICESs. The service providers not only provide assistance in ICESs planning and operation but also provide access to the financing resources.
Nevertheless, two models are outlined here to show how the ICESs could be operated namely service and cooperative model, Table 18.6. In the cooperative model, the actors jointly find the local planning and coordination site, operate the facility together, lifting the separation between production and use. The complex technical operation can be handled by the service provider, however, the ICESs remains in control of the local cooperative. In the service model, the social desire for local utility with a wide range of services is reflected with a great emphasis on the development of ESCOs.
Table 18.6
Overview of Functions and Actors in the Service and the Cooperative Model
| Functions | Service model | Cooperative model | |
| Final function | Energy use | Customers | Cooperative |
| System function | Production | Producers (decentralized) | Local production by the cooperative |
| Storage | Customers, producers, or system operators | Cooperative | |
| Transport | Operators (capacity contracted by ESCO) | Within the community, the cooperative | |
| Balance responsibility | System administrator | System administrator | |
| Coordinator | None | On community scale, the cooperative | |
| Marketing functions | Trade | ESCO | Within the cooperatives, local exchange and outside the cooperative through the national market parties |
| Delivery | ESCO | ||
| Aggregation | ESCO | ||
| Program responsibility | ESCO | ||
| Service functions | Installation | ESCO, installers | Installers in cooperation with cooperative |
| Advising | ESCO | Cooperative | |
| Market coordination | ESCO (limited) | Cooperative | |
| Financing and insurance | ESCO (in terms of the project in the community) | Cooperative | |
| Metering | Metering responsible or ESCO | Metering responsible or cooperative | |
| Communication | Through public networks or desired by ESCO | Through public networks or desired by cooperative | |
| Switching | ESCO | Cooperative | |
| Billing | ESCO | Cooperative |
ESCO, Energy service company.
There should be freedom to organize the energy to the local requirements. Laws and regulations should, as far as possible, create space for actors to actually try these or other models. In practice, it may turn out which models are viable and which are not. By analyzing the implications of these operation models in the short and long term, it will become clearer how the ICES can emerge and in what areas further legislation is possible or desirable.
4.3.3. Ownership and (Self-) Governance
Ownership refers to a source of control rights over a resource or property and power to exercise control when the contract is incomplete, such as excluding the nonowners from access, selling and transferring resources, as well as appropriately streaming the economic flows from use and investments (Grossman and Hart, 1986; Gui et al., 2016). The ownership in energy systems, such as ICESs is affected by the financing requirements, social welfare issues, as well as risk preferences (Haney and Pollitt, 2013; Walker, 2008). ICESs can have locally owned and controlled community ownership, utility ownership, private ownership, and public–private ownership, Table 18.7. Governance refers to a structure to practice economic and administrative authority, such as rules of collective decision-making among actors (Goldthau, 2014; Avelino et al., 2014).
Table 18.7
Ownership and Governance Model for ICESs
| Ownership | (Self-) governance |
| Community | All costs and benefits are covered by ICESs. Cooperative structure for the management and operation can be outsourced to the service provider. |
| Utility (DSO) | Utilities remain relevant in ICESs as owner, service provider or grid connection enabler, or combination of these roles. ICESs can benefit from its technical and financial capability. The utility can decide independently and level of community engagement is subjected to the utility. |
| Private | Private expert companies own and operate ICESs. Incorporating social and economic objectives of the local communities requires negotiation and bargaining. |
| Public–private (hybrid) | Joint decision-making and planning through the engagement of local communities and private expert companies. Private expert companies can hedge against future uncertainty. |
DSO, Distribution system operator.
In the context of ICESs, (Self-) governance refers a group of people that exercise the control over themselves by self-ruling or autonomy. Ostrom (2005) has demonstrated the robustness of self-governance in socioecological systems where government and markets could not do better. Cayford and Scholten (2014) has analyzed the viability of self-governance in community energy system and reported that it depends on communities’ abilities to be adaptive to coordinate with different governance circles and may even take different forms according to the social and technical complexity.
4.3.4. Costs and Benefit Allocation
Local balancing reduces peak demand and volume of imported energy in ICESs. The energy losses of the centralized system are also reduced through local generation and exchange. The different energy and network services provided by ICESs avoid energy costs and generate revenues. Grid-defected ICESs provide ancillary services locally, saving on ancillary services. ICES can defer grid reinforcement required for accommodating increasing penetration of DERs or demand. These avoided costs and generated revenues are the benefits of ICESs.
ICESs costs involve capital costs for DERs and energy management system, fuel cost, operation and maintenance cost, as well as network costs for interconnection infrastructure. DER capital costs involve the cost of household- and community-level DERs and cost for corresponding energy management system. Operation and maintenance cost involves the cost of operating local energy exchange as well as the cost associated with operation and maintenance of DERs. Moreover transaction cost is associated with making contracts and billings. The cost of network interconnection and operation should also be considered.
The success of ICESs largely depends on the fair allocation of these costs and benefits. The cost must be paid by those who cause it and the benefits must accrue to those who previously made the investment. In ICESs, this is sometimes difficult to achieve because parts of the facility have the character of a public good.
4.4. Future-Proof Institutional Design
As discussed in Section 2, the complex sociotechnical system, such as ICES has to adapt and operate in changing energy landscape where new technologies will become available, new institutions will emerge, and role and responsibilities of the actors might also change. ICESs should be open for new interactions and experiments to allow further technological and social innovation.
Different actors of the ICESs will have important roles to steer and transform activities of ICESs. These activities namely consumption, storage, exchange, and collective purchasing are influenced by attributes of the technical world, such as available technologies, grids, as well as the environment, attributes of community in which actor and actions are embedded, and institutions which guide and govern actors behavior. This leads to patterns of interactions and outcomes, which could be judged by technical, economic, social, and environmental performance evaluation criteria. Policymakers should steer right transformation of ICESs through suitable policies, incentives, and support schemes.
5. Conclusions
ICESs are emerging in an environment that was designed for a centralized, top-down, unidirectional network with regulation assuming full reliance on the common network. Now prosumers have options that do not fit the old model and their aggregation in the form of ICESs need fertile support to get established in an otherwise hostile environment. It is important to create dedicated policy space for ICESs within climate and energy framework for the next decades. Policymakers should steer right transformation of ICESs through suitable policies, incentives, and support schemes.
ICESs offer strategic choices for households and communities to transform their energy system and become active prosumers. Households and communities need to understand the trade-offs between self-consumption and local energy balance, as well as to provide system services for the larger energy system. ICESs also address the desire of local communities to contribute toward sustainability and energy security locally.
This chapter has highlighted several institutional precursors for the emergence of ICESs, such as regulation, support incentives, grid access, and local balancing, as well as the alignment of technologies and institutions. Advancing ICESs requires supportive institutional environment for integrated operation as well as interactions among different actors. Unbundling should be relaxed for the long-term financial viability of ICES and partial rebundling is required for local ownership of energy supply infrastructure and energy grid. The local energy exchange platform should be developed to ensure further emergence of ICESs.
Several institutional design recommendations for ICES based on technoeconomic perspectives are provided. Technical perspectives considered are flexibility, energy storage, energy services, as well as the autarkic design of grid-integrated and grid-defected ICESs. Collective financing and new business cases involving value of flexibility and ancillary services, as well as hedging against price fluctuations are important. The clear understanding of the changing roles and responsibilities, community ownership and self-governance, design and coordination of local energy exchange, as well as the fair allocation of cost and benefits are important institutional settings for the success of ICESs. These institutional settings need to adapt to the changing energy landscape.
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