SMIGHT

Energy Communities promise to bring cheap electricity to local communities by enabling participants to produce and share electricity together as a cooperative. In an ideal world this would do away with electricity producers, retailers, wholesale markets, and transmission networks. With just the DSOs left to help run these local networks or perhaps even the local networks would also be adopted by the energy communities, resulting in none of the incumbent energy industry left standing. But as is ever the case we don’t live in an ideal world. So, what do energy communities really mean for traditional utility companies?

Energy communities promise to connect households and businesses and enable them to share electricity with one another. For example, my neighbour can in effect charge their EV with the solar power generated by my solar panels, then likewise in the evening I can run my dishwasher using the power stored in my neighbourhood battery storage system. In a world where this is the case then do we need ‘traditional’ utility companies?

To answer this question, we need to first differentiate the different types of utility companies. Of course, we are not talking about the water and gas companies, we are only talking about those involved with the generation and delivery of electricity. Within this space we still need to differentiate the different roles as they will be impacted differently by energy communities. In the electricity marketplace we can see 4 distinct roles, which are legally separated from one another in most countries. We have the energy producers – these are the companies that run generation plants whether it’s an old-fashioned coal power plant or a more modern off-shore wind farm. Then we have the companies that sell electricity to end users – they essentially buy electricity on the wholesale market and then sell it to their customers – these are the companies that we are most familiar with as end users as it is them with whom we have a contract and pay our bills to. Then we have the transmission network operators – these companies transport the electricity from where it is produced to where it consumed via high voltage lines. Finally, we have the distribution network operators who take the electricity from the transmission system and distribute it at lower voltages to the end users. Both the transmission and distribution network operators have monopolies in their respective areas (it wouldn’t be economic to build multiple competing networks) and they are therefore highly regulated to ensure this monopoly position is not abused. The energy producers and retailers operate in a competitive environment driven by market forces, but also see a degree of regulation. In some countries, such as Germany, there is also an additional player: the metering point operator, who is responsible for installing and operating the electricity meters.

So now that we understand the different players in the market what impact would a perfectly implemented energy community have on each player:

• Electricity Retailer – they would lose all their business as the community provides for itself it doesn’t need to buy electricity from anywhere else.
• Electricity Producer – just like with the retailer they lose out as there’s no need for centralised energy production.
• Transmission operator – this depends a bit on the size of the community. In the case of a smaller community that is geographically confined e.g. a neighbourhood, village, or town then there is also no need for a transmission network as the energy is being produced and consumed at a local level.
• Distribution operator – this is the one player that is still needed as the members of the community still need to be connected to one another for the system to work. If a community were built from scratch, then they could build their own network, however this will not be the case most of the time.

So why don’t we see energy communities toppling traditional utility companies? This comes down to many factors, but here are the dominant reasons:

Not enough storage

Most energy communities are formed around a shared generation source such a solar array. However, a major difficulty is that most of the electricity is produced when most of the community member aren’t at home and able to use it or don’t have enough smart devices to be able to take advantage of electricity when it is being produced. This leads to large portions of the electricity being fed back into the grid. There is usually some remuneration for this but it is of course much lower than what it will then cost to take electricity from the grid later. The best solution is some form of community storage, usually a large battery. With dynamic pricing becoming more and more widespread, this type of step-up will become more and more valuable as the community will be able to benefit from off peak prices in effect being stored in the battery.

Rigid rules leading to ‘wasted’ energy

Energy communities can be setup in different ways in terms of how electricity is allocated out and shared amongst participants. Sometimes this can be very rigid e.g. the amount of electricity produced in any given window is then divided by the number of participants. If a participant can use that electricity at that moment, then great, but if they can’t or if they need more, then the electricity is either fed into the grid or taken out of the grid respectively. This leads to much more electricity being feed into the grid than would otherwise need to be, and more electricity being taken from the grid. This is easy to solve by allowing the available electricity to be shared according to demand at any given moment and then allowing for some form of cross-participant payment for use of another’s share.

Lack of Economies of Scale

The smaller any given grid is, the more difficult it becomes to balance its supply and demand equation. Remember lesson one from Power Grid 101 is that electricity needs to be produced at the same time as it is consumed. The more producers you have and the more consumers you have on any given grid the more that variations are smoothed out. Energy communities are inherently quite small which means the task of matching supply and demand is inherently tricky.

Dominant positions

The incumbent utility companies have massive advantages over energy communities in terms of their size, financial clout, and relationship with regulators and law makers, but also their importance to the rest of the electrical system. With energy communities representing a threat to some of the traditional utility companies it is understandable that they might not be as supportive as one might wish they would be.

Why can’t we all be part of one big energy community?

If the size of the community is one of the reasons why they can struggle to work, then why can’t we orchestrate a nationwide energy community? In some countries this is almost the case, it is just not so obvious. In some countries the main energy producing and retailing companies, along with the grid operators are state owned. So, the profits from this organizations flow directly back into the government which is a proxy for the wider community of a country. But the main reason why we don’t have one big energy company is the size and complexity of the existing system – it is simply very difficult to rethink and rebuild such a system.

How might energy communities benefit traditional utility companies?

Let’s try turning the question of this article on its head. What if energy communities could benefit utility companies. Again, let’s look at each player and see how they could benefit:

• Producers – They could use the collective purchasing power of a community to fund the investment in new infrastructure and shift their business model to helping energy communities run their production assets effectively or access and operate production capacity elsewhere.
• Retailers – They could benefit from having a single coordinated large customer and could position themselves as helping the energy community to buy in the electricity it needs when it isn’t self-sufficient. Plus, they could market the excess electricity on the wholesale market on the community’s behalf.
• Transmission operators – They could shift their model to connecting communities rather than connecting large scale production facilities to population centres.
• Distribution operators – What if they themselves become the facilitators of energy communities and shifted their business model to one where they purely serve their community.

Conclusion

Energy communities are unlikely to topple the large utility companies anytime soon, but their approach to energy sharing and acting in the interests of the community could help us build a better overall energy system. For us to do this we will need strong leadership from the regulators.