It is no secret that the next 30 years in energy generation will be marked by worldwide decarbonisation efforts. We also know that decarbonisation must happen at a rapid scale for us to meet the goal of the Paris Agreement to keep global temperature rise well below 2, preferably 1.5 degrees Celsius, compared to pre-industrial levels. However, many questions remain – how will the transition to a low-carbon economy reshape the future of energy markets? How will it impact the way we generate, transit, receive and pay for electricity, and dispute our electricity bills? What role will technology play in this?
Most current energy networks are based on centralised national grids – networks of wires that transmit electricity from a central location (e.g. power station) to all parts of a region or a country. This centralisation is inherent in how energy from traditional resources – oil, gas, and coal – is generated. Since these resources are found only on certain geographical locations, centralisation of their extraction in a nearby power station is often a result of historic economic necessity. However, renewable energy is different – solar panels can be placed anywhere where the sun shines, including residential rooftops; and wind turbines can be installed residentially or in “farms” with good wind patterns. This difference in renewable energy generation has a potential to transform the energy industry from today’s carbon-intensive centralised national grids to tomorrow’s decentralised, decarbonised, and digitalised microgrids.
Microgrid essentials explained
In essence, a microgrid is a self-sufficient energy network that serves a discrete geographic area. The energy distributed through a microgrid can come from multiple kinds of distributed energy sources, including solar, wind, and biomass. Importantly, unlike a national grid, microgrids are entirely local – they supply energy to the same area where it is produced thereby shortening the energy supply chain. They can also operate independently of the central grid (even if a microgrid is in fact connected to the central grid), enabling microgrids to withstand centralised outages, and to by-pass supply bottlenecks (particularly relevant with the projected increase in adoption of electric vehicles). Microgrids can store residual energy generated during peak hours in on-site batteries providing energy reserves for off-peak periods caused by the intermittent nature of renewable energy resources.
Moreover, smart microgrids have a degree of automated intelligence. A central “brain” within the framework called a “microgrid controller” manages energy generation, supply and battery storage according to its customers’ energy needs. An advanced controller can track real-time changes in the energy prices and decide to purchase power from the central grid when its prices are lower than the price of microgrid-generated electricity, or sell into the grid when prices are higher. In the meantime, while the energy from the central grid powers homes in the microgrid area, the energy generated by microgrids’ solar panels can be stored in batteries for those rainy days.
Microgrids and prosumer economy
In 2019 the EU introduced the concept of self-sufficient, consumer-driven energy communities through its Clean energy for all Europeans package and Directive on common rules for the internal electricity market. With active consumer participation at all levels of the energy market – generating, consuming or selling electricity, at its heart, and a focus on providing flexibility services through demand-response and storage, the EU is taking proactive steps towards enabling decentralised energy solutions for its 445 million citizens.
On the other side of the channel, the UK’s Energy White Paper envisages the development of more, smaller sites of generation in place of large, centralised power stations, and microgrids are already a reality: a smart microgrid in Orkney, Scotland, is the first of its kind in the UK. In operation since 2009, the Orkney microgrid is managed under an Active Networks Management system via smart grid implementation technology. It uses a central controller to monitor multiple renewable energy generators, identify when power flows are nearing the limits and instruct the energy generators to reduce their output.
More than a decade after its launch, Orkney developers now want to take the project even further and create an economy of prosumerism. Prosumers are individuals who both produce and consume the same commodity. Arguably an economy of prosumerism is a natural consequence of microgrid networks, in which each individual generates energy for themselves and stores surplus. If the surplus is not needed, or the storage capacity is exhausted, the prosumer has a choice to sell it to another prosumer, or, alternatively, pay a local flexible asset (a diesel generator, for instance) to come offline and secure its space on the grid.
In Orkney, this idea has now materialised in the Local Energy Trading Market, developed as a part Project TraDER, which provides real-time trading to help renewable generators avoid being turned off by incentivising local flexible assets to absorb their excess power. The first stage of the project focuses on matching demand turn-up with local generation, while the second stage aims at enabling new markets. So far, the project has seen 1,300 trades concluded on its platform and there is no doubt the number will keep growing.
Ultimately, a combination of data collection, machine learning and smart contracts (i.e. auto-executing, based on distributed ledger technology) may allow a fully autonomous peer-to-peer or peer-to-grid energy trading network at microgrid level. This is explored more fully below.
Peer-to-peer prosumer contracts and disputes
How will new prosumer markets operating on online trading platforms reshape energy contract drafting and dispute resolution? A plethora of legal issues may arise in peer-to-peer microgrid trading, including technical issues in the microgrid; coding or security issues; or physical events causing supply outages.
For the system to run effectively, prosumers should have the option to resolve disputes quickly, easily, and cheaply. Appropriate systems need to be in place to deal with each type of claim, whether high or low value, and the prosumer involved, whether a business or consumer.
The UK’s consumer disputes landscape already includes services such as the Financial Ombudsman Service and digital initiatives like the Claims Portal. Neither is ideally suited “as is” for prosumer claims, but an online portal or digital app service could be fundamental for resolving low value individual prosumer claims within microgrid trading relationships. A nationwide portal for claims arising from peer-to-peer contracts would ensure disputes are automatically assigned to an appropriate reviewer, resolved by reference to an industry protocol, in a set time. Whilst microgrid trading is based on decentralisation, a centralised disputes service may be crucial for ensuring efficient organisation and fair outcomes.
Business-prosumer claims may not be suitable for such resolution. On-chain arbitration, within specific parameters, has been put forward as a potential solution. UK Jurisdiction Taskforce (UKJT)’s Digital Dispute Resolution Rules propose arbitration as an accessible and cheap solution for smart contract disputes. Multiple disputes arising from the same circumstances, or disputes involving multiple co-defendants can be consolidated, as well as those where both written and smart contract dispute resolution clauses are operative. Anonymity and finality granted by the legally binding nature of arbitral decisions are further advantages. The Rules specify a rapid procedure by default and allow for smooth claim commencement. The selection process of arbitrators could be further automated.
Risk allocation in peer-to-peer contracts
Digitalisation allows for data gathering on an increasingly granular scale. Contingencies however need to be accounted for. Prosumers reliant on microgrids may be left short where there are energy supply interruptions. This can cause catastrophic issues to businesses and individuals. Start-ups and new entrants also risk failure when attempting to join microgrids.
Insurance can mitigate such risks but it will need to be underpinned by sufficient data to allow claims to be quantified and appropriately indemnified. Technology can help to allocate risks between the buyer and seller and, if a microgrid is underpinned by automation, this allocation could even be self-executing. For example, if one user registers an increased need for power they could bear the risk of a power surge on their property once this is transferred.
Risk allocation should however fundamentally be dependent on the inherent risk each party holds. Every prosumer should ensure they have appropriate end-to-end systems in place to support the transfer of energy on the microgrid. This ensures fair cost sharing between those responsible for maintaining the electricity systems in place, as well as energy users not causing inherent risks through underinvestment in digital infrastructure in their homes or businesses. This can be mitigated through fair tariff setting or tax exemptions as explored below.
Rewarding balance in supply and demand
Whilst current peer-to-peer microgrid trials are based on trading excess electricity, a new model acting prospectively, underpinned by improved forecasting, would allow for capacity planning and generation of only the amount of electricity needed in each microgrid.
This could be structured, for example, on each prosumer’s forecasted need over the next four-month period. This system would be based on fair community consumption and would again need to be supported by datafication. Flexibility to divert energy away from one prosumer to another depending on real-time needs and to refund any excess tariffs paid prospectively should also be considered. Prosumers would need to register the amount of energy needed, and underlying technology in each household or business, such as the Internet of Things (to collect usage data) and Artificial Intelligence (to scrutinise the data), would help to analyse varying consumption and distribute energy accordingly. Such a system would be continually optimised as data is gathered and fed into any distribution algorithm.
Encouraging participants to “buy-in” to this kind of system could be achieved by tax relief or exemptions for those who upgrade their technology systems, feedback anonymised data for research purposes or remain within their energy production goals. Having systems in place which automatically stop energy production and switch to storage once caps are achieved would also assist. Recent peer-to-peer trading projects have successfully used monetary initiatives such as a reduction on building service charges. Whilst community impetus is important, government backing is essential, for example, France’s model for electricity production for self-consumption most recently gained EU State Aid support which helped to combat arguments of market competition being harmed.
Microgrids focused on balanced production, smart contract flexibility, and interoperable, resilient technical infrastructure assist in meeting the Paris Agreement goals. Innovation together with community and government investment, as well as an enabling regulatory and legal structure, will be needed to realise these changes.
Richard Power is co-facilitating an Energy hackathon with Clare Hatcher (Clyde & Co), The Chancery Lane Project and Latham & Watkins, which will focus on, among other things finding innovative solutions that could enable energy transition to Net Zero world. The first session will take place on 21 May at 13:00 GMT. If you are interested in participating, please sign up here: https://bit.ly/3bhlx2S