By Dr Madeleine Morris and Dr Jeff Hardy
In July, we launched the second working paper of our Policy & Regulatory Landscape Review Series, this one focusing on digital energy platforms. We held both internal and external webinars with Q&A sessions, where we got more questions than we had time to answer. You can find the recording of our external webinar on the EnergyREV outputs page. As an emerging concept, the topic of digital energy platforms is hugely exciting, so we wanted to keep to conversation going. We’ve gathered the most asked questions and provide some responses in this blog. We don’t have all the answers – no-one does in this rapidly changing environment – so where we haven’t covered something in our report, we’ve pointed you in the direction of some of the leading thinkers in the area.
Learning from other sectors and countries
Quite a few of the questions arose from the fact the energy is lagging when it comes to integration of digital platforms. Our webinar audience were quick to point out that this could be a great opportunity to learn some dos and don’ts that will help accelerate the progress of digital energy platforms.
What are other countries doing to enable digital energy platforms? Both in terms of technology and business models, digital energy platforms are still emerging globally so they are yet to be fully integrated into any country's energy sector. Policy & regulatory landscapes in some countries may, however, be more supportive of digital energy platforms. Estonia, for example, has recognised data access as a key enabler for unlocking innovation in energy markets (see Section 5 of our report for more on data). Estonia completed its smart meter rollout in 2017, and its transmission system operator is pioneering a series of pilots to demonstrate the value of data access across Europe.
How about digital platforms in other sectors? The energy sector should certainly look to other areas of the economy, where the rise of digital platforms has been swifter, to find keys to success. Platforms such as those in ride-hailing and holiday accommodation put customers at the heart of their business models, identifying what motivates them, what they value, what they were lacking from previous incumbents and, crucially, the heterogeneity that exists across these characteristics. Lessons can be learned on good practice in building trust by baking transparency into the model; ride-hailing platforms, for example, introduced user profiles and the ability to track each ride, and price transparency has become a staple of digital platforms across the economy. Lessons can of course also be learned from mistakes already made which have undermined consumer trust by failing to implement robust consumer protection measures. We cover this in more detail in Section 2 of our report.
We focused a lot on data in our report (see Section 5), and there were a lot of great questions that were thrown up.
How do you incentivise data sharing? Data is an extremely valuable commodity – even considered a currency by some – so companies in other sectors have shown reluctance to make their data open and accessible. A crucial point to note is that energy is an essential service; system and consumer protection is paramount. The Energy Data Taskforce are clear that a core focus of the sector should be recognising that a shift to a system where data is 'presumed open' will result in improvements in efficiency, competition and innovation across the board, as well as a more secure and resilient system. The Data Bridge Alliance (led by Estonia's TSO) has stated the value of easier access to smart meter data, for example, would come from cost savings, accelerated innovation and improved competition. Digital energy platforms, such as those involved in the PFER projects, are in a great position to generate evidence that demonstrates this principle. As emphasised by panellist Dinker Bhardwaj in our webinar, it is vital that insights are shared with government, the regulator and industry, so that decisions made about how and whether to regulate platforms in the future are well-informed.
How do you balance openness of data with consumer protection? This is an extremely important question. The Taskforce's recommendation of a 'presumed open' system applies only to system-level data, which couldn’t be used to indentify individuals. Household-level data, which many digital platforms will not only use but generate, is much more sensitive, so any company accessing this level of data (e.g. smart meter data) must ensure that consumer rights or protection are not compromised. The Data Bridge Alliance project is working on the principle that people should be in control of their own data, choosing to share it (or not) with any service they wish. Again, it is vital that insights and evidence on best practice and ways of working are shared across industry, and with government and the regulator to ensure progress is quick and consumer (or system) detriment is avoided.
The value and use of energy data is likely to extend beyond the traditional boundaries of the energy sector (see Section 6.3 of the report for more on this). How this cross-vector and cross-sector data use is governed in the future – and by whom – is still an open question. Should responsibility remain with an existing agency, such as the energy regulator? Or, in light of the changing landscape of the economy, are new agencies required? Section 7 of our report looks at the changing roles and responsibilities of energy actors. IGov, a project that was based at the University of Exeter, produced some excellent thinking on this, which is being continued by the Energy Policy Group.
For more discussion on energy data, BEAMA and Foot Anstey will shortly be launching a webinar series which we will be participating in.
Markets and value
Why will new markets need to be cross-vector and cross-sector? The traditional boundaries between different parts of the energy sector – like heat, electricity, and transport – are becoming blurred as the landscape changes. Boundaries between energy and other areas of the economy are also diminishing as traditionally non-energy companies move into the sector, and as energy demand becomes an increasingly important component of operations and business models. We cover the need for emerging and future markets that can manage and realise the potential value these cross-vector and cross-sector interactions in Section 6.3 of our report.
Does the necessity for value stacking across markets stem from the current regulatory systems? Essentially, yes. The sector is sliced up into different markets, and there are rules that determine what and who can participate in each, and how they can earn revenue. The nature of some assets (e.g. batteries) means that they could bring value to multiple markets and, rather, than relying on one revenue stream, will develop a few. Since these assets could provide flexibility services in a number of ways, they could be very valueable to a system which must become increasingly responsive, but the current regulatory regime means that often, the maximum value is not being reached because value stacking is, to varying extents, blocked. We cover issues with market access and arrangements in our report on digital energy platforms (Section 6), and also in our first working paper in relation to electricity storage specifically.
How do you see the costs of DEPs being recovered from a price control point of view? It is a live issue as the DNOs are currently putting together their business plans for the RIIO-ED2 price control. Ofgem has required the DNOs to produce a DSO strategy in the recently published Sector-Specific Methodology Consultation. In part, this will require the DNOs to split out the additional costs for DSO functions, like the costs of ICT to operate, or participate in energy platforms. DNOs are already using third-party platforms to procure grid services, like flexibility, as well. In this case, the DNO will recovers the ‘costs’ of energy services through the price control, as usual, so for example, if the services defer network investment, it will show up a lower than expected cost of grid reinforcement, which benefits the DNO and customers. (Note: This is a pretty simplistic answer as price controls get complicated quickly!).
Who should operate digital energy platforms?
We had several questions about who will be leading (or winning the race to lead) the development of digital energy platforms.
The focus of these questions was whether Transmission System Operators, Distribution System Operators, or third parties could/should/will lead. We discussed this issue in Section 7 of our report, under roles and responsibilities. Ultimately we are sitting on the fence on this issue because the future is uncertain. What we do allude to is the implications where one party leads, where we draw from the Energy Networks Association Open Network project on Future Worlds. What this work shows is that roles and responsibilities change depending on who, for example, is operating flexibility markets in which distributed energy resources and domestic customers are engaging. For example, it could be the Electricity System Operator (ESO) reaching into local distribution networks, reducing the current role of the Distribution Network Operator. Conversely, the Distribution System Operator could take on more responsibilities and provide flexibility services to the ESO, diminishing some current ESO functions. It might also be a new, independent flexibility platform, which will need to integrate with the ESO and DSO and could take on some of their functions. So, it matters in terms of who does what in the future.
We also had question was on whether the review offered a sense of scale for digital energy markets (for example national vs. local vs. individual home/business scale)? We don’t directly address this in report, although what we say in the answer above about the ESO/DSO boundary is relevant to this. If for example DSOs create and facitate local flexibility markets, then this is creating a local market for energy services. We should also mention that another strand of work in EnergyREV is “Market Design for Scaling Up Local Clean Energy Systems” which is exploring how local and system-level energy markets can be designed to successfully integrate smart local energy systems at the national scale. The team, led by Thomas Morstyn and Cameron Hepburn, has recently published relevant papers on how network constraints and uncertainty can be managed within decentralised peer-to-peer energy trading platforms and how distribution system operators can incorporate local flexibility into network investment decisions. The project is currently investigating a new capacity market design for jointly allocating generation and network investment, which is a key step towards properly valuing the distributed nature of smart local energy systems.
Will digital energy platforms be fair?
There were several questions around this issue. For example, whether benefits will accrue only to “able-to-pay” consumers or to traditional energy sector players, like energy networks or energy suppliers. In part, this forms the basis of our fifth conclusion in the report:
“…without consideration of inclusion in their design that digital energy platforms could exacerbate existing fairness and distributional issues and may cause new vulnerabilities to emerge.”
Whilst we don’t delve further into this in the report, we are looking into the issue more broadly in EnergyREV. Our colleagues, Stephen Knox, Matt Hannon and Fraser Stewart at the University of Strathclyde are currently finishing a paper on Energy Justice. You can view a presentation on the preliminary findings at this link. EnergyREV, led by Rebecca Ford and Rachel Bray, are also starting research into the co-benefits of smart local energy systems. Both will touch on this important issue.
Consumer protection and principles-based regulation
In the report, one of our conclusions is that Ofgem looks to explore principles-based regulation (PBR) as an approach to regulating digital energy platforms. There were two themes of questions around this.
First, will consumers be adequately protected under a PBR regime? A good question and not something we discussed in the report. Jeff raised a similar conclusion in his recent paper on consumer-centric business models, in that new business models could target and exploit customers. Jeff, in a Redesigning Regulation report led by Laura Sandys, also raised this point. Paraphrasing the conclusion, in a more principles-based market, the regulator will need to be good at analysing the behaviours of energy businesses and have a large hammer (of regulation) to bring down on ‘bad’ practice.
Second, whether the risks PBR transfers from the regulator to businesses are those that they can manage? Also a good question, and again we didn’t discuss this in the report. It was something we discussed in the Redesigning Regulation report, though. Paraphrasing once again, businesses are great at managing the risks they can manage. So to my (Jeff’s) mind, that is the balance to be struck – the risk should sit with whoever can best manage it.
We had questions on the extent to which domestic customers will be active on digital energy platforms. If so, will they be taking on formal energy responsibilities, like being balancing responsible parties?
In Section 7.2 of the report, we talk about the role of consumers. They are both owners of important energy system data (like smart meter data) and (potentially) providers of energy system services (like flexibility services). In many cases, consumers will be providing such services through intermediaries, like aggregators or suppliers. However, should consumers choose to engage directly in markets, are they taking on a new role? A good question!
We have no definitive answers, although European Law appears to offer some insight here. ‘Active Consumers’ are defined in Article 2(6) the European Commission Electricity Directive as: “a customer or a group of jointly acting customers who consume, store or sell electricity generated on their premises, including through aggregators, or participate in demand response or energy efficiency schemes provided that these activities do not constitute their primary commercial or professional activity.” This seems to indicate that if trading flexibility services is a sideline or hobby for a domestic consumer, then likely they don’t need a licence or become a party to industry codes. (Caveat, please take proper legal advice on this!).
 Lavrijssen, S. and Parra, A. C. (2017) ‘Radical prosumer innovations in the electricity sector and the impact on prosumer regulation’, Sustainability (Switzerland). Multidisciplinary Digital Publishing Institute, 9(7), p. 1207. doi: 10.3390/su9071207.