Two sides of the same power market

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Australia has hit a notable energy milestone: one in four homes now has rooftop solar panels, more than anywhere else in the world. It also has a notable energy problem: one in four homes now has rooftop solar panels.

Electricity networks require an instantaneous balance of supply and demand. Historically, at least, networks have provided this by adding supply as demand increased. The equation was inherently one-sided. Any asset capable of adding or reducing supply communicated directly with the market operator. There may have been dozens, even hundreds, of power plants in any given network, all interacting in concert to match supply and demand.

Rooftop solar and distributed energy storage changes that equation in a handful of chaos-inducing ways. First, solar on homes adds tens or hundreds of thousands of new (albeit tiny) power generators to the electricity network. Second, those systems turn consumers into producers, pushing electrons back onto the grid when supply exceeds their own personal demands. Third, the market operator has very limited communication with or control over those producers. The market doesn't so much interact with rooftop solar (or batteries and electric vehicles) as it does react—by absorbing power when there's excess generation and covering shortfalls when distributed generation falls away.

A market operator can handle that reaction-only relationship at low penetrations of solar, batteries, and electric vehicles. But Australia is now well past that. Its power market today is increasingly unable to do what it needs to in order to operate properly. "Rooftop solar has reached such a high penetration in Australia that it is untenable for networks to maintain a stable grid and power market with only limited input from power loads or battery owners," says Will Edmonds, a Sydney-based analyst for BloombergNEF.

Harnessing these distributed energy resources may provide solutions to the very problems they create. As the Australian Energy Market Operator sees it, things will have to become two-sided. The first step in creating a two-sided market is aggregation of many small distributed generation and storage assets under the control of one entity. This aggregation, in essence, creates a virtual power plant, a single point of contact controlling a significant amount of capacity.

Virtual power plants are not new, and they exist in Australia and in many other power markets. In Australia's case, virtual power plants are still limited in capability thanks to regulation. If operated by the owners of electricity networks, they can't provide services to companies that sell electricity; if operated by retailers who sell electricity, they can't provide services to the network owners.

This is why those in charge of Australia's electricity system are so keen on creating two-sided markets, with the network owners and retailers being equally able to provide services wherever they're needed most and to whomever will value them most. This aggregation will hopefully allow for much greater operational flexibility in the near term. Equally important, though, is that it will allow for greater understanding of the long-term implications of even more distributed power generation. The list of objectives for Australia's first two-sided market, dubbed Project EDGE, includes determining different ways to consider the limits of networks, achieving a deeper understanding of the roles and responsibilities that market participants can play.

Crucially, the pilot should also "demonstrate how to facilitate standardized, scalable and competitive trade of local network services"—in other words, making sure people benefit from participating. Those benefits could take any number of forms, from payments for not generating electricity at times of peak supply to providing stored electrons from a battery when demand exceeds supply, or even delivering excess power for free when supply outruns demand.

Australia has it right, I think: markets indeed require standards if they are going to scale; they need scale if they are to be competitive; they need competition if they are to trade; and they need trade in order to provide services. If the trial is successful, it could prove two things. First, power users can play a vital role in stabilizing the decentralized grids of the future. Second, they can make money doing it, with all of the actual work done by the aggregator on the behalf of the user.

As more users sign up, the balance of power in the electricity market is gradually shifting away from large, dirty power plants. In their place are millions of properly rewarded buyers and sellers, plus a better-functioning electricity system.

Nathaniel Bullard is a BloombergNEF analyst who writes the Sparklines newsletter about the global transition to renewable energy.

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