Ofgem seeks to create world’s first distributed energy supermarket

Ofgem has announced plans to create the “world’s first distributed energy super marketplace” underpinned by a “common digital energy infrastructure”.

In its most extensive form, the regulator said this infrastructure could comprise a central platform for the end-to-end delivery of distributed flexibility.

Ofgem outlined the proposals in a new call for input, which described how issues around market access and coordination are preventing sources of distributed flexibility from providing, and being properly compensated for, their full value to the energy system.

The regulator drew a distinction between consumer energy resources owned by households and distributed energy resources owned by businesses. It said the call for input focuses on advancing the former as doing so would also advance the latter by proxy.

Ofgem said consumer energy resources have struggled to participate in flexibility markets, partly because these markets are based on legacy designs that have been adapted to accommodate them, rather being built with them in mind.

Given the magnitude of the challenges faced – dozens of products, hundreds of actors and millions of assets – and the scale of the benefits on offer, the regulator said there is a case of a “public interest intervention” in the form of a common digital energy infrastructure.

It identified three underlying market failures this solution would address:

• Imperfect and asymmetrical information – The inability to see the “whole picture” leads to inefficient decision-making, losing value for individual actors and the whole system. Buyers and sellers have insufficient visibility over their options. Consumers are unaware of both their potential value to the system and the costs they impose on it. Investors cannot build accurate and optimised business cases and regulators cannot effectively alleviate harms.
• Uncoordinated oligopsony markets – Flexibility markets are dominated by a small number of buyers, which operate them in siloes. There is a lack of harmonisation in terms of products, access and processes, making it difficult for sellers to compare their options and increasing transaction costs. A lack of coordination across products leads to inefficient and insecure decisions by buyers, who do not have the necessary primacy rules to identify and resolve conflicts. Exclusivity requirements prevent sellers from stacking revenues. These problems reduce liquidity and competition.
• Absence of trust – Without transparency, sellers don’t believe markets are being operated impartially, undermining their motivation to participate and further reducing liquidity and competition. Flexibility markets lack clear governance and oversight or an independent dispute resolution mechanism.

Ofgem has proposed three possible archetypes of a common digital energy infrastructure – thin, medium and thick:

Market directory (thin)

An open directory would help buyers and sellers of flexibility to understand the markets and assets available. Common data and communications would be established between all market participants.

Ofgem described this approach as thin on the basis there would be no common point of access to markets or governed coordination mechanism, meaning markets and participants would be “blind” to each other unless they took action themselves to establish bilateral data sharing agreements.

During the exploration stage, buyers would need to navigate individually to any appropriate market for which they meet the entry criteria and during the registration stage buyers would need to individually complete due diligence on sellers and their assets. Contracting would be market specific.

The competition, availability, dispatch, verification and settlement stages would all take place bilaterally between buyers and sellers.

Exchange (medium)

Markets would be visible on and coordinated through an exchange but would continue to retain their own designs, platforms and systems.

During the exploration stage, the exchange would provide a single point of truth for both buyers and sellers, which could access historic data on prices and asset performance. During the registration stage, the exchange could offer a common pre-qualification function as well as standardised contracts.

The competition, availability, dispatch, verification and settlement stages would all take place outside of the exchange, but ex-post data from these steps would be fed back.

Central platform (thick)

There would be a central platform for the end-to-end delivery of flexibility, encompassing all activities from exploration through to settlement across all markets.

During the exploration and registration stages, the platform would provide the same single source of truth and common participation processes and contracts as the exchange. However, the competition, availability, dispatch, verification and settlement stages would all take place on the platform itself.

As the platform would be clearing all markets, they could be fully co-optimised across all voltage levels for the whole energy system.

Cost and benefits

In its analysis of these different options, Ofgem said the central platform would offer major benefits in terms of the resolving the market failures concerning information, coordination and trust, particularly with regards to the latter two.

However, the regulator said this would also be complex, costly and time consuming, requiring substantial new infrastructure. It said this would also be reliant on external initiatives, with the full optimisation of markets requiring much greater visibility over low-voltage networks.

Although still challenging, Ofgem said an exchange would be easier to deliver, but would provide much of the benefits of a central platform. It said an exchange would also be easier to adapt and more conducive to innovation.

The regulator said the market directory would be much be simpler, quicker and cheaper to deliver than the other two options but would provide limited benefits in terms of resolving the market failures it is seeking to address.

Commenting on the proposals, Ofgem interim director of infrastructure and supply, Akshay Kaul, said: “Currently, energy markets are complicated, fragmented, and difficult to navigate, making it difficult for small assets like electric vehicles and heat pumps to join in, and putting off potential sellers and investors.

“We are setting out plans for how we can standardise and open markets – specifically by creating an ambitious vision for distributed flexibility involving a common ‘digital energy infrastructure’ which will allow more communities, businesses and organisations to buy and sell surplus renewable electricity and services when and where they need it. A single digital platform will allow users to access multiple markets transparently and simply.”

The deadline for responses to the consultation is 10 May.

The call for input was released alongside another consultation on proposals by the regulator to create a series of regional system planners to coordinate the development of local energy plans with councils and network operators.