European Energy Prosumers

Jan. 23, 2017
Europe has moved beyond the early deployment of distributed generation, with a growing number of consumers producing electricity for their own needs.

With decarbonization and decentralization, the power sector is undergoing one of the most profound changes in its history. While an increasing share of energy sources are decentralized, such as onshore wind or photovoltaic panels on the horooftops of houses, new technology allows for new types of customers to emerge, and they are generally more aware and demanding, more active and engaged. Twenty years after the First Energy Package, the upcoming review of the EU electricity market design legislation is a unique opportunity to set future-proof principles for prosumers.

Europe has moved beyond the early deployment of distributed generation, with a growing number of consumers producing electricity for their own needs and selling their excess electricity to the market or to other consumers. For prosumers to do so in the most efficient way, a cost-effective market-based regulatory framework that empowers prosumers to participate in the market and ensures that costs are not unduly shifted to other consumers is needed.

In countries where market liberalization has been completed, consumers can select a service provider to produce part of their electricity themselves. While they generate and consume their own electricity, most prosumers remain connected to the power grid, which guarantees them a continuous supply of electricity by providing backup power when their photovoltaic panels and storage device are not sufficient to meet their demand. Prosumers have become a building block for the energy transition; they can contribute to a more sustainable power system while gaining increased control over their energy uses. Via smart grids, prosumers can send their electricity back to the grid, charge the battery of their electric vehicles, help integrate larger shares of variable renewable energy sources in the grid, and — by providing decentralized flexibility resources — contribute to avoiding costly network reinforcement.

However, prosumers will only be able to participate in electricity markets on a level playing field with other assets if smart grids are coupled with a timely roll out of smart meters. Indeed adequate metering data, with granular enough reading intervals, is another enabler for prosumers to become more active. Moreover, via smart meters, they can choose among a wider variety of services that energy companies could offer, for instance, taking care of balancing responsibilities on their behalf. The Council of European Energy Regulators recommended that member states abandon non-market-based net metering solutions, which allow meters to go backwards when electricity is self-generated. Net-metering reduces consumers’ sensitivity to energy prices and allows them to shift their consumption when the price is significantly different. Instead, smart metering and smart grids make it possible to measure the injection and consumption of electricity separately and frequently enough to base the pricing of excess electricity on the varying wholesale prices and to incentivize customers to respond.

Beyond these innovations, the current signals for prosumers to invest and operate their own generation or storage assets need to be clarified to prevent unnecessary distortions to the overall energy system. In many countries, the electricity bill is used to recover regulated costs, such as network costs and policy- support costs related to the ongoing efforts to decarbonize the energy system and to bring more renewables on board. European households pay 36% of their bill to cover for taxes and policy-support costs, 27% for network charges and only 37% for the electricity supply. As these costs are often charged in euros/ kWh, when prosumers self-consume 1 kWh of their own electricity, they contribute much less to these “system” costs, which are, therefore, partially shifted to the other consumers.

This will require additional analysis on the way network tariffs are designed because they should reflect the value of the network to all those connected to ensure a fair contribution of all consumers. The recovery of the fixed costs of building, operating and maintaining networks should be well articulated. One possible way to improve the situation could be to evolve toward more capacity-based network tariffs to ensure that consumers as well as prosumers connected to the network pay for the grid they use. Regarding the policy-support costs, member states should seek ways to free the electricity bill from the disproportionate levies that burden electricity consumers but also ensure that the way they are charged does not give artificial investment signals that result in a massive shift of costs to other consumers. For example, policy-support costs could be charged with a mix of euros/kW and euros/kWh, depending on consumers or prosumers’ consumption volumes and patterns.

Finally, to better integrate final consumers into the system, retailers should be able to develop innovative products such as retail offers linked to wholesale market prices fluctuations (dynamic pricing) that give signals for shifting consumption. A more dynamic approach to network tariffs, to reflect the situation in the grid, also should be further investigated.

To allow the energy revolution to happen in the most costefficient way, consumers, energy companies and policy-makers must help design a regulatory framework that is adapted to the needs of the moment but also to the challenges ahead.

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