Designing grid tariffs and local electricity markets for peak demand reduction in distribution grids

Abstract

The decarbonization of the power system is envisioned to be a key part of European Union’s goal to be climate neutral by 2050. By shifting from large fossil fuel generation to climate-friendly renewable energy sources, such as wind and solar, electricity can serve as a green energy carrier, facilitating the electrification of the heat, transport, and industrial sector. This development requires significant investments in costly grid construction. Some of these costly upgrades can be postponed or avoided by efficiently integration consumers by unlocking demand side flexibility. Shifting power system flexibility that has traditionally been on the supply side, to the demand side, requires new market design and price signals which incentivizes flexible response. Under more sophisticated price signals, distributed energy resources can provide services to the grid, such as peak demand reduction. Existing research focuses primarily on centralized control of distributed energy resources for planning and operation of distribution grids, but there is an increasing need for research on developments on the consumer side, especially related to multi-stakeholder environments and design of efficient price signals that achieves the sought development of reduced peak demand in distribution grids. In addition, local electricity markets may provide alternative coordination mechanisms to centralized control, that are more in line with current regulation. A change towards more cost reflective grid tariffs is hence of increasing interest, not only because existing research has pointed out the inadequacy of the current grid tariffs designs, but also because they are fairer and avoid unintended cross-subsidization between consumer groups. This thesis investigates the design of grid tariffs and local electricity markets, focusing on their capabilities of reducing peak demand in distribution grids. Using energy system analysis, the conclusions presented in this thesis are mainly drawn by analyzing the results from energy system optimization models. Policy implications with analyses on socio-economic aspects are also significant part of this work, with analyses focusing on the trade-offs between cost reflectivity and fairness. Hence, the thesis also provides some interdisciplinary insights, containing analyses and advice for policy makers and regulators. The overarching contributions of this thesis are the extensive comparisons of grid tariff designs and their capability of reducing the peak demand. In addition, a comprehensive overview of the potential role of local electricity markets are provided, and further investigated as a framework for enabling coordination mechanism that tackle demand coincidence factor-related challenges. Following the contributions from each research article, a broader discussion on the future role of grid tariffs and local electricity is conducted, focusing on the policy implications. The findings of this thesis imply that grid tariffs should be redesigned to support the decarbonization-by-electrification trend. Grid tariff design should not be limited to specific cost components, but rather focus on the design parameters described in this thesis, such as peak basis and ex ante versus ex post peak rate period setting. Further, grid tariffs can be designed to impact the peak demand on different grid levels, which should be considered by the distribution system operator in the choice of tariff scheme. Albeit less efficient on higher grid levels, capacity subscription tariffs prove relatively efficient and cost reflective on multiple grid levels, without creating new peak loads when subject to load shifting. In addition, capacity subscription tariffs can be combined with coordination from capacity trading in local electricity markets to increase its efficiency and deal with the coincidence factor challenge of price signal design. Lastly, capacity subscription tariffs provide stable cost recovery, are fairer than volumetric flat tariffs, and the optimal subscription level can be found using methods suggested in this thesis.