Peer-to-peer (P2P) electricity trading is being promoted, to varying degrees, in both the EU and China. It allows individual citizens and businesses to produce and trade their own solar power (local, rooftop), while enabling the close-to-real-time balancing of supply and demand to maintain system stability. Helena Uhde at the ECECP gives an insight into the current status, implementation, regulations and policies in both regions. She cites two pilot case studies, one in Landau, Germany and one in Henan Province, China. The total number of pilots in either region is small, so there is a long way to go for P2P markets to become widespread. Different business models and market mechanisms must be tested in local communities to see which ones work best. Only when participants are sure that it saves money over the long term will this part of the transition puzzle be solved.

System flexibility is the key to overcoming challenges in the energy system by integrating more variable renewable energy resources, as explained in the EU-China Joint Statement Report ‘Integration of variable renewables in the energy system of the EU and China’. The authors of the report urge more discussion about the evolving role of distribution networks and local energy markets.^[1]

With the EU’s announcement that it is to become a climate-neutral continent by 2050, as well as President Xi Jinping’s aim for China to be carbon neutral by 2060, both economies have set ambitious climate targets that can only be achieved with a radical energy transition. According to scenario analyses by the IEA, China needs to increase the share of renewable energy sources in the total electricity generation mix from about 25% in 2020 to 40% in 2030 and 80% in 2060 if it is to achieve its carbon neutrality target.^[2] Photovoltaics alone are expected to cover almost 45% of the electricity generation mix in 2060, compared to 4% in 2020.

The EU is even more ambitious, announcing that it will raise its current renewables target from 32% to at least 40% of the EU’s total energy mix by 2030.^[3] Integration of these renewables will require fundamental changes to the current energy paradigms.

Close to real-time supply and demand balancing

The timeline and socio-technical structure of the power systems in China and the EU may differ, but common challenges are becoming apparent as the proportion of renewable energy resources rises. A fundamental challenge is the need for close to real-time, local signals on supply and demand to balance the system and maintain system reliability. A more active demand side is also needed to enable the necessary flexibility, for example in the form of ancillary markets and demand-response mechanisms.

One instrument for increasing flexibility is to expose the demand side of the electricity system to changing market prices, e.g., through so-called ‘peer-to-peer electricity markets’. In these, often locally constrained markets, consumers and small-scale generators can trade electricity with each other as equal ‘peers’. Other energy commodities, such as heat, cooling, and flexibility, can also be traded in P2P markets. These electricity markets enable consumers to participate actively in the market while creating new business models for small-scale electricity generators.

P2P electricity markets are often designed with two layers: a physical layer for transmission and a virtual layer for electricity trading, as depicted in Figure 1.

Energy Communities as the starting point for P2P markets in the EU

Unlike wholesale electricity markets, an important aspect of P2P markets is that consumers become market participants. With its 2019 Clean Energy Package for All Europeans, the EU introduced the legislative concept of ‘energy communities’, which defines the rights of consumers to participate in energy markets individually or as a community through generation, consumption, transfer or sale.^[4]

Two documents in the package are of particular importance: the revised Renewable Energy Directive [(EU) 2018/2001] and the revised Internal Electricity Market Directive [(EU) 2019/944]. The Renewable Energy Directive defines the role of renewable energy self-consumers and renewable energy communities and focuses on renewable energy. It further specifies that this role can be fulfilled by means of ‘renewables power purchase agreements, electricity suppliers and peer-to-peer trading arrangements’, among others.

The document stresses that renewable energy self-consumers and communities must not be placed at a disadvantage compared to large market players. The Internal Electricity Market Directive puts the emphasis on electricity, encouraging market participation either by individuals or citizen energy communities. These can provide flexibility services through demand response and storage. Now that the directives have been jointly adopted by the EU Parliament and Council, the EU Member States are obliged to incorporate the directives into their national legislation.

Implementation in the EU

There are many research and pilot projects relating to P2P electricity markets in the EU, although the exact number is difficult to establish, as they include not only EU-funded pilot projects, but also private initiatives. Under the European Commission initiative BRIDGE, Horizon 2020 funded projects in the area of smart grid, energy storage, energy islands and digitalisation are documented to foster an exchange of information between projects and develop best practice. A total of 90 projects (58 ongoing) are included in this initiative, only some of which are P2P electricity market projects. The BRIDGE 2021 brochure, which provides a comprehensive overview of the projects, deserves special mention.^[5]

On 20 April 2022, the Energy Communities Repository was launched.^[6] The project will support energy communities in the EU for 24 months and gather best practices. The repository will be implemented by a consortium consisting of Energy Cities, REScoop and FEDARENE. The Horizon 2020 project COME RES, for example, is supporting the development and testing of new business models for renewable energy cooperatives in nine EU Member States. As can be seen, the EU’s focus is on promoting citizens’ initiatives, of which P2P electricity markets are only one of many possibilities for community energy management. Different business models and market mechanisms are being tested in local communities.

Case study 1: The Landau Microgrid Project in Germany

One of the first implementations of a local P2P electricity market in Germany is the Landau Microgrid Project (LAMP), implemented by the Karlsruhe Institute of Technology (KIT) in cooperation with Energie Südwest AG, a local energy supplier, and software developer Selfbits GmbH.^[7]

In the pilot project, 20 households located in the Lazarettgarten in Landau, a city in south-west Germany, are enabled to trade locally generated renewable electricity among themselves. Trading on the platform takes place via automated software agents, in line with the participants’ price preferences. Participants gain insight into their electricity consumption and generation data, collected through blockchain-enabled smart meters and transmitted via mobile app. Market participants are provided with a smart meter and a mobile device so that they can use the app free of charge. If P2P market prices fall below the actual electricity tariff, market participants receive a credit on their electricity costs reflecting the savings made. If the P2P market prices rises higher than their actual electricity tariff, the energy supplier Energie Südwest AG covers the additional costs.^[8] The pilot project is an experiment that replicates the free market but builds in financial safeguards. However, it is worth noting that if exposed to the risk of actually losing money, the behaviour of market participants may well deviate from that observed in the pilot.

Market-based trading of distributed energy in China

While the term ‘P2P electricity markets’ is not used explicitly in Chinese regulations, policies issued by the National Energy Agency (NEA) and the National Development and Reform Commission (NDRC) between 2016 and 2019 reflect the concept.^[9] An overview of the policies is given in Table 2.

The first phase of policies (2016-2017) focused on market-based trading under the concept of the ‘energy internet’, i.e., the interconnection of the energy sector with the Internet, and the second phase of policies (2017-2019) focused on market-based integration of distributed energy resources.

In the ‘Outline of the pilot program for distributed electricity generation market trading’, issued by NEA in 2017, three mechanisms for the exchange of distributed energy were announced: direct trading, entrusted sales, and sales to grid. While the second option leaves it up to the grid operator to trade the electricity on behalf of the distributed energy generator and the third option basically represents selling electricity into the grid at a fixed tariff, the first ‘direct trading’ option leaves room for the design of different P2P market mechanisms. Distributed multi-bilateral trading is thus an option, in addition to a centrally controlled auction.

Implementation in China

In 2019, NDRC announced a list of 26 market pilots for distributed energy. The pilot projects are mainly located in provinces with a large share of distributed energy capacity, and about half of the pilot projects are located in ‘economic and technological development zones’ or industrial parks.^[10] Apart from the breakdown of the energy mix in the market, not much information is available on the pilot projects.

Case study 2: Hebi Distributed Trading Pilot (鹤壁分布式交易试点)

One of the 26 selected pilot projects is the Hebi Distributed Trading Project in the Baoshan Industrial Park in Hebi, Henan Province.^[11] The pilot project for market-based trading of distributed generation has been implemented by Beikong Clean Energy Group. By 2020, a total capacity of 220 MW of distributed energy capacity was planned, including 70 MW of distributed photovoltaic power plants, 150 MW of distributed wind farms and 30 MWh of supporting energy storage. Trading on the platform was to be carried out using the ‘direct trading’ method. Transaction settlement was to take place via the provincial electricity trading platform.

In this project, the market participants are distributed energy generators (sellers), and nearby electricity consumers (buyers). The solar and wind energy systems are distributed over a relatively large geographical area, on 15 pieces of previously unused land. The grid company controls the power flow and receives a wheeling fee for distributing the electricity generated. Unlike the European P2P electricity markets, which are centred around residential consumers, the consumers here are chemical and cement companies located in the industrial park.^[12] One could argue that this project should be called a business-to-business (B2B) market rather than a P2P market. Against this, however, it is worth bearing in mind that electricity trading is not the core business of the industrial consumers taking part.

Barriers to implementation in China

Apart from the 26 pilot projects that have been announced, start-ups are struggling to implement the concept in practice. One Chinese company with a lot of potential was Energo Labs, a Shanghai-based startup largely focused on south-east Asia that built blockchain-based platforms for P2P, machine-to-machine, and vehicle-to-microgrid trading. One of the company’s projects was the De La Salle University campus microgrid project in Manila, Philippines.^[13] In this blockchain-based P2P electricity market project, electricity was traded between university buildings.

However, due to the small number of market participants (two buildings), trading was not particularly effective. Today, the Energo Labs website is no longer accessible, social media accounts have not been updated since 2018 and there are no reports on new projects. A former employee tells us that projects in China only reached the planning stages, but did not get as far as implementation. ‘First, there is a lack of regulations for new models. Current regulations cannot keep up with and may even hinder the use of new technologies such as AI, blockchain, behind-the-meter energy balancing, etc. Secondly, the regulatory environment is extremely complex. In order to get approvals for pilot projects or the introduction of new technologies and business models, many hurdles have to be overcome.’

Besides regulatory barriers, finding an economically feasible business model for P2P electricity markets in China is also difficult. Electricity is heavily subsidised, resulting in very low tariffs for private consumers. Moreover, the density of high-rise buildings in cities leaves hardly any space for renewable installations.

One feasible application area could be the trading of renewable energy between commercial and industrial consumers in industrial parks. As reports of the initial phase of China’s green power trading pilot have shown, companies were willing to pay a premium of 8%-13% over the price of coal power for green electricity.^[14] This could be of interest, for example, to multinational companies that want to decarbonise their supply chain. There may be other services for which consumers would be willing to pay more. For example, P2P electricity markets may be able to ensure energy reliability for particularly critical processes or priority charging for electric vehicles. Creativity is needed to find the right target group and a suitable business model for P2P electricity markets in China.

Outlook

P2P electricity markets are a means of consumer empowerment, local integration of distributed energy resources and creation of flexibility via time-varying electricity prices. These concepts are being tested and new business models developed in pilot projects around the world. However, are P2P electricity markets the model of the future for organising electricity distribution at a local level? So far, the scale-up of P2P electricity markets has been difficult due to regulatory barriers and the market power of utilities and grid operators.

Local balancing still poses difficulties, and questions of coordination between network operators and P2P market project developers also need to be clarified. Additionally, although decentralised organisation lowers the risk in many areas, if new infrastructure is being built, the risk for investors increases: market participants need to see the merits of the idea in the first place, and then stick with it in the long term. The future will show whether the P2P electricity markets model will prevail when the pilot projects are over.

***

Helena Uhde is a Junior Postgraduate Fellow at the EU-China Energy Cooperation Platform

This article was first published in the EU-China Energy Magazine – April Issue, available in English and Chinese, and is published here with permission

 

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