Exploring the Local Energy Market Model in Retail 2.0 Stage 2
So far in this series, we've gone over why now is the time for innovation, the shortcomings of the status quo, and how startups can create the Stage 1 foundation for modern retail energy. Once Stage 1 has been completed and you've established at least one anchor tenant, it's critical to move into the second stage. In order to build Energy Retail 2.0, it will be necessary to enable self-aggregation and move toward a commercial local energy market (LEM) model.
Now that an anchor tenant is in place, there's the need to expand the reach. It's more cost-effective, and self-aggregation is critical for the second stage.
What Is Self-Aggregation?
Before understanding self-aggregation, let's first explore aggregation. It's a hot topic as it involves a group of people combining their buying power. It allows that group to choose an energy supplier for the entirety of that group. The purpose is to get the energy suppliers to bid competitively in order to provide the group with the lowest rate.
The problem with aggregation is the lack of control: the government is still the one choosing your energy supplier, not you. Citizens have a say in the process, but elected officials are the ones making the final decision.
Self-aggregation in the retail energy market means that you, as a retailer, are the one responsible for doing all of the aggregating.
The Benefits of Self-Aggregation
The most obvious benefit of self-aggregation is that you overcome the biggest con of traditional aggregation. You are able to decentralize, ensuring that you have freedom over who your energy supplier is (as opposed to being limited by the government). It ensures that you have access to the affordable, clean, local energy that you are after.
Another benefit of self-aggregation is that sites don't have to be located behind a single utility interconnect. Often, sites are able to be located on the same utility grid, ensuring that sites have access to more benefits than ever before.
While self-aggregation is not allowed in all energy markets, there are also regulatory frames that allow site aggregation to be used. This means that you don't have the ability to decentralize, but it would still provide you with the opportunity to financially optimize and reduce energy hedging.
How Stage 1 Tenants Will Expand Their Reach
Stage 1 tenants will need to expand their reach in order to be more successful within the local energy market. This means moving past that they anchor tenant model completed in Stage 1. The footprint of the LEM would need to be expanded. This also involves recruiting economically rational loads and distributed energy resources (DERs).
Recruiting economically rational loads have to do with renewable energy. When there are higher loads, the energy prices are lower. It all has to do with supply and demand. The utility industry can be just as volatile as any other industry. Within particular utility ecosystems, energy consumption can increase or decrease dramatically.
So, many utilities are turning to AI to predict energy consumption and, therefore, establish how the energy prices will be affected by the changes in energy consumption. When recruiting, it's important to explore the load volume and determine whether your alternative energy solution is economically rational.
But Don't Expand Before You're Ready
DERs need to be carefully examined, as well. These are electric generation units located within an electric distribution system, either at or near the end-user. These are often an alternative to the traditional electric power grid. Accessing these can provide clean energy while also ensuring that energy is reliable at all times. Should one form of energy be unavailable, DERs could step in to continue providing energy.
One of the main principles of the retail energy market is being customer-centric, so running out of power is not acceptable. To be successful, you have to look at how you're going to give the customers what they want. They want to choose an energy retailer that will provide them not only with clean energy but consistently available energy.
Too many retail markets have failed because they're not looking at all the angles. Any good business looks at ways to thrive no matter what. By taking the time to recruit economically rational loads and DERs, you have a backup plan. It ensures the energy is always there, regardless of what crisis may be going on within the city or even outside of your grid.
Where Renewable Energy Fits Into the Local Energy Market Model
As the Stage 1 tenants expand their reach, it is necessary to aggregate their other facilities into the stage of local energy markets. It helps translate the generation, storage, and flex of Stage 1 across more sites. This means more sites, more customers, and more people learning to achieve energy efficiency. It also encourages the use of renewable energy sources.
Within Retail 2.0, it's possible to help the cities and counties who have committed to achieving 100% renewable energy but need help overcoming some of the constant barriers. In order to help more people achieve their goals, you need to keep your eye on expansion. Before you can even think to expand, though, you need to make sure that you have the necessary steps in place. Otherwise, your effort to expand will be the reason you failed.
Understanding More About the LEM Retail 2.0 Model
There's a process involved with Retail 2.0. The local energy market model is not something you immediately leap into. It requires a foundation, and that's why Stage 1 is so important. Otherwise, you're jumping right into self-aggregation without first having a major player (a tenant) on board.
Stage 1 is what allows you to transition into Stage 2.
As you move into Stage 2 with the local energy market, you can use the existing owned facilities from Stage 1 to help you recruit local commercial businesses and service providers of the Stage 1 tenants.
Why would the tenant allow you to do that? They still make money, and it goes toward the common good of achieving 100% renewable energy. Additionally, the local commercial businesses and service providers benefit because they get access to affordable, clean, and local energy. It's a win-win for everyone — as long as you show everyone how the dots connect.
When you recruit local businesses and service providers, it also allows the commercial community to expand existing commercial relationships to include energy. It establishes a stronger commercial community. They may have already been benefiting from other utilities, including cable and telecommunications. Energy, up until now, is typically excluded from such commercial relationships because of the centralization and its ties to the government. Within this LEM retailer 2.0 model, you decentralize and show large corporations how they can leverage this benefit.
Walmart's Power Plan
Walmart is a perfect example of the Retail 2.0 model at its best.
They have an approach to renewable energy where they are looking to accelerate efficiency within their buildings and start to scale renewables. They've been using the PPA (Power Purchase Agreement) as an effective model to leverage their scale and buying power as a way to accelerate renewables. One day, they could end up selling renewable energy to consumers as a way to lower the costs. They are also looking at Green Power Purchases (GPPs) that serve the same role as DERs. GPPs don't have the same assurance that power comes from a renewable project. But they do offer access to the deregulated market.
In Texas, Walmart will be generating some of its own electricity. This includes building a new wind power facility. Then, the company can be more ambitious when it comes to using renewable energy and taking control of the electricity that they use.
There will always be large corporations that have supply chain requirements, including carbon and renewable requirements. Ensuring that a local energy market model is capable of being a part of the procurement process is vital. Involving large corporations into Stage 1 is a big part of this. After all, by showing the large corporations the benefits from the very beginning, it gets them on board. Then, they can use the retail model that has been established instead of rely on the standard, centralized energy solutions.
Moving Onto Stage 3
Stage 2 is an ongoing process of expansion involving self-aggregation. You also need to move to the final stage of development. Stage 3 involves taking the expansion found within the second stage into a full community market. The local community market ensures that it is the most economically efficient model and involves recruiting employees. Or, as in the example of Walmart, customers.
In the end, it all comes down to solving the problems found within the existing energy market. The reason Stage 2 is so vital is that it solves the problem of the government controlling the energy provider that we ultimately use. By decentralizing and choosing to self-aggregate, it makes it possible to take full control.
The key problem lies in the fact that decentralization and self-aggregation are not currently allowed in all areas. As such, there is also the need to push past political agendas in order to identify the benefits of a local energy market — and its success in various cities can help to highlight just how beneficial they are. Next week, I'll discuss what Stage 3 looks like.