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Death spiral, transmission charges, and prosumers in the electricity market

Abstract

The presence of prosumers with distributed renewable energy has been viewed as an effective way of enhancing the power sector’s resilience. The current transmission charge is designed mainly to recover lumpy transmission investments and other routine costs. Thus, a decline in the reliance on the bulk power market owing to an increase in consumers becoming prosumers shifts transmission costs to traditional consumers, a situation known as a “death spiral”. This study examines how the presence of prosumers affects the transmission charge and market outcomes by explicitly considering their optimization problem in the market. A prosumer is formulated either as a price-taker or as a strategic entity, and is assumed to make his/her own decision on the amounts of consumption, dispatchable energy to produce, and energy to sell into or buy from the bulk energy market, subject to non-dispatchable renewable output. We refute the common belief, demonstrating that the transmission charge does not necessarily increase with the proportion of prosumers in the market. The bulk power market could benefit from lower power prices owing to the prosumers’ renewable production with low marginal costs. Strategic prosumers may cause the transmission charge to increase because they reduce their procurement from the bulk energy market. Therefore, our analysis contributes to the recent debate on transmission costs in the presence of prosumers.

Introduction

Electricity markets are undergoing a transformation. The increase of renewable production in an effort to mitigate climate change and pursue sustainability has led to significant changes and challenges in the design and operation of modern power markets. Smart meters and IT-related technologies, together with innovative business models, have led to a growing body of customers capable of producing renewable energy, including those behind meters. These customers have altered the conventional demand-side paradigm in energy production.

This major shift in the energy sector toward a more engaged and pliable demand-side involvement, although enhancing the sector’s resilience, has direct effects on the behavior and participation of various agents in the sector. Prosumers are capable of generating and consuming power, in contrast to conventional consumers or suppliers who participate in only one side of the market. The presence of prosumers is expected to have significant implications for the design and operation of future competitive power markets [1]. This transformation is also facilitated by legislation. For example, in the U.S., the state of California mandated that all new residential construction must be zero net energy (ZNE) by 2020 [2]. More recently, the electricity community has begun developing a platform that allows a distribution system operator to coordinate and align with prosumers, and an independent system operator at the transmission level to facilitate energy transactions.

The interactions between prosumers and the energy sector are enabled by the presence of aggregators. Aggregators collect and integrate the demand response and distributed energy resources at the distribution level, and then offer the aggregated energy bundle as a product to the wholesale market [3]. Examples include community choice aggregators, which are popular in California and other U.S. states. These aggregators operate renewable facilities over diverse households/facilities and geographical areas, thereby constituting a substantial distributed generation and energy management capability [4], [5]. This allows prosumers to participate in a wholesale power market through an aggregator. However, they can also participate locally using peer-to-peer (P2P) transactions not available to ordinary customers, owing to their duality as a producer and a consumer [6], [7]

An emerging issue that has received some attention is the fact that a decline in the reliance on the bulk power market by prosumers might shift transmission costs and other related costs to traditional consumers who rely on utilities procuring energy from the bulk energy market. In fact, Bushnell [8] argues that the increase in energy procurement costs (while the wholesale energy price has declined) by major utilities in California (e.g., Pacific Gas and Electric) is likely due to the recovery of fixed costs induced by the renewable capacity under the state’s ambitious renewable portfolio standard (RPS). The aforementioned situation describes a “death spiral”, in which consumers might self-sort to become prosumers. In this case, consumers who are unable to become prosumers bear an increasing transmission charge. This has been the subject of recent debate, and is considered an unintended consequence [9], [10]. This is corroborated by a 2018 survey of energy utility leaders indicating that more than 70% of respondents believed the death spiral to be a serious concern to the power industry in the U.S. [11].

This study examines the impact of prosumers’ presence on transmission charges and market outcomes. We extend the model of Hobbs [12] by explicitly considering the transmission network and the prosumers’ optimization problem in the market. For our analysis, we make the following assumptions: (i) While each prosumer might be relatively small in terms of size, with a limited ability to affect the bulk energy market, we assume that a large number of prosumers enter a contract with a single aggregator, who participates in the bulk energy market on their behalf. We therefore model the joint optimization of an aggregator and prosumers. In particular, the prosumers decide the amounts of consumption, dispatchable energy to produce, and energy to sell into or buy from the bulk energy market, subject to exogenous and non-dispatchable output from renewables. (ii) We vary the proportion of demand between prosumers and traditional consumers, while maintaining the same aggregated marginal benefit function to make the results comparable. In other words, if the prosumers were designated as conventional consumers, all the cases should lead to the same market outcomes. (iii) The transmission charge is endogenously determined in the model to cover the transmission owners’ investment, routine operations & maintenance costs, and other administrative costs. The level of transmission charge is affected by the proportion of prosumers in the market. (iv) We assume four levels of exogenous renewable outputs (i.e., 500, 1000, 1500, and 2000 MW). These levels are chosen to illustrate possible cases of prosumers from short (i.e., buy power) to long (i.e., sell power) positions in equilibrium. (v) Because prosumers are relatively new to the market, they might be subject to relatively less oversight, partly as a result of an underdeveloped regulatory framework to address their behavior. Therefore, we assume a prosumer is either a price-taker or a strategic entity, subject to non-dispatchable renewables.

The rest of the paper is organized as follows. Section 2 reviews the relevant literature and highlights our contribution. Section 3 formulates the simulation models. A numerical case study is presented in Section 4, while Section 5 discusses possible policy measures. Section 6 concludes the paper.

Section snippets

Existing literature

The effects of prosumers on the wholesale power market has received some attention in the literature. This is partly because prosumers are expected to play a crucial role in the future. Prosumers own distributed renewable energy resources, coupled with technologies that allow for P2P transactions or direct engagement in the bulk energy market through aggregators [13], [14], [15]. For example, Chen et al. [16] examine how a demand aggregator operating a conventional generator and a green energy

Simulation models

This section proceeds as follows. First, we introduce the optimization problem faced by each entity in the market, i.e., consumers, prosumers, producers, and the system operator. Second, we derive the Karush–Kuhn–Tucker (KKT) conditions associated with each variable in the optimization problems. Third, the collection of KKT conditions together with the condition for revenue adequacy defines a market equilibrium problem, which can then be solved using complementarity solvers such as PATH [35].1

Numerical case study

In this section, we discuss our results after describing the setup of the case study. In particular, Fig. 1, Fig. 2, Fig. 3, Fig. 4, Fig. 5 give the outcomes related to the perfect competition cases. Fig. 6, Fig. 7, Fig. 8 show the outcomes when prosumers are designated as strategic entities.

Policies to mitigate the death spiral

All policies aimed at mitigating the death spiral problem entail some form of wealth transfer. We consider a fiscal policy that charges a volumetric tax on consumers who, in a sense, “unsubscribe” from the main grid to become prosumers.13 This tax is applied to prosumers’ procurement from the wholesale market. The collected

Conclusion

The lumpiness of an investment, which incurs a type of nonconvex cost, has historically presented a great regulatory challenge for utilities in the power sector trying to recover their costs. The postage stamp approach, based on the share of demand or peak load, is commonly used by regional grid operators or ISOs to allocate transmission costs. An emerging entity, a prosumer who owns a set of renewable units, is likely to complicate this transmission cost allocation. While their presence

CRediT authorship contribution statement

Yihsu Chen: Conception and design of study, Material preparation, Data collection, Analysis, Writing – original draft. Makoto Tanaka: Conception and design of study, Material preparation, Data collection, Analysis, Writing – original draft. Ryuta Takashima: Conception and design of study, Material preparation, Data collection, Analysis, Writing – original draft.

Declaration of Competing Interest

The authors declare the following financial interests/personal relationships which may be considered as potential competing interests: Yihsu Chen reports financial support was provided by National Science Foundation.

Acknowledgments

The research is partially supported by a US National Science Foundation grant under the contract #1832683.

All authors approved the version of the manuscript to be published.

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© 2022 Elsevier Ltd. All rights reserved.

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By |2023-06-23T21:10:58+00:00June 23, 2023|Life and Health|0 Comments

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