Download PDF Summer Bridge on Engineering the Energy Transition June 26, 2023 Volume 53 Issue 2 This issue explores the energy transition needed to address the mounting threats of climate change. The articles are an excellent resource to help inform meaningful decisions and steps for energy-related contributions to reduce carbon emissions. Peer-to-Peer Trading in Support of Decarbonizing the Electricity Sector Wednesday, June 7, 2023 Author: Wayes Tushar, Chau Yuen, Tapan K. Saha, and H. Vincent Poor Peer-to-peer trading benefits the grid through reductions in peak demand, reserve requirements, and operating costs as well as improved reliability. Electricity generation is the largest source of carbon dioxide (CO2) production, contributing about 40 percent of global energy-related emissions (Luderer et al. 2019). But the electricity sector has the potential to reduce CO2 generation by electrifying the building, industry, and transport sectors—most of which now depend on fossil fuels—and providing electricity from renewable energy sources.[1] In this article we describe the prospects and benefits of peer-to-peer trading to help decarbonize the electricity sector. Introduction An initiative for decarbonizing the electricity sector that is gaining momentum involves engaging prosumers—electricity consumers who also have production capabilities (Tushar et al. 2020)—with distributed energy resources (DERs). Using prosumers’ resources at the edge of the grid—the point in the electricity network at which electricity users are connected—to decarbonize the electricity sector will necessitate prosumers’ seamless and active participation in market management and sharing (Peck and Wagman 2017). At present, such participation is mostly passive: prosumers sell their excess energy to the grid through feed-in tariff schemes at a price set by the utility. This is not a sustainable model for prosumers’ active participation in the energy market because of limited monetary benefit and lack of independence in managing resources (Tushar et al. 2018). Furthermore, in some places there is a restriction on prosumers’ DER exports to the grid, reducing the potential benefits to the prosumer. Energy management through P2P trading enables prosumers to fulfill energy-related objectives in a distribution network by sharing resources. Decarbonizing the electricity sector through prosumers’ active participation requires innovations in how prosumers interact with the grid and make decisions about sharing their resources with other stakeholders, such as electricity consumers and retailers in the network. One emerging market mechanism that has proven its capability to encourage electricity sharing is peer-to-peer (P2P) trading (Cui et al. 2019). P2P trading is an energy management technique that enables prosumers in a distribution network to share resources and information with one another and other stakeholders to fulfill various energy-related objectives, such as decarbonization of the electricity sector and electricity cost reduction. Energy resources that can be shared through P2P trading include electricity from solar generation (Chen et al. 2021), negawatts (Tushar et al. 2020), and battery capacity (He et al. 2021). The more such sharing is enabled in the electricity network, the less reliance on fossil fuel–based electricity. For these reasons, efforts in P2P research and development have been extensive (for details on P2P trading, see Azim et al. 2021c; Tushar et al. 2021a). The Fundamentals of P2P Trading P2P trading, as a form of transactive energy (Shahidehpour et al. 2020), provides a platform for prosumers to use economic and control mechanisms for sharing their energy resources and flexibility services in a local electricity market. With this arrangement, (i) prosumers can reap substantial revenue compared to existing feed-in tariff schemes (Tushar et al. 2021) and (ii) the grid can benefit from reductions in peak demand (Kanakadhurga and Prabaharan 2021), reserve requirements (Andoni et al. 2019), and operating costs (Mengelkamp et al. 2018) as well as improved reliability (Morstyn et al. 2018). Layers of the P2P Network Structure The P2P network structure needs two interactive layers: virtual and physical (figure 1).[2] The virtual layer, built on a secure information system, handles the exchange of information and negotiations to buy and sell orders among the participating prosumers (or peers), who all have access to the virtual layer. The physical layer handles the transfer of electricity and may be either a dedicated physical structure to facilitate P2P sharing in a locality or a traditional distribution network provided and maintained by an independent system operator. Types of P2P Markets P2P markets can be categorized as coordinated, decentralized, community, and retailer-enabled. In all of these forms, a constraint on the underlying distribution is that the export and import of power cannot violate the network’s statutory (operational) limits. Negotiations between P2P peers follow different market rules depending on the roles of various stakeholders and their approaches to coordination and communication. In a coordinated market, a centralized entity or co-ordinator is responsible for the trading and communication between peers in the network and directly controls their export and import limits for P2P sharing (Tushar et al. 2021a). The peers influence the market outcome by independently deciding energy and price before allowing the centralized entity to control the export and import of energy. This arrangement can improve the social welfare impacts of P2P sharing (Zhou et al. 2020) if the coordinator sets the export and import limits of each participant for that purpose. However, if the number of participants becomes very large, the computational burden can become unmanageable (Papadaskalopoulos and Strbac 2013).[3] In a decentralized market, participating prosumers decide on their energy trading parameters and share the resources among themselves without a centralized coordinator. As prosumers are in full control of their decisions about energy sharing, their privacy is preserved. The scalability of decentralized P2P markets is remarkable, but it is challenging to maintain the same efficiency as the coordinated market and these markets have poorer social welfare outcomes compared to co-ordinated markets. This is because in a decentralized market, prosumers are interested in maximizing their own benefits, which does not necessarily maximize social welfare outcomes. Examples of decentralized P2P markets are discussed in Sorin et al. (2019). In a community market (Moret and Pinson 2019), resource sharing among the participants is handled by a community manager, without directly controlling prosumers’ resource exports and imports. With very limited information exchange between the community manager and participants, a community-based market ensures a very high level of prosumer privacy and enables prosumers to maintain their autonomy in decision making. In a retailer-based P2P market (Tushar et al. 2021b), peer participation follows the same framework as in the decentral-ized market, but a retailer can facilitate prosumers’ sharing with available resources to participate in either the spot or retail market by expediting the bidding of surplus energy in prosumers’ batteries. Both prosumers and retailers can improve their revenues compared to coordinated, decentralized, and community markets. These P2P market structures enable prosumers to share their resources in a local electricity network and contribute to decarbonizing the electricity sector. But their contributions toward decarbonization may vary depending on what type of resources they share. Types of P2P Resource Sharing Since 2017 the feasibility of P2P trading and its benefits for electricity customers have been demonstrated extensively through pilot projects and scientific research. Based on state-of-the-art P2P trading, three types of electricity resources can be shared in a local electricity network by prosumers with DERs. Electricity In P2P electricity trading, locally generated electricity—predominantly from rooftop solar (photovoltaics, PV)—is shared in a community, reducing consumption of electricity from fossil fuel–driven generators. This approach facilitates decarbonization at cheaper rates and lowers electricity bills for both prosumers and consumers (without DERs). The need for fossil fuel–driven electricity can be substantially reduced by allowing consumers to manage their energy consumption through negawatt trading. A P2P trial in Western Australia shows how P2P electricity trading can help a community to achieve decarbonization. In the city of East Village at Knutsford near Fremantle, Powerledger (2022) has successfully set up a RENeW Nexus project to enable 40 residential houses to share their electricity via P2P trading.[4] The participating properties rely on fossil fuel–driven generators for only 32 percent of their total electricity demand; they meet the remaining 68 percent of demand through P2P trading of renewable energy and thus contribute to decarbonization. P2P trial projects in Asia, Europe, and the United States similarly demonstrate decarbonization via P2P electricity trading (Tushar et al. 2021a). Negawatts Negawatts are negative watts, the amount of power that a prosumer can save through efficient consumption. In the P2P exchange of negawatts, a prosumer negotiates with peers to decide on a price to reduce its demand by alleviating energy consumption and then trades that demand with peers to maintain a fairly steady demand level among customers in the community. Negawatt trading can help electricity customers reduce their reliance on fossil fuel–based electricity even when the supply of renewable energy is limited (Azim et al. 2021a).[5] For example, if the supply of renewable energy is limited, consumers need to buy energy from fossil fuel–based generators to meet their additional demand. Through negawatt trading, overall demand in a community can be reduced and thus reliance on fossil fuel–based generation minimized. Japan’s Yokohama Smart City Project illustrates successful implementation of negawatt trading. In this demonstration project, experiments with various types of electricity customers (e.g., high-rise office buildings, urban centers, housing complexes, shopping centers, and small to medium-size factories) showed that about 71 percent of the customers were willing to participate in negawatt trading by taking different power conservation measures. Options included reduced use of air conditioning systems and the scheduling of electricity-related activities (e.g., washing machine use, heating of swimming pools, and electric vehicle charging) for nonpeak periods (Honda et al. 2017). There was a direct correlation between successful negawatt trading and the trading system’s responsiveness to individual customer preferences (Honda et al. 2017). The Yokohama project showed that the need for fossil fuel–driven electricity can be substantially reduced by allowing consumers to manage their energy consumption through negawatt trading. Storage Capacity One of the most common renewable energy resources is rooftop solar. At present, during sunshine hours, prosumers with rooftop solar use the resulting power for household activities, and excess power is directly exported into the grid. But without effective management, simultaneous power exports can result in voltages and currents in the distribution network well beyond statutory limits, compromising the network integrity and even disrupting its operation. The most popular solution to unmanaged power exports is to use battery storage at either the individual household or community level. But battery storage is expensive. P2P trading of storage capacity has become a viable mechanism to provide access to battery storage to mass electricity prosumers. In P2P storage trading, owners of storage devices negotiate with other prosumers in an electricity network to agree on rent per unit of storage capacity to be shared with peers. Depending on what type of storage is shared, the framework for negotiation may vary. For example, in one community several household owners share their small-scale battery storage with a facility con-troller, which ensures the consistent availability of routine functions such as apartment elevators and streetlights (Tushar et al. 2016). This kind of model can facilitate decarbonization by using shared storage to store renewable energy for use by the facility controller at times when the supply of electricity from rooftop solar is very low or null. Another model for storage capacity sharing via P2P is medium- or large-scale storage shared by community members. Participating entities either cooperate (Yang et al. 2021) or compete (He and Zhang 2021) with one another to access some fraction(s) of the community storage capacity, maximizing their use of renewable energy and contributing to decarbonization of the electricity sector at the community level. Table 1 summarizes strategies for P2P sharing of different resources and how they contribute to decarbonization. Future Considerations for P2P Trading and Decarbonization As P2P trading continues to demonstrate its potential for shaping the electricity network and decarbonization, new technologies are emerging to complement its capabilities and mitigate its limitations. In this section we focus on the concept of the dynamic operating envelope and decentralized finance and discuss how P2P trading can benefit from integrating them into its capability portfolio for decarbonization. Dynamic Operating Envelope In a power system, a limit to the amount of electricity that a customer can import from or export to the grid enables the trading of electricity without violating the network’s statutory limits. Traditionally, network operators keep the export and import limits to fixed levels considering the worst-case load and generation limits, not necessarily based on the actual network capacity. Because of these export and import limits, prosumers need to coordinate with the network operator before exporting electricity, to conform with the requirements. This hinders prosumers from trading according to their maximum capacities. Recently, however, a new concept, the dynamic -operating envelope (Liu et al. 2021), has emerged to relax prosumers’ export/import limits. It allows the network operator to dynamically set the export (or import) limits, enabling prosumers to operate freely as long as they operate within the “envelope” of these limits (Milford and Krause 2021). A dynamic operating envelope calculates the export limit per user in real time. For example, depending on the condition of the network, a prosumer with a 7 kW (or larger) system would be permitted to export close to its limit during some parts of the day without approval from a third party or controller. This flexibility can increase the flow of renewable energy from prosumers’ DERs into the electricity mix and thus contribute to decarbonizing the electricity sector. In the context of P2P trading, the flexibility of the dynamic operating envelope can be very useful in terms of increasing prosumers’ participation in trading by stimulating their independent decision making and increasing revenue. For example, in many parts of the world, the export limit of rooftop solar is capped at 5 kW (Azim et al. 2021b) based on traditional operating envelopes. This means that, even if a household or small business owner installed a large PV system (e.g., 7 kW capacity), it would not be allowed to export more than 5 kW. If it attempted to do so, the inverter would be cut off from the system. Sometimes, even stricter restrictions are imposed (e.g., a maximum export limit of 3.5 kW; Liu et al. 2021) to ensure network integrity during peak PV generation hours. However, P2P trading that can incorporate a dynamic operating envelope in its decision-making paradigm is yet to be implemented. One way to include this capability in the trading framework might be to develop a hierarchical decision-making algorithm in which, as the first step, each prosumer would receive the maximum dynamic operating limit in each time slot from the network provider and manage its supply and demand to set the power it is willing to trade. Once the maximum power amount that each prosumer can export safely to the network is determined, then, in the final step of the algorithm, prosumers would initiate P2P trading among themselves. Decentralized Finance Decentralized finance (DeFi) is an emerging financial model suitable for P2P financial transactions. It uses secure distributed ledger technology (e.g., blockchain; Hassan et al. 2019), which uses a consensus mechanism to verify financial transactions and removes the involvement of third parties in the transactions (Chen and Bellavitis 2020). Anyone with an internet connection can create an account in the system and trade with another entity. By registering for DeFi, each P2P participant can track their generation and consumption of renewable energy 24/7—which can help offset carbon taxes (Papadis and Tsatsaronis 2020)—and receive certificates for contributing to decarbonization. With such certificates P2P participants may get tax rebates, qualify for special mortgage programs, have better occupancy rates, and receive higher rental rates (Awair 2019). Figure 2 shows how contributions to decarbonization by different buildings/households can be tracked through a DeFi platform. It is relevant to note that DeFi does not provide anonymity (Sharma 2022). Although a prosumer may hide their identity from other entities in a P2P network by using an anonymous name, they are traceable by organizations such as the government and law enforcement with the legal authority to access the accounts if needed. Such traceability reduces the probability of cheating in financial transactions and can build confidence among prosumers to use such a trustless system for trading. Conclusion We have discussed how peer-to-peer trading of renewable energy can help reduce CO2 emissions in the electricity sector. 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Zhou Y, Wu J, Long C, Ming W. 2020. State-of-the-art analysis and perspectives for peer-to-peer energy trading. Engineering 6(7):739–53. [1] For instance, the 2022 Integrated System Plan draft of the Australian Energy Market Operator notes that a fivefold increase in distributed photovoltaics (i.e., rooftop solar) is necessary for the country’s decarbonization efforts (AEMO 2021). [2] For detailed descriptions of the elements of the P2P network structure layers, see Tushar et al. (2021). [3] To learn more about the coordinated market, see Lüth et al. (2018). [4] Powerledger RENeW Nexus, https://www.powerledger.io/media/renew-nexus-enabling- resilient-low-cost-localised--electricity-markets-through- blockchain-p2p-vpp-trading [5] More information about negawatt trading is in Tushar et al. (2020). About the Author:Wayes Tushar is a lecturer, School of Electrical Engineering and Computer Science (EECS), University of Queensland, Australia. Chau Yuen is an associate professor, School of Electrical and Electronic Engineering, Nanyang Technological University, Singapore. Tapan Saha is a professor, EECS, University of Queensland. Vincent Poor (NAE) is the Michael Henry Strater University Professor, Princeton University.