Energy Communities: a Game Changer for the European Electricity Grid

A bottom-up, community energy model could transform our energy system to be more democratic, sustainable and stable. The European Union has recently laid the legal foundations for this reconstruction. Now it’s up to the Member States and local authorities to ensure the concept will flourish, democratically accelerating decarbonisation.

The underlying benefits of the community energy models

According to a 2016 study by CE Delft, the potential of citizens’ contribution to the energy market is significant: “83% of the EU’s households could potentially become an energy citizen and contribute to renewable energy production, demand response and/or energy storage, which amounts to about 187 million households. About half of the households, around 113 million, may have the potential to produce energy.” Additional European Commission estimates suggest that by 2030, citizen-led energy communities could own some 17% of installed wind capacity and 21% of solar.

Energy sharing is a model where citizens can exchange locally produced power with one another (peer-to-peer) — or external markets. The EU Directive 2018/2001 on the promotion of the use of energy from renewable sources defines peer-to-peer trading of renewable energy as: “The sale of renewable energy between market participants by means of a contract with pre-determined conditions governing the automated execution and settlement of the transaction, either directly between market participants or indirectly through a certified third-party market participant, such as an aggregator.”

The benefits of a community energy model are tangible. We generally prefer to buy (probably cheaper) energy from sources we know personally (a neighbour, local cafe or a school), especially when we are aware that any savings or other benefits could be used for social progress. The cafe may be using its savings to donate meals to those in need, and the school to purchase additional materials. For many who are environmentally aware and concerned about climate change, the model’s contribution to communities’ energy efficiency and overall higher self-sufficiency based on renewable resources is at least as appealing. The economic benefits of community energy sharing spur additional investments in renewable energy generation and storage facilities. Finally, local energy optimisation, enabled by innovative technologies, decreases the burden on the wider grid, reducing congestion and limiting the need for new grid infrastructure investments.

As concluded by the European Commission’s Joint Research Centre (JRC) recent study: “while financial motives and monetary benefits (such as shares or cheaper electricity prices) can be a strong motivation, they do not exclude other types of social and environmental motivations. Moreover, commercial activities such as supply to customers outside the membership base are less common, implying that community objectives prevail over profit interests.”

Clean energy package & new Electricity Directive

Last year the European Union agreed to a new energy policy framework — The Clean energy for all Europeans package, devised as a roadmap to accelerate EU’s transition from fossil fuels to clean energy sources. One of its key pillars is the new EU Electricity Directive, The Directive on common rules for the internal market for electricity 2019/944, which puts peer-to-peer (P2P) energy transactions on the European legal map, as enshrined in one of its underlying principles:

“Consumers should be able to consume, to store and to sell self-generated electricity to the market and to participate in all electricity markets by providing flexibility to the system, for instance through energy storage, such as storage using electric vehicles, through demand response or through energy efficiency schemes.”

The 2019 EU Electricity Directive further recognises legal and commercial barriers to the implementation of this principle, including “disproportionate fees for internally consumed electricity, obligations to feed self-generated electricity to the energy system, and administrative burdens, such as the need for consumers who self-generate electricity and sell it to the system to comply with the requirements for suppliers, etc,” and requests that they be removed while ensuring that consumers “contribute adequately to system cost.”

Member States are also requested to ensure that self-consumers located in the same building, including multi-apartment blocks, are permitted to arrange sharing of renewable energy that is produced on their site or sites between themselves, without prejudice to the network charges and other relevant charges, fees, levies and taxes applicable to each self-consumer.

Importantly, the 2019 EU Electricity Directive creates a legal framework to recognise “citizen energy communities,” defining one as a legal entity that:

(a) is based on voluntary and open participation and is effectively controlled by members or shareholders that are natural persons, local authorities, including municipalities, or small enterprises;

(b) has for its primary purpose to provide environmental, economic or social community benefits to its members or shareholders or to the local areas where it operates rather than to generate financial profits; and

(c) may engage in generation, including from renewable sources, distribution, supply, consumption, aggregation, energy storage, energy efficiency services or charging services for electric vehicles or provide other energy services to its members or shareholders.

However, the new EU Electricity Directive leaves the key prerogative, ability for energy communities to act as distribution operators, including price setting, to be regulated by Member States individually. The Member States are also expected to create conditions for these communities to participate in the market in a fair and nondiscriminatory fashion. Notably, no specific guidelines are provided in this area. The word consumer (or prosumer) does not even appear in the official study on “The future electricity intraday market designpublished in March 2019, although a prior, 2017 study on the “Design the electricity market(s) of the future” by the European University Institute’s Florence School of Regulation deduces that: ”The SESP [Smart Energy Service Provider] platform must facilitate all processes associated with creating an on-line community of consumers, prosumers and producers.”

State of play: energy communities in EU Member States

The creation of the overarching legal framework for energy sharing by the Clean Energy for All Europeans represents tremendous progress towards a bottom-up energy market design. The EU Member States are tasked with transposing this legislation by the end of this year, creating the right conditions for citizens to be able to use energy sharing’s full potential.

This created opportunity is also a challenge for the Member States as its implementation requires not only clear regulation, including relevant amendments of existing legislation, but also resources to provide individual pro/consumers with support and sufficient information, including technological tools to actively participate in the energy market.

In its 2019 report on energy communities, the Council of European Energy Regulators (CEER, Ibid.) has reiterated the need to revise legislation to provide energy communities with a level-playing field, but also underscored the importance of ensuring that these communities bear the related grid use cost, that the local and external energy supply are well coordinated, and that operational inefficiencies, such as duplication of services provided by local distribution system operators (DSOs), be avoided while maintaining the principles of an unbundled energy market and general consumer protection.

For many EU Member States, the reform begins with the renewable energy communities (RECs), defined by the Directive (EU) 2018/2001 of the European Parliament and of the Council of 11 December 2018 on the promotion of the use of energy from renewable sources. While the legal definition of REC continues to coexist with that of a new definition of citizen energy communities, effectively most citizen energy communities at the beginning of the model’s implementation are likely to be enhanced RECs (for a more detailed comparison of the two legal definitions, see 2019 CEER Report on Regulatory Aspects of Self-Consumption and Energy Communities, p.11–12). Yet, even RECs are a relatively novel concept, with a relatively limited number of legally registered citizen-led energy communities and many still representing innovation pilots, often enjoying limited regulatory exemptions. The new EU legislation is an opportunity to provide these different types of energy sharing initiatives with means to operate more effectively, integrating them in the wider energy system.

The Netherlands has been at the forefront of experimenting with energy communities, based on a Decree of 28 February 2015, concerning the deviation by experiment of the Electricity Act 1998 for decentralised generation of renewable electricity (Decree on experiments on sustainable electricity generation), which allowed for citizen-led, small scale, self-financed renewable energy communities on low voltage grids, entitled to set their own internal tariffs for supply, subject to regulatory approval. From 2019, there is also the Dutch public fund for community projects that supports energy cooperatives, mainly focused on startup costs to encourage initiation of these projects.

Many other member states have also taken regulatory action to encourage the development of energy communities. While the Dutch concept is primarily based on civic engagement, the Polish model of energy clusters is one with stronger role of local authorities and a link with structural development projects, initiated with the Act of 22 June 2016 amending the Act on Renewable Energy Sources and some other acts (Journal of Laws, item 925). Community energy projects led by local authorities have also been a feature in Hungary and many other EU member states. One of the non-binding objectives of the Dutch climate agreement is that at least 50% of new solar and wind projects need to be community owned. In Belgium, the development of renewable energy projects tendered by local authorities already includes this criterion, while Scotland is still hailed as the most effective European legislators in this area, having exceeded and increased its initial 2011 ambition for locally and community owned renewable installations. In Denmark, the 2009 Renewable Energy Act obliges all wind energy developers to offer a 20% ownership share to residents living near new installations, which although a lower threshold ensures more active civic participation in all such projects, representing 3 % of Danish GDP.

Energy Cities, the European association of cities in energy transition, have already published guidelines on how cities can support energy communities, now that these communities are legally recognised at EU level, and may include local authorities as shareholders. The report draws from different models across Europe that could now be further strengthened and replicated, from partnering to develop the smart grid to jointly owning local utilities and/or infrastructure and changing how energy is procured. The role of facilitation of citizen consultation to develop energy communities and relevant private-public partnerships is emphasised, and this requires additional resources for local governments:

“New models of joint energy management with citizens, including via the creation of local energy companies or through social enterprises and citizen cooperatives are thus taking shape across Europe. The Clean Energy Package for all Europeans is meant to provide a boost to the emergence and scale-up of these “energy communities” and it is now up to each city, region and nation to give flesh and blood to these new definitions.”

While no longer a member of the European Union, the United Kingdom’s regulatory sandbox experiments, initiated by the 2014 Community Energy Strategy, can also be studied as a potential case study to inform future EU member state future legislation (for more see 2019 ASSET report: Energy communities in the European Union and 2020 JRC report: Energy communities: an overview of energy and social innovation).

France, which also supported more traditional small renewable energy communities, has taken the first step to enable energy communities as mandated by the new EU directive in early March 2020 by removing a footnote in its Energy Code, which had previously limited these to experimental projects of up to five years duration. However, this is just the first step. The French energy communities are still limited to low-voltage networks which excludes large electricity consumers, and further measures are required to reach the objective for level-playing field.

The fine balance between supporting energy communities and preventing market distortion needs to be achieved, as already evidenced in the example of Germany, which provided preferential treatment in wind auctions to energy communities, then limited in 2018 to avoid market distortion.

One country that defined energy communities in law before the new EU electricity directive is Greece, with the January 2018 dedicated legislation on community energy. Importantly the law also provides support measures and moves away from subsidies to addressing energy poverty by empowering vulnerable households to become prosumers with access to clean energy, including through virtual net metering and power sharing investments. According to Greenpeace and REScoop, which are actively working on the implementation of this legislation: “This means that available social policy funds should start reallocating from current support schemes to programs that promote wider civic participation, incorporating the principles of energy democracy.”

Greece has since embarked on the implementation of this new legislation, including integration of energy communities in other, related legislation, possibility of preferential participation or exclusion from competitive bidding procedures and preferential charges for market services, exemption from paying the annual fee for holding an electricity generation license, priority to obtain production license, connection offer, and approval of environmental conditions for power stations, reduced letter of guarantee (50%), etc.

The foundation for innovation has been laid across many EU member states in experimenting with various regulatory, market and structural configurations of local energy communities. A comprehensive evaluation of the findings stemming from these initiatives would inform approaches that could lead to a successful integration of citizen-led energy communities as contributors to the future renewable-driven energy grid.

Next steps

The first step in implementing energy communities across the European Union lies in a legislative gap analysis and updating of strategic documents, including national energy and climate plans. While there is already a comprehensive database of regulatory obstacles to increase deployment of renewable energy resources in the European Union, there are also some more energy community-specific initial legislative gap analysis undertaken by organisations such as REScoop. The identified barriers to effectively operating energy communities range from restrictive heating legislation in Denmark and exclusion from Energy Efficiency Obligation schemes in France to general reduction of licensing and procurement complexities in many European states. Notably, in France, Italy and Belgium, “energy sharing is currently forbidden or simply does not exist in regulation.” The network charges and incentive schemes also need to be revised to “acknowledge the benefits that linking renewables generation with energy efficiency and flexibility can provide to the energy system or the DSO.” In addition to providing recommendations to transpose the new EU electricity directive in national legislation and create a new support scheme to reflect the role of energy communities, REScoop also concludes:

“Member States must ensure that citizens have sufficient access to advice on technical and financial aspects of setting up RECs. To the extent that RECs already provide guidance, training and information to the broader public on benefits to becoming active through production or demand side management, Member States should provide finance and capacity support so these initiatives can be scaled up.”

To summarise, EU Member States must undertake legislative reform, revisit network charges, incentives and other support schemes and engage citizens, partly by strengthening the capacity of local authorities. In revising policies, particular attention should be paid to the role of energy communities in combating energy poverty, a subject that merits further research attention, especially considering that currently energy communities are more prevalent in wealthier parts of Europe due to the required financial and organisational resources. As underscored by JRC: “Energy policies in the form of subsidies and economic support are considered a key factor that can influence the success rate of energy communities.” It is also important to note that JRC concluded that the measures taken by the EU Member States until now “remain less ambitious than the supportive frameworks set out in the recast Renewable Energy Directive and the recast Electricity Market Directive.”

To truly empower pro/consumers, the energy market design is to be reconsidered including the new functions of utilities, distribution and transmission operators. The new European electricity directive envisages that DSOs cooperate with energy communities based on fair compensation, which is to be assessed by competent regulators, but there is limited information on how DSOs could participate in local flexibility markets. Further clarification of the relationship between the energy communities and distribution operators may indeed be essential to effective implementation of community markets, as is the elaboration of the role of utilities/virtual power plants in potentially operating these communities. This is intrinsically linked to digital innovation, “allowing members of a community to set individual preferences and visualize the local energy supplied by themselves and other members in the community … integrated on community platforms, thus assembling virtual decentralized power plants.”

The market and physical power flow interactions of energy communities and their effective inclusion in the wider energy system will require a software-enabled integration of grid infrastructure, energy assets, market mechanisms and information flows among diverse energy market stakeholders. Several platforms that aim to manage these complex interactions are in development, including Grid Singularity’s open source D3A software. The future deployment of these advanced energy ecosystems, which fully embody the spirit of Europe’s Green New Deal, will require engagement of regulators and possibly also local authorities, with legal and financial support provided such as in the case of the UK’s energy innovation programs.

The final step will be to consider how the concept of energy communities could scale beyond microgrids to shift the entire electricity market towards a bottom-up demand response model.

Authored by Ana Trbovich and Urszula Papajak

Written by

Engineering d3a.io, open source software that simulates and operates custom energy exchanges, creating local marketplaces that interconnect to form a smart grid

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