This insight paper is focused on emerging business models for SLES and how they can help deliver value to local communities.
Resource
Achieving Net Zero in the UK stands its best chance of success if local energy infrastructure works in a smart and connected way. Given the scale of the challenge, few local authorities have a clear plan to make that happen owing to lack of funding, resources and skills, but there are major steps they can take – from good local area energy planning (LAEP) to the creation of smart local energy systems (SLES).
As part of the Innovate UK-funded Prospering from the Energy Revolution (PfER) programme – which aims to accelerate innovation in SLES – Energy Systems Catapult analysed the approach and lessons learnt from 25 smart local energy projects attempting to deliver a local, integrated approach for Net Zero.
What is a smart local energy system?
A smart local energy system, or SLES, is a way to bring together different energy assets in a local area and make them operate in a smarter way. They could be connected physically (e.g. a solar farm powering a housing development) or digitally (e.g. a virtual energy marketplace). They will help a local area decarbonise more quickly and cost effectively, and can deliver wider social and economic value for communities.
Our insight paper identifies five emerging business models for SLES, and how – by making designs more investable, replicable, and scalable – they can help deliver value to local communities as they try to decarbonise.
We’ve created the models to give local authorities an introduction to the innovations happening within PfER, and – taken as a companion piece to local area energy planning (LAEP) activity – provide strategic guidance to inform their own Net Zero plans.
Each model considers:
- Benefits of the business model and the value it can deliver to the local area
- Risks and considerations for those looking to set up new projects
- Different roles the local authority could play in the business model and how they might interact with other key delivery partners
Five types of Smart Local Energy System
Project marketplace – An organisation or digital platform that takes the lead in finding local renewable energy projects and linking them to investors and the supply chain, increasing visibility and credibility of renewable projects while decreasing costs and risks.
Local flexibility market – A single buyer creates a market and incentives for more flexible use of the local power system, sending out price signals to aggregators and energy asset owners in the area and enabling local businesses and homes to provide flexibility.
Local energy market – A marketplace that matches local energy users with local green energy assets like solar, storage, and EV charging. Local users can buy directly from a local generator or buy other energy services available in the market.
Virtual network manager – An organisation creating a virtual balancing system that optimises local generation and demand, commonly used in constrained areas where new grid connections are difficult or expensive. Allows faster roll out of low-carbon technology.
Anchor asset – A major local energy asset like heat networks, EV charging hub, or storage into which other energy assets are linked, reducing carbon emissions or costs for end users and delivering low-carbon services to locals.
Project marketplace
An organisation or digital platform that takes the lead in finding local renewable energy projects and linking them to investors and the supply chain, increasing visibility and credibility of renewable projects while decreasing costs and risks.
Linking potential renewable energy projects in a local energy plan or climate strategy to supply chain and investors. The marketplace will allow opportunities to be aggregated up and more easily assessed and delivered for the local area. Has the potential to evolve into a local energy market but there is less emphasis on matching supply and demand. This is proactive approach of increasing supply of locally used renewable energy or energy efficiency to reduce local demand.
Why is it better for Net Zero?
Increases visibility and credibility of renewable projects while decreasing costs and risks.
What makes it a SLES?
A co-ordinator or marketplace that links projects with investors and supply chain.
Main low-carbon interventions
Solar, storage, retrofit.
Project marketplace | Key benefits
Financial
- Increases private investment in local area.
- More cost-effective delivery of projects.
- Reduces energy bills.
Local growth
- Build local skills and supply chain.
Net Zero
- Accelerates roll out of high impact projects.
Health and wellbeing
- Funded projects can be targeted at vulnerable/fuel-poor.
Project marketplace | Considerations
Community interests
- This archetype is about improving investment and local supply chain. Although some projects may help increase community engagement in Net Zero it is not a certainty.
System resilience
- Not addressing any future network constraints or infrastructure upgrades that are required in future.
Market design
- For the business case of projects to be viable longer term, will need to address how value of using locally generated energy and providing local flexibility is increased.
Financial
- Finding the right type of investor. Need to appeal to a type of investor who is interested in long-term, slower returns.
Project marketplace | Roles
Investor roles |
Customer roles |
Support roles |
|
Local procurement framework – specific for the delivery of Net Zero projects. Invest in energy assets and infrastructure. Local project co-ordinator – that helps create local projects, raise finance, and contract supply chain to deliver. Local projects platform – software that aggregates local projects and matches them with finance and supply chains. |
Decarbonise buildings – local authority estate could be put forward for heat network or solar projects without being the primary investor. Lease land – license or host land that could be used for grid connected assets like solar and storage. |
Local energy planning – set priorities for the local area and assess potential for energy assets. Recruit local projects – helping vet local projects. Local authority-approved projects may be more likely to get investment. Support recruitment of investors and supply chain. |
Local flexibility market
Local flexibility markets are driven by a single buyer at the top creating a market for flexibility in the local area. The market would send out signals from the buyer to aggregators and energy asset owners in the area. It will enable aggregators and distributed energy assets to provide flexibility, in electricity demand, either for the system operator or someone else at a local level. Unlike a local energy market, only flexibility and constraint management is being procured.
Why is it better for Net Zero?
A single buyer creates a market and better business case for local, flexible energy assets.
What makes it a SLES?
Marketplace/platform for flexibility.
Main low-carbon interventions
Storage, EV charging, heat with storage.
Local flexibility market | Key benefits
Financial
- Lower energy bills for end users.
- Improved business case for asset owners.
- Reduces public money (including grants) required for Net Zero.
Resilience
- Reduces impact of constraints.
- Reduces need for network upgrades and reinforcement.
- More diversity and flexibility in local network.
Net Zero
- Accelerates roll out of low-carbon technology.
Health and wellbeing
- Funded projects can be targeted at vulnerable/fuel poor.
Local flexibility market | Considerations
Market design
- Needs to create right price signal and incentives for local flexibility, the current market rules do not sufficiently reward it.
- If moving to a local system operator, how will they integrate with wider system operation at a regional and national level?
Net Zero
- Favours flexibility over the delivery of Net Zero.
Scalability
- No consistent approach for buying local flexibility.
- Harder for smaller-scale assets to participate.
Fair transition
- Extra support needed for vulnerable customers. Flexibility markets alone will not address fuel poverty concerns.
Local flexibility market | Roles
Investor roles |
Customer roles |
Support roles |
|
Local system operator – play a greater role in managing local networks and systems operation. Higher complexity and risk but much greater control in delivering climate strategy. Invest in energy assets – Local flexibility market will improve the business case for energy assets that can provide local flexibility. |
Work with aggregators – and earn additional revenue from publicly owned energy assets. Also opportunities to utilise social housing. Trade flexibility – work directly with flexibility platform and system operators for larger, publicly owned energy assets like solar and storage. |
Local energy planning – support local network operators to understand local constraints and value of flexibility. Work with local industry and businesses – align development plan for local commerce and industry to energy plans. |
Local energy market
A marketplace that matches many local energy users with many local energy assets like solar, storage, and EV charging. Local users have the potential to buy directly from a local generator or buy other energy services available in the market. The market is facilitated by a software platform which could be run by a number of different parties in the local area.
Why is it better for Net Zero?
Creates a market for local green energy from many local generators and many local buyers.
What makes it a SLES?
Marketplace/platform for buying and trading energy.
Main low-carbon interventions
Solar, storage, EV charging, heating.
Local energy market | Key benefits
Net Zero
- Accelerates reduction of local carbon emissions.
- Increases local participation in Net Zero.
Financial
- Lower energy bills for customers.
- Improved business case for generators.
Economic opportunity
- Increases local economic growth and employment.
System resilience
- Increases flexibility in local network.
Local energy market | Considerations
Policy and regulatory
- Complex to setup – new market rules required.
- Relationship with system operators. Need to understand how DNO and National Grid will interact with the local energy market.
Creating value
- It is not clear, yet, how additional value is generated in local energy markets vs national markets.
- Market requires sufficient volume and liquidity to be viable.
Digital and data
- Huge volume of user data needs to be stored and used. Needs both technical capability and safety protocols in place.
Fair transition
- Extra support will be required to support vulnerable customers and address fuel poverty concerns.
Local energy market | Roles
Investor roles |
Customer roles |
Support roles |
|
Own the local energy market – set market signals to incentivise climate strategy. Generate income for council and potential replication in other local authorities. Invest in energy assets – like solar, storage, and EV charging infrastructure. Local energy market will improve business case by increasing value of local power. Become an energy service provider – create local energy tariff and sell through the market. Could include locally owned generation. |
Buy from the local energy market – local, renewable energy for the public sector. Potentially at cheaper price through ToU and reduced use of system charges. Sell to the local energy market – existing community or publicly owned generation could sell to the local energy market at an increased price. Lease buildings or land – to have energy assets installed that can sell into the local energy market. |
Recruit for the local energy market – inform public and encourage local participation in the local energy market. Planning – through planning can promote more use of land for more desirable social and environmental outcomes. |
Virtual network manager
The creation of a virtual balancing system that optimises local generation and demand. Most commonly used in constrained areas to enable new connections, or an area where curtailment is impacting generators. Energy assets are deployed behind the meter at low cost to the user. By aggregating assets to provide flexibility, any revenue generated or savings made are used to offset the technology costs. An energy service contract or licence arrangement would need to be in place with users.
Why is it better for Net Zero?
Service provider helps virtually manage local constraints that allows faster roll out of low-carbon technology.
What makes it a SLES?
Platform that virtually manages network at an agreed grid supply point.
Main low-carbon interventions
Solar, storage, EV charging, and heat.
Virtual network manager | Key benefits
Financial
- Lower bills for end users.
- Improved business case for local asset owners.
- Reduce public spending required to meet Net Zero.
Economic
- Reducing constraints enables local economic growth.
Net Zero
- Accelerates roll-out of low-carbon technology.
System resilience
- Reduces need for network reinforcement.
- More diversity and flexibility in the network.
Equity and social
- Funded projects can be targeted at vulnerable/fuel-poor.
Virtual network manager | Considerations
Community interests
- Making sure local interests are protected and virtual network is not just focused on revenue generation.
- Handling data of participants on the virtual network ethically and safely.
Policy and regulatory
- Need to understand relationship with regional and national system operators.
- Longer-term energy contracts required to roll out low-carbon technology.
Creating value
- Virtual network needs to be funded either through increased value for local authority or local network operator.
- Revenue of virtual network is subject to merchant price risk.
Virtual network manager | Roles
Investor roles |
Customer roles |
Support roles |
|
Be a local energy service company – joint venture with private investment to create a local energy service company. Invest in the virtual network manager – working with partners to improve local balancing and constraints. |
Decarbonise buildings – benefit from renewable assets installed for free on public buildings. Procure a local service provider – bring in a private sector service provider to provide energy services into the local area. |
Promote offer – add credibility and trust to service provider looking to roll out energy assets in the local area. Co-ordinate local stakeholders – bring together key stakeholders to ensure maximum benefit from the solution (e.g. networks, housing, business, community). Planning and consent – reduce legal or planning restrictions for licensing energy assets on buildings. |
Anchor asset
The anchor asset model facilitates the connection of multiple energy assets to deliver lower-carbon and lower-cost end service to the end users. Examples include the combination of storage and EV charging enabling the charging of public sector fleets. Or solar and storage helping optimise a heat network to be lower carbon. The service becomes more cost effective by utilising upstream trading and flexibility services.
Why is it better for Net Zero?
Investment in assets and infrastructure that delivers low-carbon services to locals.
What makes it a SLES?
Physical connection of low-carbon infrastructure (e.g. heat network with solar and storage).
Main low-carbon interventions
Heat, EV charging, supported by other vectors (solar, storage, hydrogen).
Anchor asset | Key benefits
Financial
- Revenue opportunities from investing in energy assets.
- Reduces public money (including grants) required for Net Zero.
- Lower bills for end users.
- Price certainty / protect against future price rises.
Economic
- Increases local employment and skills.
Net Zero
- Faster roll-out of low-carbon technology.
- Improves access to Net Zero for local area.
Health and wellbeing
- Reduces air pollution.
- Better health outcomes and reduced illness.
Anchor asset | Considerations
Finance and investment
- Large capital investment required.
Creating value
- Reliant on wholesale trading or flexibility and those markets are subject to risk.
Policy and regulatory
- The future of gas pricing.
- Reliant on market rules outside of SLES remit.
- Vertical integration – current Ofgem rules don’t allow a power network provider to also sell energy services to end users.
Delivery complexity
- Long lead time on planning and delivery.
- Complex to integrate different technology.
Anchor asset | Roles
Investor roles |
Customer roles |
Support roles |
|
Energy service provider – local energy service contracts for heat and transport. Need capability to bill and collect from local residents and businesses. SLES designer/operator – owner of the SLES design and making the system run effectively. Complex role so would need partners to support. Invest in energy assets – ownership of major energy assets and infrastructure like heat networks and EV charging. |
Customer of heat network – public sector buildings or social housing are an offtaker from the heat network. Charge your EV fleet – public sector fleets are a main customer of any EV charging/fuelling. Procure SLES operator – delivery of local network is delivered by a third party but procured by a local authority. Allows service-level agreements and community obligations to be built into the contract even if no CapEx invested. |
Planning – Heat networks and EV infrastructure can be encouraged as part of new build planning applications. Heat network zoning likely from 2025. Recruit for heat network or public charging network – Working with private sector local authorities can add credibility and trust to projects. Needs high utilisation from local area to encourage investment. |
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