A sophisticated market for distributed energy has the power to strengthen the NEM and enable more renewables, writes Dor Son Tan of Energy Networks Australia.

In June 2018, Energy Networks Australia and the Australian Energy Market Operator (AEMO) started the Open Energy Networks (OpEN) project to explore how distributed energy resources (DER) could be integrated into the future energy system.

One way this could be achieved is through distribution markets, which are a way for customers and other participants to buy and sell energy and related services at a local level in a more dynamic way, responding to price signals and customer preferences. For example, I have solar panels and they produce more energy than I use during the day. This excess energy could be used to help charge my next-door neighbor’s electric vehicle (EV) more efficiently with minimal grid losses.

As we head into a future with more residential solar PV, EVs and smarter devices, a lot of people in the electricity industry are working hard to figure out how to prepare the system – physical assets and regulations – for the future. This is where some stakeholders think distribution markets can play a part.

It’s a difficult challenge to meet, not only because we don’t know what will happen in the future but also because the decisions we make will affect almost every customer in Australia, whether they have solar panels or not.

Combined with the pandemic-induced economic slow-down and potential flow-on effects to DER uptake, this means we are well and truly in an uncertain, complex and ambiguous world.

The different models of distribution markets

Building on work undertaken by the Energy Networks Association UK, the OpEN project started with three models to spark discussion and reflection: single integrated platform (SIP), two-step tier (TST) and independent distribution system operator (IDSO). After further discussion a fourth model was identified that incorporated beneficial aspects of the SIP and the TST. This model was named “the Hybrid”.

Before I describe how each of the models work, it is important to discuss two of the key roles found in all models. These are the distribution market operator (DMO) and the distribution system operator (DSO). While the exact responsibilities of these roles will differ slightly between models, the core functions of each essentially remain the same.

Distribution System Operator (DSO): A DSO, with visibility of power flows and DER on the local network, will be required to manage the network within the technical constraints of the assets (otherwise known as “operating envelopes”), identify when network issues emerge and act to manage these issues.

To do this, the DSO will need to see the flow of power across the distribution network in real-time. Where an issue on the network emerges, the DSO may obtain services to support the operation of the network from DER directly, or via aggregators, retailers and third parties. Such services would be compensated.

The DSO provides inputs to the DMO to ensure DER participation in markets does not compromise system security at the distribution level.

The DSO will plan and actively operate distribution assets to support the optimal use of DER for the benefits of all consumers. Given current distribution network service providers’ (DNSP) experience in maintaining and operating safe and reliable networks, they are best placed to take on the expanded DSO role.

Distribution Market Operator (DMO): The Distribution Marker Operator (DMO) manages the distribution market, optimising the provision of services and energy from DER within operating envelopes provided by the DSO. The DMO also provides information to AEMO to support the participation of DER in the wholesale market and ancillary service provision.

At the distribution level, a DMO administers, operates and manages platforms for aggregators, the DSO and AEMO to access flexibility services. The DMO might also administer, operate and manage platforms to support local market trading for energy and capacity.

Several parties could take on the DMO function, such as aggregators, retailers and new third parties. However, AEMO, as the current wholesale market operator, is likely to be best placed to be the DMO.

How the distribution market models work

It is important to understand that these are still theoretical models and we don’t yet have a clear understanding of how they would work in practice. Several trials in Australia are underway or proposed to answer these implementation questions.

Model 1: Single Integrated Player (SIP)

The single integrated platform framework most closely resembles the current system, with AEMO acting as the single market operator.

AEMO would operate a single centralised platform to optimise the dispatch of DER and manage all distribution and transmission-connected generation and storage. The platform would link with aggregators for the provision of DER services, providing direct access to the market. Aggregators would provide bids and offers directly to AEMO via the platform.

Each DNSP would need to provide AEMO with constraint information, in the form of operating envelopes, to indicate any limits to providing services.

Aggregators and energy retailers would develop portfolios of DER customers to provide system services offerings to AEMO’s central market platform. AEMO would assess all bids and offers and optimise the dispatch of energy resources considering transmission and distribution network constraints. AEMO would have the commercial relationship with DER via aggregators/retailers and would be responsible for financial settlements to market participants.

The aggregator/retailer would activate DER based-on dispatch instructions from AEMO via the platform. In this way, AEMO would be responsible for maintaining system security and reliability.

Model 2: Two-step Tiered

This framework involves DNSPs taking responsibility for optimisation of DER dispatch within their own networks.

The framework derives its name from its two types of market platform: the central wholesale market platform operated by AEMO, and distribution level market platforms operated by DSOs. The distribution level platforms have responsibility for the organisation and operation of the local market for DER and for the development and operation of the distribution network.

Aggregators would provide bids to the DNSP, representing their dispatch preferences. The DNSPs would aggregate bids from all DER in their networks and provide them to AEMO.

AEMO would include these aggregated bids in wholesale market dispatch optimisation. This would represent “co-optimisation” of both distribution and wholesale markets.

Model 3: Independent Distribution System Operator

This framework involves independent distribution system operators (IDSOs) optimising DER dispatch within distribution network technical limits. A separate IDSO would be needed for each distribution network, or a single IDSO for the NEM and WEM.

This is the most complex of the frameworks considered. It is similar to the two-step tiered platform, with aggregators providing bids to the IDSO, and the IDSO aggregating those bids to each transmission connection point, taking into account distribution network limits. The IDSO would pass these aggregated bids to AEMO to include in the national electricity market dispatch process.

The model allows some decentralisation. Independent organisations would need to be established in each distribution network area.

Model 4: A hybrid

In examining the three frameworks stakeholders created a fourth, hybrid framework that addresses some of the problems with the others. Some felt that while the independent distribution system operator framework resolved some of the issues presented by either AEMO operating the single integrated platform or DNSPs operating the two-step tiered platform, the framework was too complex and unwieldy.

In the hybrid framework, the DNSP would manage and communicate distribution network constraints (operating envelopes) to DER participants – via aggregators and retailers – and AEMO. AEMO would manage a market platform that optimises all DER bids for wholesale electricity and system support services.

Are distribution markets the answer?

Like the answer to many questions in this space, it depends. There are obvious advantages to a distribution market in that it would provide some certainty of the rules and responsibilities of different parties, but it also does come with a cost both in complexity and dollars.

The recent release of the AEMO Renewable Integration Study reports that Australia has 9GW of installed solar PV, with between 12GW and 19GW forecast by 2025. Note that impacts from covid-19 were not considered int the modelling since we don’t yet know the extent of the economic impact.

While 9GW is an impressive number we should also consider that uptake of distributed photovoltaics (DPV) is not uniform across the NEM, with Queensland, South Australia and Western Australia being the obvious leaders. This difference suggests that interim jurisdictional solutions may help alleviate challenges now, with fuller integration when/if uptake displays greater uniformity across the NEM and the WEM.

Energy Networks Australia considers it is a question of when distribution markets will be established, not if. Mapping a path to an eventual future of distribution markets is appropriate, however this should be when the benefits to customers outweigh the costs. We are not yet at that point.

Final thoughts

DER remains the hot topic in electricity and covid-19 has not stopped the huge amount of work in this space from the many perspectives of customers, market bodies, governments, networks and businesses.

Regardless of how this challenge is approached, we should all keep in mind the following.

Electricity is an essential service, and the system must continue to serve all Australians now and in the future. This is a principle on which all stakeholders can agree. Also, the future is more uncertain now than ever before and we should preserve optionality in any decision we make so we don’t back ourselves into corners that we will regret later. Finally, the decisions we make as a society need to be continually evaluated and subject to rigorous scrutiny and governance.

If we can keep these three things prominent in our planning and actions, then future generations can be satisfied that we made the right choices with the information we had.


Dor Son Tan is head of distribution at Energy Networks Australia.

Parts of this article were taken from Energy Networks Australia’s Position Paper on OpEN.