Photovoltaics and Heat Pumps Limitations of Local Pricing Mechanisms

Abstract

With the increasing amount of volatile infeed from renewable energy sources the need for flexibility becomes more and more urgent. This holds especially for the distribution grids where critical load situations caused by high local renewable infeed occur increasingly often. Therefore, demand side management with broad participation of households has been proposed as one cornerstone for a future sustainable energy system. Local prices may contribute substantially to enable a smart behaviour of grid users by providing appropriate incentives. Although the benefits of both demand side management and local prices seem evident in theory practicalities have to be considered when it comes to assessing their effectiveness. Notably individual restrictions for different kinds of grid users have to be regarded in detail. Eventually, the potential contribution of local pricing to a secure and efficient energy system may be called into question. In this paper, a typical rural low voltage grid is analysed having local electricity generation from PV systems and typical household consumption. In addition, a high penetration of heat pumps is supposed as well as the implementation of a framework of local prices. With households heated by electric heat pumps a potentially flexible consumer type is implemented in detail. Thus, a model of a possible future rural low voltage system is implemented and used to assess the limitations of local pricing mechanisms – firstly, by a sequential deduction of the possibly leveraged potential of the local market mechanism under existing technical constraints and, secondly, by a scenario analysis of the allocation of economic benefits. Results show that even with given local incentives the consumption adjustment towards an efficient grid usage cannot be realized frequently as comfort and system needs have priority. I.e. due to limited complementarity of heat pump consumption and photovoltaic infeed patterns expected operational system cost reduction is low – especially in comparison to required investments in smart systems. Hence, the example disproves any generalized claims about the efficiency of local pricing - yet obviously it does not prove that local pricing is of no worth in general. As second main result, stylized policy choices are analysed. Thus, it is demonstrated how the benefits of local pricing mechanisms can be distributed to the market participants and which are the difficulties that policy makers will have to face. Ultimately, for the present case study, it is not possible to set sufficient investment incentives for the installation of flexibility measures for heat pumps without either causing disadvantages to renewables-based electricity generators or without receiving additional regulatory payments from the overarching system. Thereby, the paper contributes to the existing literature by analysing a novel pricing mechanism and, more importantly, demonstrating the effects of these pricing mechanisms on the system costs and the economic figures of the market participants. As main result, it can be seen that practicalities play an important role and must be taken into account when considering the implementation of local pricing mechanisms. Furthermore, policy makers have to pay attention to the redistributive effects as they might be substantial even though the costs savings of the overall system will not necessarily be meaningful.