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User-centered innovation and regulatory framework: energy prosumers’ market access in EU regulation

The paper “User-centered innovation and regulatory framework: energy prosumers’ market access in EU regulation” (Butenko, A.) will be presented at the 5th Conference on the Regulation of Infrastructures (24 June 2016).


ABSTRACT

The traditional European energy system in terms of its technical and commercial/ market design, as well as the regulatory framework supporting it, is organized according to the value chain from energy production, to transport, storage and then distribution.   This system has formed in the 20th century; however, the current European energy market is far from static. In the recent years many developments have shaped its structure: First, liberalization and drive towards integrated internal market push the dynamics of the energy market towards a pan-European, harmonized and coordinated model.   Secondly, the intensifying security of supply and climate change concerns trigger the emergence of renewable energy sources (RES) in the energy mix of the Member States.  RES are usually produced in a more decentralized manner compared to traditional fossil energy sources.  Combined with an increased level of energy-related awareness of the population, as well as technological progress (including increasing digitalization) and respective increasing affordability of technology, this creates a bottom-up pull in the energy market towards distributed and smaller-scale energy production. Thereby the European energy market is experiencing somewhat conflicting forces: push towards more centralization on European level, and at the same time pull towards more decentralization on national level.

One of the most important characteristics of such pull is the evolution of the traditional energy value chain into a more bottom-up model. In this new model, energy consumers who previously had a rather passive, consuming role, and were confronted with top-down determined energy supply options, services, as well as prices, are now assuming a more proactive role, in some cases becoming prosumers of energy.  Such evolution of the consumers’ roles is due on the one hand to the increasing availability and affordability of ‘hard’ technology, such as solar panels and wind turbines, and on the other hand to the increasing  availability and affordability of ‘soft’, digital, technology, such as smart meters and appliances, online platforms, etc., which make it easy for consumers.  In cases of energy prosumption the traditional energy distribution ‘spots’ in the historic value chain (e.g. residential areas) are becoming those of production (e.g. due to the solar panels on the roofs). This phenomenon is referred to in the literature as ‘local sustainable energy’ initiatives (LSEs).  The LSEs trend is a specific kind of bottom-up innovation, usually referred to as ‘user-centered innovation’, describing the situation when users of products/ processes/ services innovate themselves in order to suit their specific needs, rather than rely on the manufacturers/ suppliers to do so for them.

LSEs can assume different formats, ranging from an individual household, to organized collectives, cooperations, etc.  The development of LSEs initiatives in Europe highlights the possibility of different types of transactions in the national energy markets of the Member States, such as e.g. small energy prosumers participating in balancing and flexibility markets, traditionally reserved for large industrial players.  Moreover, LSEs’ development creates opportunities for a different type of energy market, and namely local energy market characterized by peer-to-peer transactions between the different types of prosumers/ consumers (sharing economy). Again, such types of transactions are partially enabled by the progress in digital technologies, such as smart meters and online trading platforms. The emergence of these new types of transactions catalyzes other formats of cooperation, services, market structures and cost-benefit allocation than previously existing in the market. Another result of LSEs initiatives is the emergence of new actors in both national and local markets who fulfil new roles and have new responsibilities, as well as changing roles and responsibilities of the existing actors. 

At the moment the contribution of local energy to the total energy demand in Europe is marginal.  However, given the right conditions- namely technology progress and price decrease (e.g. for small-scale energy storage, such as batteries),  further digitalization, and wide adoption of these technologies- the LSEs could potentially have drastic consequences for the design of energy market as we know it. This could for example be the case for the so-called ‘grid-defection’ (disconnecting their household from the energy grids).

The European regulatory framework relevant to the development of LSEs quite naturally reflects the traditional, top-down, centralized, and predominantly fossil, energy value chain.   In other words, the respective regulatory framework is ‘geared’ towards the existing level of technology and market design. Moreover, this framework reflects certain assumptions about the energy market structure (such as e.g. the perspective upon consumers as passive customers of the energy suppliers). However, as technology progresses and the formats of market design evolve, as is the case with the LSEs initiatives, the problem of ‘regulatory disconnection’ could arise, meaning that the existent regulatory framework might not be ‘fit for purpose’ any longer due to its disconnection from rapidly developing innovation.   Hence, not only the regulatory framework itself does not correspond to the current reality, but the same is also true regarding the underlying assumptions: e.g. as the consumers become prosumers, the perspective of ‘a passive consumer’ is not relevant any longer.  In such cases the existing regulatory framework (perhaps unintentionally) represent obstacles for (further) development of the LSEs initiatives in Europe.  The LSEs are recognized as a desirable development, aligned with the policy goals.  Thus, the legal provisions of the current European regulatory framework representing, perhaps unwittingly, unjustified obstacles for the innovation taking place at the level of local sustainable energy initiatives are problematic, as they could hamper the reaching of the EU policy goals.

In the current research we focus on the specific type of innovation, and namely user-centered innovation by the local sustainable energy collectives, illustrated by the transactions between individual and collective prosumers of the local energy, be it peer-to-peer transactions or interaction with national energy market players, e.g. energy suppliers. This particular innovation is used as a case study in order to test current degree of ‘fit’ between the European regulatory framework on one hand and innovation in the energy sector on the other hand. Local energy initiatives are discussed from the Dutch perspective. In other words, the Dutch example is discussed as approximate for the European situation. This is due to the fact that the Netherlands displays a medium level of market maturity regarding local energy: it is behind such ‘progressive’ countries as Denmark and Germany, but ahead of many Central and Eastern European Member States, such as Poland and Hungary.  The expectation is that the findings beased on the Dutch example are extendable to the other EU Member States, since EU regulatory framework is assessed. It is also expected that the findings of the paper are extendable to the other areas of innovation in the energy sector.

The paper is structured as follows: First, we discuss the example of local energy as a user-centered innovation and its impact on the energy market on the Dutch example. Furthermore, we establish whethere there is, in fact, a regulatory disconnection between the relevant European regulatory framework (limited to energy law) on the one hand and the actual innovation taking place in the market on the other hand. More specifically, we identify the obstacles present in this framework in relation to local energy transactions between individual and collective prosumers on the local and the national energy market. Finally, if such obstacles are identified and deemed significant (regulatory disconnection is present), we provide recommendations as how to alleviate the situation and further stimulate user-centered innovation.


ABOUT THE AUTHOR

Anna Butenko is currently carrying out her doctoral research in energy law & economics at the Amsterdam Centre for Energy of the University of Amsterdam, focusing on the new legal framework for local smart distribution systems in electricity and gas.

Anna Butenko holds a Master’s degree in Law from the Universities of Tilburg (Netherlands) and Leuven (Belgium), and a Master’s degree in European Studies from the Universities of Groningen (Netherlands) and Uppsala (Sweden). Anna has developed her energy markets and regulations’ expertise working for the leading Dutch consultancy in the field of energy, DNV KEMA ( currently DNV GL), as gas markets, policy and strategy consultant for four years. Prior to joining DNV KEMA Anna worked for Gasunie, the mother-company of the Dutch gas transmission system operator, as policy and regulation analyst.

Anna is also a Research Fellow at Tilburg Law and Economics Center (TILEC), and a member of the International Association for Energy Economics (IAEE), as well as of the Dutch Energy Law Association (De Nederlandse Vereniging voor Energierecht, NeVER). Anna is fluent in English, Dutch, Russian and Romanian.


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Presentation given by Anna Butenko