Energy sharing: an uncomfortable truth for the status quo
This article is an edited English version of an op-ed by Siward Zomer and Justin Pagden, published in the Dutch newspaper on 26th May 2023.
Siward Zomer is cooperative director of the national umbrella and advocacy organisation of energy cooperatives Energie Samen. Justin Pagden is business developer at Agem Energie Experts.
Siward Zomer and Justin Pagden argue that energy sharing offers citizens a fair cost of energy.
Energy sharing: the uncomfortable truth
Recently in the Netherlands, voices arguing against energy sharing have emerged, claiming that it is a fairy tale too good to be true. They believe that someone needs to protect poor consumers from politicians, energy community advocates, and grid operators who promote this idea.
However, these critics base their arguments on misconceptions about what energy sharing entails and anticipate the wrong choices that could be made within it. This undermines the concept of energy sharing. Nonetheless, we agree that making the wrong choices should be avoided. In this article, we explain what energy cooperatives mean by energy sharing, our goals for it, why the European Union places significant importance on energy sharing and why it may not be a desirable concept for commercial energy suppliers.
'The energy crisis has revealed that the market does not accurately reflect the true cost of energy production'
The regular energy market operates as a genuine marketplace with a trading exchange where the basic market rules of macroeconomics apply. In this market, the price of a kWh is determined by the balance between supply and demand, which in turn affects the price. If supply is high, prices are low, and if supply is low, prices are high. Producers, suppliers, and other parties speculate to buy energy as cheaply as possible at a given time and sell it at a higher price later.
The concept underlying this market is that the value of a kWh is determined by the price someone is willing to pay for it in the market. The act of buying it at a lower price and selling it at a higher price is considered value creation, even though no additional kWh has been generated. However, the recent energy price crisis has exposed the inadequacy of this market in accurately reflecting the actual cost of energy production. It is vulnerable to the unpredictability of international energy trading, and the market players involved are unable to shield consumers from these uncertainties.
Cost price versus market price
The prevailing notion that the value of a product is equal to the bid of the highest bidder has not always been the dominant idea in determining price within a market. Economists like Adam Smith, the father of free-market thinking, concluded that the value of a kWh is determined by the sum of the labor, capital cost, and distribution expenses involved in producing it. Energy cooperatives refer to this sum as the cost, which encompasses all the necessary expenses to maintain the energy flow, including required reserves.
For some time now, the cost price of wind and solar power has been lower than the market price during certain periods. However, some parties still sell it at a higher price, burdening consumers with unnecessary additional costs. In this way, value is extracted from society to maximize profit, leading to capital leakage from society to shareholders.
Energy sharing aims to create a new market with different market rules. It allows citizens and companies within a collective, which we refer to as an energy community, to establish local markets based on alternative market rules and their own pricing.
Other type of agreements
Within an energy community, members have the opportunity to make agreements different from those dictated by the international market. Instead of being determined by what someone is willing to pay for it (the price), the agreed price is collectively based on the cost.
With energy sharing, locally generated energy does not need to go through the market, where value is extracted by suppliers as intermediaries. Instead, the value, in the form of lower and more stable tariffs, remains within the community. By ensuring that cost-based access to energy is available to all, a fair distribution of value can be achieved.
The energy sharing market operates within an energy community and is built on principles of solidarity. Members collaborate in developing and operating sustainable means of production, such as wind farms or solar farms, and they collectively agree on the cost price. Even if there are individuals in the market willing to pay more for it, the shared energy is still distributed among the community members at the agreed fixed price. Similarly, when market prices are low, the collective continues to purchase shared power at the agreed-upon fixed price.
As a result, the collective operates independently of the international energy market, providing many people with the assurance of paying a fixed and stable price for at least a portion of their energy bill, unaffected by market fluctuations. Although the exact evolution of the price remains uncertain, it is expected to be more certain, stable, fairer, and less reliant on the volatile international energy market.
Not against the market
Energy cooperatives are not opposed to the market; instead, they advocate for the development of diverse markets based on different values. The energy sharing model creates a new revenue stream for market players, based on the services they offer to energy sharing communities on a competitive basis. Any company, including those outside the energy sector, can engage in providing these services. Grid operators, for instance, who already facilitate the energy market, can adapt their services to align with the new market model.
Existing energy suppliers are also free to develop and offer additional services to energy communities. In the near future, energy communities will choose the service provider they prefer, such as an IT platform or a company specialising in billing and settlements. The selection will be determined based on the value for money offered by these service providers.
To ensure proper regulation of the new energy sharing market and the establishment of an energy price based on cost, market rules are necessary. These rules serve multiple purposes, including preventing disruption of the energy system, ensuring fair access to the market for all, avoiding grid imbalances, and setting standards to enable participation of individuals with lower incomes.
It is important to note that energy sharing does not imply a scenario where anyone and everyone can sit in a small attic room and freely share energy. Similar requirements may apply within an energy community as those imposed on all energy suppliers. Energy communities are democratic in nature and closely collaborate, resulting in a system where compliance is largely self-regulated. Efforts are already underway to establish a charter emphasising fair access to energy for all income levels.
In the Achterhoek, energy sharing is already a reality
The cooperative energy supplier "Agem Gemeentelijke Energie" supplies energy to its members, the eight Achterhoek municipalities, following the self-supply model, and operates on a not-for-profit basis. In cases of insufficient generation, they purchase energy from other cooperative producers or the international market to supply their members. Any surplus energy is sold on the market. Additionally, Agem Energie Experts support the Achterhoek cooperative Streekenergie, which comprises local energy producers. Customers can purchase the energy generated by these cooperatives through the cooperative supplier Energie Van Ons.
However, the fact that energy sharing is already happening does not necessarily mean that it is legally recognized. Without proper legal recognition, it becomes challenging to establish appropriate market rules. According to Dutch law, the activities carried out by cooperatives in collaboration with cooperative suppliers, including collective energy production, distribution, and usage, are legally classified as separate entities. This legal distinction creates obstacles in formulating market rules, as they would need to be based on different legal concepts.
Energy sharing empowers consumers to collectively and democratically establish their own local market rules. As a result, several local or regional markets emerge, interconnected with each other and the international market. These markets complement one another and reduce dependence on a single market. One of the objectives of the European Commission is to promote market stimulation and empower consumers by providing them with more options. Consequently, the Commission also supports the enablement of energy sharing for consumers.
Towards a fair marketplace
The uncomfortable truth for the entities currently dominating the status quo is that many individuals and small businesses are increasingly inclined to withdraw from participating in energy market speculation. Instead, they desire the opportunity to obtain collectively generated energy from a transparent, stable, and fair marketplace that operates based on cost and adheres to social market rules.
Read the full article (in Dutch): https://energeia.nl/energeia-artikel/40106628/energie-delen-eenongemakkelijke-waarheid-voor-de-status-quo