Peak-valley tariffs and solar prosumers: Why renewable energy policies should target local electricity markets

Abstract

There is a growing recognition that local electricity markets (LEMs) for distributed
power resources are technically and economically feasible. However, the conditions
under which these markets can create value for prosumers and consumers (P&C) and
ensure overall welfare for society are insufficiently understood. To help address this
literature gap, this paper takes China as a case to study a local electricity market that
is driven by peer t o peer trading. The results show that peak valley tariffs increase
cost savings for P&C at the expense of grid revenue and the larger the peak valley
spread, the greater the benefits to P&C and, hence, losses to the grid. In addition, the
study finds that t he value of solar PV declines when deployment of solar technology
increases linearly with storage installation in the market. Because the declining value
of variable renewable energy appears to be especially problematic in wholesale
electricity markets (WEMs), this study argues that as long as storage installation
increases at a faster rate than variable renewable energy deployment, LEMs that
operate independent of the central grid can potentially offer a more cost effective
option for large scale renewable energy utilization. These results underscore the
importance of government policies that seek to promote the development of LEMs.

Keywords: Solar prosumers, Local electricity markets, peak valley tariffs, peer to peer trading, China