NEM Market
6 min read

Understanding the Electricity System – An MVP

The minimum viable product (MVP) is a concept deeply ingrained into startup culture. It’s a response to the perfectionism that can slow down learning and innovation cycles, and by building MVPs instead of ‘perfect’ product, it can help startups understand if what they are building provides value for their customers, faster.

At Gridcognition we are very interested in the future of energy, but before we can build towards the decarbonized and decentralized future we can imagine, we need a basic MVP to iterate on.

The concept of an MVP is not only useful when building products – it’s also useful to understand complex systems.

Part of the complexity of the energy system can be removed by imagining a minimum viable energy system – the smallest set of energy system players that functions like the real thing:

  • consumer,
  • network,
  • generator,
  • retailer, and
  • a system operator.

1. Consumer

Electricity is an essential service and the entire electricity system exists to serve the needs of electricity consumers.

Electricity consumers come in all sizes, from tiny residential customers to large industrial sites.

Not only can the amount of electricity vary a lot between consumers, but the way they pay for electricity can be very different.

Residential customers are used to paying for their energy at a flat rate, where the price of electricity is the same at all times of the day. Large industrial customers can be on tariffs where the price of electricity changes every hour.

One thing is for certain – whatever the cost to supply energy is, ultimately consumers pay the entire bill.

2. Network

Electricity is carried to these Consumers on a Network. An electricity network is a natural monopoly, often with a single private company given the right to operate the transmission or distribution system.

Electricity networks come in two flavours – Transmission networks and Distribution networks.

The Transmission Network Operator is responsible for building, owning, and operating the high voltage transmission lines that carry electricity long distances from generators to distribution networks.

In some jurisdictions, the Transmission Network Operator is the operator of the overall electricity system, which can also include operating a wholesale market for Generators and Retailers to trade electricity (and they may be called the Transmission System Operator or TSO, or Regional Transmission Operator or RTO). In other jurisdictions, there can be distinct players with these responsibilities.

Some very large Consumers might connect directly to the Transmission network, but the majority will receive their electricity from a Distribution network. Similarly, some smaller Generators might connect directly to the Distribution network.

The Distribution Network Operator (or Distribution Network Services Provider) is responsible for building, owning and operating the medium and low voltage infrastructure that carries electricity to consumers.

The interface between a Transmission Network and a Distribution Network is a Substation, which includes the infrastructure to transform the high-voltage electricity produced by Generators down to medium-voltage electricity, where it can be carried to Distribution Feeders that step down the voltage further so it can be used by small consumers.

A key insight into the network is that their costs are based on peak demand. Electrical infrastructure must be sized to meet peak demand – so it’s the demand on peak days that drives costs in networks. As a response to this networks often recover their costs in a way that will incentivize customers to reduce their peak demand, such as Ausnet’s Critical Peak Demand tariff.

3. Generator

Generators produce electricity, usually with large centralised power plants connected to the Transmission Network.

The primary source of income for generators is selling the energy they produce to Consumers or Retailers (possibly via a wholesale market).

In some jurisdictions, generators also receive income to provide ancillary services or generation capacity.

Ancillary services are ancillary to energy and can include a variety of services that the electricity system needs to function reliably, like providing reserves to help balance supply and demand.

Capacity payments are paid for being available to generate, even if the generator doesn’t produce any electricity. These payments will be higher for generators that can supply energy on demand (and lower for variable sources of energy, like wind or solar). In markets with this mechanism, these payments help to underwrite investment in new generation plant, ensuring there is enough capacity built to meet peak demand.

Costs for generators can include fuel, operations & maintenance (O&M), possibly paying for some ancillary services, and repaying the capital cost of the plant.

4. Retailer

The Retailer supplies electricity to consumers.

Suppliers purchase energy in large amounts directly from generators or via wholesale markets and then sell it on to consumers.

An energy supplier is a true middle man – connecting consumers and generators together – and leaving the physical handling of the commodity they sell to the networks.

Because retailers are the interface with consumers they are often responsible for meeting Government policy goals around renewable energy and energy efficiency, and so may administer certificate schemes or be required to provide payments to consumers who export energy back into the electricity network from distributed generation systems, like roof-top solar.

The electricity systems is complex. Consumers are not just being supplied electricity, they are being supplied a basket of services including energy, capacity, ancillary services, use of the transmission network and distribution networks, environmental certificates, and fees to administer the system. And these underlying services often have market driven, and thus uncertain, pricing; electricity can be one of the most volatile commodities in the world.

So the key job of Retailers is to manage risk and complexity on behalf of Consumers, ensuring they receive an essential service at a fair price.

5. System operator

Our MVP energy system is all connected – energy can flow from our generator all the way through the network to our consumer, with the retailer taking responsibility for recovering costs from the consumer. So why do we need a system operator?

System operators typically have two roles in electricity systems:

  • ensuring a safe and secure supply of electricity,
  • operating an electricity market.

It’s the system operator who is responsible for deciding who will need to generate at different times throughout the day. Scheduling generation requires understanding both the supply side (who can generate what) and the demand side (how much electricity consumers will require).

The primary concern of a system operator is keeping the lights on – secondary to this is to reduce the cost of supplying electricity. Commonly this is done through an electricity market, with the lowest cost electricity taking priority over higher cost generators.

In conclusion

In future, we plan to start iterating on this MVP… adding more variable renewables; distributed generation; microgrids and embedded networks; storage systems; load management and demand response; virtual power plants; flexibility markets; two-sided markets; accelerated decarbonisation; and more, oh my!

If there is anything you would particularly like to see, be sure to let us know! Email [email protected] with your thoughts and help us imagine the future energy system!

Alex Leemon
Flexibility Markets Lead
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