An Economic Analysis of Market Design : Local Energy Markets for Energy and Grid Services

The convergence of digital and distributed energy resource (DER) innovation is creating the potential for a more decentralized electricity distribution system, including local energy markets (LEMs) for local coordination of consumption and production. Using market processes to coordinate physical and economic flows enables parties to benefit from reducing congestion, with prices as the decentralized coordination signals (control signals in an engineering sense). Digitization of the distribution grid facilitates these opportunities, including opportunities for DERs to provide grid services including voltage management, system reserves, and frequency support through LEMs. This chapter synthesizes exchange theory, transaction cost economics, mechanism design, and auction theory into an economic framework to suggest market design principles for why and how LEMs enable DERs to provide energy and grid services in a decentralized architecture. It then provides a brief analysis of the institutional context in the United States, and how the institutional diversity and experimentation in the U.S. may affect LEM development and adoption