Futuristic cityscape powered by local energy grids.

Power to the People: How Local Electricity Markets Can Revolutionize Your Energy Bill

Soraya Malik in Tech & Innovation December 2025 • 4 min read.

"Discover how hierarchical local electricity markets (LEMs) are optimizing energy distribution and empowering consumers to take control of their energy costs."

The energy landscape is undergoing a dramatic shift. No longer are we solely reliant on massive, centralized power plants. Distributed energy resources (DERs) such as rooftop solar panels, home batteries, and electric vehicles (EVs) are becoming increasingly common. This shift, while promising, presents challenges to the traditional electricity grid.

The existing grid was designed for one-way energy flow: from power plant to consumer. Integrating DERs, which can both generate and consume electricity, requires a more sophisticated approach. This is where local electricity markets (LEMs) come in.

Imagine a system where you can not only generate your own electricity but also sell excess power back to your neighbors, all while ensuring the grid remains stable and efficient. That’s the promise of LEMs. A new study proposes a hierarchical LEM structure designed to do just that. The goal? To effectively integrate DERs, increase grid efficiency, and reduce energy costs for everyone.

What are Local Electricity Markets (LEMs) and How Do They Work?

Futuristic cityscape powered by local energy grids.

At their core, LEMs are designed to bring energy transactions closer to the consumer. Instead of a centralized model, LEMs empower local communities to manage their energy needs more efficiently. This involves creating a marketplace where participants can buy and sell electricity locally. This system can offer benefits to both consumers and the grid itself, enhancing resilience, optimizing energy use, and potentially lowering costs.

A hierarchical LEM takes this concept a step further by introducing a two-tiered structure:

Secondary Market (SM): This operates at the level of secondary feeders, which are the lines directly serving homes and businesses. In the SM, DER-coordinated assets (DCAs) aggregate and coordinate DERs (like solar panels and batteries) within their secondary feeder to bid into the market.
Primary Market (PM): This operates at the level of primary feeders, which supply power to the secondary feeders. The SMs, acting as agents for their respective primary feeder nodes, then bid into the PM.

The beauty of this system lies in its ability to balance local needs with overall grid stability. The SM focuses on factors like consumer costs, flexibility limits, and commitment reliability (ensuring DERs deliver on their promises). Meanwhile, the PM ensures grid physics constraints are met, minimizing line losses and maintaining overall system balance. A distribution system operator (DSO) oversees the entire LEM, ensuring smooth operation.

The Future is Local: Embracing a Distributed Energy System

The hierarchical LEM is more than just a theoretical concept. Simulations using a modified IEEE-123 bus system with high DER penetration demonstrate its potential to lower overall costs, reduce distribution-level locational marginal prices (d-LMP), and create more efficient market scheduling. As DERs become increasingly prevalent, LEMs offer a promising path towards a more sustainable, resilient, and affordable energy future. This model enables consumers to become active participants in the energy market, driving innovation and ensuring a more equitable distribution of benefits.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2110.02358,

Title: A Hierarchical Local Electricity Market For A Der-Rich Grid Edge

Subject: math.oc econ.gn q-fin.ec

Authors: Vineet Jagadeesan Nair, Venkatesh Venkataramanan, Rabab Haider, Anuradha Annaswamy

Published: 05-10-2021

Everything You Need To Know

What are Local Electricity Markets (LEMs), and what's the key difference between them and traditional energy distribution systems?

Local Electricity Markets (LEMs) are systems designed to decentralize energy transactions, bringing them closer to consumers. Unlike traditional centralized power grids that operate on a one-way energy flow from power plants to consumers, LEMs empower local communities to manage their energy needs more efficiently by creating a marketplace where participants can buy and sell electricity locally. LEMs facilitate the integration of Distributed Energy Resources (DERs) and promote a more resilient, optimized, and potentially cost-effective energy ecosystem. Traditional systems lack the sophistication to handle bi-directional energy flow from DERs.

How does a hierarchical Local Electricity Market (LEM) function, and what are the roles of the Secondary Market (SM) and Primary Market (PM)?

A hierarchical Local Electricity Market (LEM) operates with a two-tiered structure: the Secondary Market (SM) and the Primary Market (PM). The SM functions at the level of secondary feeders, serving homes and businesses, where DER-coordinated assets (DCAs) aggregate and coordinate Distributed Energy Resources (DERs) to bid into the market. The PM operates at the level of primary feeders, supplying power to the secondary feeders, with SMs bidding into it. This structure balances local needs with grid stability, as the SM focuses on consumer costs and DER reliability, while the PM ensures grid physics constraints are met. A distribution system operator (DSO) oversees the entire LEM operation.

What are Distributed Energy Resources (DERs), and why are they important in the context of Local Electricity Markets (LEMs)?

Distributed Energy Resources (DERs) are decentralized power sources located near consumers, such as rooftop solar panels, home batteries, and electric vehicles (EVs). They are crucial for Local Electricity Markets (LEMs) because LEMs are designed to integrate these resources effectively into the grid. DERs enable consumers to generate their own electricity and sell excess power, promoting a more sustainable and resilient energy system. Without DERs, the need for LEMs would be significantly diminished, as the traditional grid setup is designed for centralized power generation.

What are the potential benefits of implementing hierarchical Local Electricity Markets (LEMs) on a wider scale, and what challenges might be encountered?

Implementing hierarchical Local Electricity Markets (LEMs) on a wider scale promises several benefits, including lower overall costs, reduced distribution-level locational marginal prices (d-LMP), more efficient market scheduling, and increased grid resilience. Consumers become active participants, driving innovation and equitable benefit distribution. Challenges could include the need for advanced grid management technologies, regulatory frameworks to support decentralized energy transactions, and ensuring cybersecurity across distributed energy networks. Further research and development are needed to optimize the coordination between the Secondary Market (SM) and Primary Market (PM) and to address potential issues related to data privacy and market manipulation.

How do Distribution-Level Locational Marginal Prices (d-LMP) play a role in Local Electricity Markets (LEMs), and what implications do they have for consumers and energy providers?

Distribution-Level Locational Marginal Prices (d-LMP) in Local Electricity Markets (LEMs) reflect the marginal cost of supplying electricity at specific locations within the distribution grid. By incorporating d-LMP, LEMs can provide more accurate price signals, incentivizing efficient energy consumption and DER placement. This means consumers can respond to price variations by adjusting their energy usage or selling excess power back to the grid during peak demand. For energy providers, d-LMP allows for better management of grid congestion and optimization of resource allocation. The reduction of d-LMP through hierarchical LEMs indicates a more efficient and cost-effective energy distribution system. The hierarchical structure facilitates managing the locational pricing by enabling granular pricing at the Secondary Market (SM) level which the Primary Market (PM) level then takes into account.