Local flexibility markets:
lessons from international evidence
Michael G. Pollitt
Energy Policy Research Group
Cambridge Judge Business School, University of Cambridge

Japan Flexibility Workshop
27th September 2021

www.eprg.group.cam.ac.uk

Introduction and background• Local flexibility markets are markets for constraint
management within the lower voltage distribution network.
• They usually involve bids to increase or reduce MWs (realpower) or MVars (reactive power) to manage current or
voltage fluctuations on the network.
• Demand for local flexibility is rising as local demand grows oras more generation connected to distribution network. In theUK capacity for distributed generation export may be limited.
• Distribution system operators (DSOs) have been
experimenting with procurement of flexibility from loads orfrom generators behind a constraint.
• We look at the results from two sets of studies: one for theCentre on Regulation in Europe (CERRE) in Brussels andone from Project Merlin, an innovation project in the UK.
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About CERRE study

With thanks to my colleagues Karim Anaya and Monica
Giulietti, and CERRE and sponsors for funding this study

Full report and webinar published at CERRE website:
Optimal regulation for European DSOs to 2025 andbeyond – CERRE

The report aims to:• Suggest how regulation of the distribution system operator (DSO) can beimproved in the period to 2025 and beyond• Investigate directions in which current regulation might be developed leading to
an improvement in social welfare
Methodology:• 2 parallel surveys to national regulatory agencies (NRAs) and DSOs
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Survey participants and respondents•

51 responses, 20 countries.

• Respondents from 12 NRAs and 37DSOs.
• 9 countries with responses from both
NRA and DSOs.
• 39 responses from DSOs, 17 countries
represented.
• 125m customers served by the DSOs,
225m protected by NRAs
• 40% of DSOs with 1 million or morecustomers.
• Participation of 2 energy network
associations.

18
16
14
12
10
8
6
4
20
<=100K<1m and >100K>1m4

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DO NRAs PROMOTE THE MORE ACTIVE DSO?

NRAs could do more to support thetransition to an active DSO…

Does your jurisdiction have a regulatory
sandbox type regime to encourage newbusiness models?
100%
80%

Does your jurisdiction promote R+D
funding for the future of the DSO?

60%
40%

50%

20%

40%0%
YES30%NO

Has your regime granted a derogationfrom normal DSO regulation to facilitate afuture of the DSO trial?

20%
10%
0%
YES

NO

Don't' Know

80%
60%
40%
20%
0%
YES

NO

DON'T KNOW

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WHAT IS THE SIZE OF ANNUAL COMPETITIVEPROCUREMENT BY DSOs?

Current competitive procurement by DSOs of congestion management andreactive power is small.
Current Annual Size of competitive
procurement by DSOs
90%80%70%60%50%40%
30%20%
10%0%
0Don't know

Congestion Management<10MW/MVAr
Reactive power

Share of DSOs reporting
different %s of competitive
procurement
70%
60%
50%
40%
30%
20%
10%0%
No0% or NAResponse

Tra ilCongestion Management

2%

5%

15%

Reactive Power

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WHAT DSOs WANT THEIR REGULATORS TO DO?

•This produced a range of responses, which brought out a number ofissues.

•First, DSOs questioned whether there were the incentives in andaround the revenue allowances for monopoly DSOs and the extent towhich these encouraged non-capex solutions.

•Second, there was the issue of the incentives to innovate and thegeneral regulatory support for innovative solutions.

•Third, there were issues raised around stakeholder engagement.

•Fourth, points were made about whether current regulatory
arrangements were sufficiently flexible.

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WHAT ARE DSOs DOING THEMSELVESTO FACILITATE THE MORE ACTIVE DSO?

•This produced a range of responses, which brought out a numberof issues.

•First, there was attention to staff training.

•Second, there were improvements to network planning.

•Third, there was investment in network capacity and the energy
transition itself.

•Fourth, there was an emphasis on R+D and new experiments.

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9WHAT DO NRAs AND DSOs KNOW ABOUT PROJECTS?

Patchy awareness of experimental projects in both NRAs and DSOs about thefuture of the DSO…
Percentage of respondents naming
example projects in their jurisdiction

Percentage of DSOs andNRAs citing extrajurisdictional examples

Smart energy system integration
at local/regional level
60%

DSO information provision tofacilitate longer-term planning

50%

Promotion of flexibility
ma rkets/assets (e.g. for…

40%30%

Local gas and electricity
decarbonisation (sector coupling)

20%
10%

Promotion of EV charging
infrastructure

0%0% 10% 20% 30% 40% 50% 60% 70%

NRAs

DSOs

>=1 Example
NRAs>=2 Examples
Large DSOs>=3 Examples

Small DSOs

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BARRIERS TO EMERGENCE OF MORE ACTIVE DSO?

DSOs concerned about regulation, NRAs concerned about competition…

NRAsompaVonieslt agelevels
at…

oneNof
ce
Sizof
…

Other
(La
ckof…
La
ck

Laeg
ck
ul
atof
or…
yob
stac
les
La
ckof
loca
l…
RTa
rif
fs

tru
ct
ur
e

60%50%40%30%20%10%0%

plea
In
se
itia
…
lown
er
sh
C
ipom
…
petenc
eof
La
…
ck
Taof
prx/
su
ice
bs
…
id
yregi
me

Top 3 Barriers to more active role for DSOs bypercentage of respondents

DSOs

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www.eprg.group.cam.ac.ukAbout Project MERLIN
With thanks to Karim Anaya and all our colleagues from Project MERLIN

With thanks to distribution utilities/ESOs (Ausgrid, Avacon, Enedis, Liander, NGESO, Stedin,Tennet,Tepco, UK Power Networks, Western Power Distribution), ENA UK, FfE, NYSDPS,
Silicon Grid, energy experts.
MERLIN = Modelling the Economic Reactions Linking Individual Networks:
Is a BEIS funded innovation project, under the Power Forward Challenge:
Canada-UK Joint Challenge on Smart Energy Systems.

Project reports published at SSEN website. https://project-merlin.co.uk
This presentation draws on our first, second and third reports:••••

The first of which compares 13 use cases of DNO/DSO to procure flexibility
The second makes recommendations of what can be learnt from the cases
The third identifies key regulatory aspects for the development of local flexibility markets in 7jurisdictions
The fourth (forthcoming) measures the value of procuring flexibility (CBA) under key scenarios

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Procurement projects we examine• Selection of Use Cases (13 in total) from 7 jurisdictions.
• Discussion of latest projects/initiatives (from 2017 onwards).

Country

project/initiative nameproject leader(s)typestart datestatususe of an independent platform(e.g. marketplace, others)

Australia
FranceBattery Virtual Power Plant (VPP)
Nice Smart Valley
AvaconAusgrid (DSO)
Enedis (DSO)
Avacon (DSO)

demonstrator
demonstrator
demonstrator

Jun-18Jan-17Jan-17

ongoing (Phase 1 completed)end Dec. 2019end Dec. 2019

nono
no

The Altdorfer Flexmarkt (ALF)
Power Potential

FfE e.V.
NGESO (TSO)

demonstrator (proofof concept)
demonstrator

20172017

ongoing (end in 2020)
ongoing (end in March 2021)

yesno

Flexible Power
Flexibility Services
Piclo Flex

WPD (DNO)
UKPN (DNO)
Piclo

BAU
BAU
BAU

Mar-19Mar-19Mar-19Cornwall Local Energy MarketCentrica

trial

May-19ongoingongoingongoingongoing (Phases 1 and 2completed)Jun-18Q4 2017

ongoing (end in 2020)
ongoingnono

ongoing (potential extension to
first DSOs: Liander, Stedin)
ongoing (different Europeancountries)

yes, national platform (involves
several DSOs)

Germany

GBJapan

V2G Demonstrator Project Using EVs as Tepco (integrated demonstrator (proof
Virtual Power Plant Resourceutility: DSO/TSO)of concept)
DynamoLiander (DSO)BAUThe Netherlands

NorwayGOPACS

TenneT (TSO) and 6
DSOs

BAU

Jan-19

Nodes

Nodes

BAU

2018

no (but it can be also via Piclo Flex,CLEM)
yes (only via Piclo Flex)yes (involves several DNOs)
yes

yes

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Current developments in local flexibility markets
Questions raised per each Use Case:• What are the recent developments in smart architectures and solutions forthe procurement of flexibility services?
• What are the different proposals for market design for the procurement offlexibility services?
• Why are new business models required to capture the value of flexibility?
• How do network operators value flexibility?
• What are the most and least common trends in the acquisition of flexibility
services and what is still missing?
• Can regulatory changes help to unlock the value of flexibility for a more
efficient grid management and service provision?
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Current developments in local flexibility markets
Summary of Use Cases (selected)
Country

Use Caseproduct/service to be
traded/tested

aggregators

price ruleuse of maximum prices,ranges (market-based only)

remuneration schemePower Potential(NGESO)

PV systems, wind turbines, CHP,
reactive and active power biogas plants, etc

optional

pay-as-bid (wave 2)

noFlexible Power(WPD)

flexibility services(several)PV systems, wind turbines, CHP,
biogas plants, storage systems,
flexible loads

optional

pay-as-bid (with regulatedprices)yesutilisation (active and reactivepower) and availability (reactivepower)
availability (secure, dynamic),
utilisation (secure, dynamic,restore); with maximum prices(£300/MWh secure, dynamic;£600/MWh restore)
availability (secure), utilisation(secure, dynamic), service fee(sustain: £47.58/kW/year). Range(with lower and upper values)
regarding total price for HV (secure)GB
Flexibility Services flexibility services(UKPN)(several)Piclo Flex

The
Netherlands

flexibility providers

flexibility services(several)PV systems, wind turbines, CHP,
biogas plants, storage systems,
flexible loads
PV systems, wind turbines, CHP,
biogas plants, storage systems,
flexible loads

Cornwall LocalEnergy Market

flexibility services(several)Dynamoconstraint management(congestion)

diesel generators, gas turbine,flow battery, domestic battery
clusters, ice manufacturer
Lidl (with cold store and battery
at the distribution centre), Vandel Valk (heat pump)

GOPACS

constraint management(congestion) , TSO-DSO
coordination

PV systems, wind turbines, CHP,
biogas plants, storage systems,
etc

optional

HV: pay-as-bid, LV: regulatedprice

yes (range per site)

optional

pay-as-bid

yes (based on each DNO'srequirements)

utilisation and/or availabilitydepending on the service

phase 1: pay-as-bid (withoptional, phase 1 regulated prices), phase 2: pay(Kiwi Power)
as-clearyes (Phase 1)

phase 1: utilisation, phase 2:
utilisation, availability(reservation). Regulated price up to£300/MWh (combined) in phase 1

required (ScholtEnergy)

not applicableavailability and utilisation. Highratio availability/utilisation (0.9)

optional

regulated price (aggregator)
pay-as-bid (trading parties),
TSO/DSO pay a spread(difference between buy andsell order)

nodispatch (utilisation)

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Current developments in local flexibility markets
Main findings and recommendations based on Use Cases

smart architectures and solutions
different bespoke and third-party platforms
in useeasy for participants to understand andaccessextensive stakeholder engagement
new business models

the value of flexibility
market design for flexibility services
different designs with a variety of services to different ways to value flexibility, frombe procured
regulated prices to market-based ones
clear rules need to be adopted, ideallyaligned with the current ones and ensureneed of a standard cost-benefit methodology
consistency, standardisation and stakeholder with the incorporation of social values
buy-into be published and with indication of WTP
most and less common trends

the role of regulationdifferent channels to procure flexibility
aggregators are playing an important role

most: to solve congestion, multiproduct, PAB can help via different ways, a supportive
less: pay-as-clear, reactive power, etc
regulatory environment is crucial
Unlocking the value of flexibility depends on
distribution utilities must identify the sources to experiment a reverse clock auction with a allowing the benefits to society to beof value and to market test themcustomer revenue benefit target
monetised via the regulatory regime

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The role of regulationin supporting DSO flexibility procurement
Questions raised:• To what extent the current regulatory frameworks from different jurisdictions support
the development of the future distribution utility with a focus on the use of flexibility?
• What is missing and the status of current or future proposals to deal with this?
Methodology:• Questionnaires were designed and sent to key parties• Identification of key regulatory topics (12 in total)• The questionnaires aim to capture for each regulatory topic what has been alreadychanged (past), what is currently under consideration (present) and what should bechanged (in future)• If at least one of the participants confirmed any existing change, or changes being
Considered/changes that should be considered we mark the country response as a “Yes
Summary of respondents to questionnaires:
Summary of responses
Regulator
Distribution utilities
Energy AssociationsPlatforms/marketplaces
Experts
number of responses

AUFR
1
1
13

DE
11

GB
1
1

2

www.eprg.group.cam.ac.uk

JP13
12
7

NL
112NO total
115
72
13
11218

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Expert views on the role of regulationin supporting DSO flexibility procurement

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Observations on
regulation and local flexibility markets
Key Takeaways- Even where flexibility markets are highly developed and incentives (i.e. DSO revenue
model and tariff structure) exist to undertake least cost procurement, it remains unclear
as to whether they are cost effective at a sustainable scale.
- More dynamic network tariffs have been or are being considered in several jurisdictions,but all jurisdictions remain cautious as to the practicality of their implementation.
- While there are moves across multiple jurisdictions to specify and standardise flexibility
products it remains unclear as to whether this is the optimal way to handle customer
willingness to pay which is not a function of the flexibility product but of the assets’characteristics.
- Market design of flexibility markets is a work in progress, and we remain in anexperimentation phase.
- There is little interest across our jurisdictions in P2P trading as an issue in current debates
about flexibility markets. The focus, outside GB, remains on procurement by thedistribution utility to meet its own needs.
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Observations on
regulation and local flexibility markets
Key Takeaways- The facilitation of increased co-ordination between TSOs and DSOs is actively being
pursued across most of the jurisdictions where unbundling is in place, with some signs ofactive conflict between the TSOs and DSOs in some areas which needs to be addressed.
- Allowing DSOs to procure flexibility on behalf of the TSO is not seen as a big issue outsideof GB. This reflects the fact that currently DSOs and TSOs are procuring very different
types of flexibility and trying to avoid direct competition or even direct contractual
relationships. It is not clear how sustainable this avoidance of conflict (and its resolution)is in the longer run.
- Most of our jurisdictions are working on a common cost benefit methodology to evaluate
flexibility solutions. There is clearly a need for this and for it to be consistent withstandard social cost benefit methodologies being used by central and local government.

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References•

ACM (2019), Verkenning naar de mogelijkheden van flexibilisering van nettarieven, Authority for Consumers &Markets, May 2019.

•AEMC (2020), Consultation Paper. Distributed Energy Resources Integration – Updating Regulatory Arrangements.
Australian Energy Market Commission, July 2020.

•Anaya, K.L.; Pollitt, M.G. (2021a) How to Procure Flexibility Services within the Electricity Distribution System: Lessons
from an International Review of Innovation Projects. Energies, 14, 4475. https://doi.org/10.3390/en14154475
Anaya, K.L.; Pollitt, M.G. (2021b) The Role of Regulators in Promoting the Procurement of Flexibility Services within theElectricity Distribution System: A Survey of Seven Leading Countries. Energies, 14, 4073.
https://doi.org/10.3390/en14144073
Anaya, K. and Pollitt, M.G. (2020a), A review of international experience in the use of smart electricity platforms for theprocurement of flexibility services (Part 1), April 2020.
Anaya, K. and Pollitt, M.G. (2020b), A review of international experience in the use of smart electricity platforms for theprocurement of flexibility services (Part 2 – Main Findings), May 2020.
Anaya, K. and Pollitt, M.G. (2020c), Regulation and policies for local flexibility markets: Current and future
developments in seven leading countries, August 2020.
BNetzA (2017), Flexibility in the electricity system. Status quo, obstacles and approaches for a better use of flexibility.
Discussion Paper. Bundesnetzagentur, April 2019.
ENA (2020), Open Networks Project Phase 4 2020 Project Initiation Document. Energy Networks Association, January
2020.
EN Australia (2020), Open Networks Project. Position Paper. Energy Networks Australia, 2020.
Ofgem (2020), RIIO-ED2 Methodology Consultation: Overview. Office of Gas and Electricity Markets, July 2020.
Pollitt, M., Giulietti, M. and Anaya, K. (2021), Optimal regulation for European DSOs to 2025 and beyond, Brussels: 20CERRE.

•••••••••

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