Why do we need flexibility? The growth of distributed generation is disrupting the traditional approach to distribution network planning. It’s no longer about building to meet peak demand. Instead, local grids are struggling to accommodate times when generation exceeds their hosting capacity.

Adding to the challenge is the electrification of heat and transport, which is changing existing demand patterns and making forecasting more difficult. However, it also presents an opportunity to respond to price signals and control demand.

Traditionally, system operators have been incentivised by regulation to prioritise capital investment in the grid, but continuing this approach would require doubling the size of the network at huge costs to consumers and at a pace too slow to keep up with demand.

This is causing mounting frustration among developers who face congestion and delays in connecting new housing, industry, generation, and storage.

Without addressing these issues, the next energy crisis could be local, with consumers unable to install heat pumps or charge EVs, and developers prohibited from connecting new generation or storage while existing renewables are paid to be curtailed.

How much progress has been made?

The implementation of the Clean Energy Package and European Balancing Guidelines has been disappointingly slow and inconsistent across member states. Nevertheless, transmission system operators are moving towards standardisation of ancillary services, which should expand access to storage and demand-side flexibility. Aggregated access to markets is unlocking the value of ancillary services to the demand side.

At the residential level, the emergence of dynamic tariffs and demand charges is accelerating the growth of Home Energy Management (HEM) solutions to optimise the self-consumption of rooftop solar in individual buildings.

However, network charging does not incentivise individual consumers to behave in a manner that reduces costs for all consumers. Market-based solutions at the distribution level have only been implemented on a small scale through trials and pilots.

The 2022 Flexibility Market Monitor by LCP Delta and smartEn has highlighted the North-South divide in approaches taken across Europe. In southern Europe, energy communities are more prevalent, providing more opportunities to share excess solar generation. In northern Europe, meeting the peak winter heating demand is the greater challenge, and markets for flexibility procurement offer the distribution system operator more control.

Regardless of approach, progress has been slow and value low, hindering the development of scalable business models to harness the growing capacity and capability of local flexibility.

How do customers get involved?

We know that many customers can adjust their consumption patterns to be more flexible. Enel X Global Retail has found over 8 GW of such flexibility around the world. However, convincing customers to participate is challenging, as they are typically risk-averse and need to be certain that it will be worthwhile.

While dynamic tariffs and demand charges can help, we believe that more customer engagement can be fostered through explicit participation in markets where they are rewarded for their flexibility.

Enel X Global Retail and other aggregators work with customers to maximise the value of their flexibility. Currently, this often involves providing services to transmission system operators combined with wholesale markets and resource adequacy mechanisms. In our vision of the future, an increasing proportion of the value should come from addressing local issues as distribution networks become more constrained.

What are the new proposals?

The proposed amendments to the Electricity Market Design aim to address some of the challenges to demand-side flexibility, but the distribution gap risks being overlooked.

Both transmission and distribution system operators will have an obligation to assess their need for power system flexibility and to consider the potential of demand-side response and storage to fulfil this need, and member states will define an objective to be reflected in national energy and climate plans.

Networks need to consider both capital and operating expenditure to provide appropriate incentives to use flexibility services and facilitate demand response, but this falls short of the requirements in the most advanced markets for local flexibility. And the proposed peak-shaving product for demand-side response is still focused solely on the needs of transmission system operators.

The right to separate contracts for flexible assets like heat pumps and EVs, combined with market trading closer to delivery, will increase the opportunity for demand response to participate fully in all markets. But poorly implemented renewable energy sharing within a bidding zone may worsen the problem of local congestion where there is a conflict with the need for local balancing.

To benefit from local optimisation, it’s crucial that local- and system-level flexibility products are designed to coexist. If either of them requires exclusive control of participating assets, it will make both more expensive.

How do we prevent the next crisis?

While the proposed reforms to the Electricity Market Design are a step in the right direction, further steps are needed to realise the full benefits of local flexibility.

We will need flexibility solutions to integrate variable renewables and low-carbon demand assets in a way that meets consumer demand and helps solve congestion issues. This could include more ambitious actions on energy sharing, energy communities and local optimisation schemes. This would also allow distributed assets to play their part in replacing gas as the dominant source of flexibility.

Balancing at the local level will reduce the need for investment in networks and generation, and can reduce the amount of expensive rebalancing by system operators. This will reduce carbon emissions from the energy sector, ensure more efficient use of assets, and reduce costs for consumers.

Prioritising flexibility won’t remove the need for grid investment. To meet the challenge of climate change we will need both, and we will need to balance these approaches and focus them where they will have the most impact.

The upcoming smartEn Smart Energy Summit on 19th April 2023 will offer a platform for debates on financing, innovation, and monetisation of local flexibility.