For a household with an EV, flexibility can often show up as a tariff, with cheaper power overnight and higher prices at peak – or perhaps a dynamic rate linked to wholesale conditions.
But for a distribution network operator managing a constrained substation, flexibility needs to be both shaped and directed. That means tariffs to influence behavior, and contracts, programs, or markets to secure a response from those same consumer assets, when and where it’s needed.
I increasingly see these approaches positioned as alternatives. In my view, that framing does not fully reflect how these tools – markets and tariffs – are used in practice, much as I argued in my recent blog on markets or programs. If we want distributed energy resources to become dependable assets, we need both.
Price shapes behavior
Time-of-use (TOU) tariffs – sometimes referred to as “implicit” flexibility – are a visible interface between the energy system and the electric customer.
TOU tariffs in the UK and US, and critical peak pricing across parts of the US, expose customers to variation in price. The aim is to encourage demand to move away from system peaks and towards periods of lower cost, less strain on the power system, and lower carbon intensity.
This does work. Price signals influence charging behavior, heating and cooling schedules, EV charging sessions, and battery optimization. At scale, those individual decisions begin to reshape aggregate demand for utilities.
That baseline shift matters as electrification accelerates. EVs, heat pumps, customer energy storage, and more are adding significant new load. Without some signal to guide behavior, peaks would rise sharply and distribution network reinforcement would follow.
A risk of synchronised behavior
However, there can be a downside. When a tariff encourages overnight charging, large numbers of devices can begin charging at roughly the same time – that is, when the TOU price reduction starts, which is commonly 11pm or midnight depending on the specific utility’s tariff. When a critical peak event is announced, many assets respond together. When wholesale-linked tariffs drop sharply, that flexible demand can cluster into a narrow window.
From the perspective of a supplier balancing a portfolio, that response can look efficient but, for a local distribution network, it can create new stress points.
This “consumer herding” behavior is a predictable outcome of those uniform price signals. If everyone responds to the same price at the same time, the systems simply shift the peak rather than reduce it.
Tariffs can move behavior at scale and at the utility system level. They do not, on their own, ensure that movement aligns with local system needs.
Coordination and location matter
Flexibility markets or programs then address a different problem.
When a utility identifies a specific constraint or anticipates a defined system need, it can procure flexibility in a targeted way. Local flexibility markets in the UK and non-wires alternatives or demand response procurements in states such as New York and California are examples of this approach.
Here, the requirement is explicit, with the location specified and then delivery measured.
This layer of coordination matters because electricity networks are physical and therefore location specific. Congestion occurs on particular feeders and voltage issues arise in specific areas. Wholesale prices do not always reflect those local conditions.
Markets allow operators to align flexibility with those physical realities. They provide a mechanism to direct response where it is needed most, rather than relying on broad price exposure to produce the right outcome by coincidence.
Different tools for different coordination problems
As I see it, the mistake is to assume that one of these mechanisms can replace the other.
If we relied solely on tariffs, we would be assuming that behavioral response will always line up with network requirements. As an industry, we know this is not true. As electrification increases and devices become smarter, the scale of synchronised response is going to grow. Without a coordinating layer, clustering effects become more likely.
If we relied solely on markets, we would be ignoring the importance of shaping everyday consumption patterns rather than paying for explicit flexibility. Targeted procurement can resolve specific constraints, but it does not automatically influence how millions of households use electricity day to day. Without that broader behavioral shift, the volume of intervention required would increase – as would the cost of those interventions.
Tariffs influence the baseline, and markets help utilities refine and direct that flexibility.
An ecosystem of tools
I therefore find it more helpful to think of tariffs and markets as part of a flexibility stack – different tools in our toolbox to get what needs to be done.
At the base, retail tariffs and dynamic pricing structures shape consumer behavior at scale. They make participation accessible and embed flexibility into routine decisions.
Above that, markets and structured procurements provide precision. They translate system needs into explicit requests and ensure that response is aligned with physical constraints.
Between these layers sit enabling technologies, such as smart meters, DERMS, flexibility energy market platforms, and virtual power plants. These tools connect consumer action to system insight. They help ensure that flexibility is not just visible in price data, but in operational planning too.
When designed together, these layers can reinforce one another.
From price response to dependable assets
For households, flexibility will often continue to feel like a tariff decision yet for operators, flexibility must feel dependable. It needs to show up in the right place, at the right time, in the right volume.
In my view, that gap between consumer experience and system requirement is where coordination becomes essential.
Tariffs can incentivize consumption behaviors across millions of devices. Markets can target specific constraints. Together, they allow distributed energy resources to move beyond passive price response and become reliable contributors to utility system stability.
The debate should not be markets or tariffs. Instead, it should be how we design both so that behavioral scale and operational precision work in alignment rather than at cross purposes.
