In 2019, the UK government legislated to set itself the target of reaching net zero by 2050. Many European countries and other nations followed suit with similar targets – a global step towards creating a greener future for our planet.
Aiming for net zero requires drastic change in how nations produce and consume energy. The UK government has committed to decarbonise the electricity system by 2035. Across the EU, power systems need to reach a minimum of 42.5% renewable energy by 2030. In the US, the aim is to have 100% clean electricity by 2035 – and Net Zero by 2050.
These regions therefore need to increase their use of renewables to hit these targets. Here’s our guide to what flexibility marketplaces and markets are and how they can help with this transition.
What this guide covers:
- What is energy flexibility?
- What are flexibility markets?
- Why do we need flexibility markets?
- What are the benefits of a flexible energy system?
- Who are the key stakeholders in flex markets?
- How do flexibility marketplaces work?
- The four main flexibility market archetypes
- Where does Electron fit in?
What is energy flexibility?
Flexibility is a means for energy systems to manage and coordinate the generation and consumption of electricity.
This normally requires asking flexibility providers to reduce their use of energy, or to use it at a different time. In other words, it incentivises a change in behaviour.
What are flexibility markets?
Local flexibility or “flex” markets help manage when and where electricity is generated and consumed. It does so with price signals that reflect the current supply and demand of electricity available on the grid at any location.
“Flexibility” itself essentially becomes a service that can be bought or sold in an energy exchange through a flexibility marketplace.
The Energy Networks Association (ENA) reported that local flexibility markets tendered a record 4.6GW of capacity in Great Britain in 2022. From that 4.6GW, 2GW were contracted – with low-carbon technology comprising 70% of the total.
Demand for flexibility is therefore growing – and fast.
Why do we need flexibility markets?
As the electricity grid integrates our changing electricity patterns, such as larger electricity use at less predictable times and the variable supply of renewable electricity, markets play a crucial role in facilitating this transition.
Power flexibility at the local level can be exchanged in these markets to help solve the various challenges that a transition to renewable energy throws up.
What are the benefits of a flexible energy system?
Helping manage varying demand and intermittent energy generation
Renewable energy relies on energy sources with inherent variability, such as wind or solar, which means intermittent generation. Similarly, consumption patterns are changing and becoming more volatile. For example, digitisation is driving the need for more data centres, which need a vast amount of electricity to run.
In yesterday’s power system, fossil fuel-fired plants could adjust up or down to follow demand. However, to hit net zero targets, we need to make the most of the variable, non-dispatchable renewable energy – or the energy that cannot simply be turned up or down to match demand.
Deferring the investment requirement in grid upgrades
There are physical limits to what the wires and transformers that make up the electricity grid can cope with.
It doesn’t make sense to build an electricity grid that can cope with the maximum load at peak times. This would be very expensive and time-consuming – and would only be required a few times a year.
The alternative is to optimise the use of the network by time and place with energy flexibility, in parallel to ongoing, necessary network upgrades.
Optimising the grid for the thousands of Distributed Energy Resources (DERs)
The number of Distributed Energy Resources (DERs) is also growing, from the rapidly increasing number of EVs on our roads and the decarbonisation of home heating using heat pumps on the demand side, to renewable generators and battery storage.
This further complicates how the system needs to be managed. Coordinating the actions of these DERs to ensure safe and reliable running of the system by place and time is complicated. A solution is therefore needed to ensure those distributed assets can be easily coordinated.
That’s where the ability to trade on local flex markets comes into play, facilitating the flexibility that’s essential for the energy transition.
The lowest-cost route to Net Zero
Flex markets therefore aim to optimise the use of existing network infrastructure, while making better use of zero-marginal cost energy. They also aim to create value for DERs, through additional revenue streams and faster times to connect to the grid. And, for end consumers, lower electricity transmission and distribution costs result in lower energy bills.
Who are the key stakeholders in flex markets?
For flexibility trading to be possible, many actors need to collaborate in the flex marketplace. The main stakeholders are:
Distribution System Operators (DSOs)
The distribution network is becoming more dynamic – rather than static and passive – with two-way power flows thanks to both generation and demand side DERs.
DNOs are therefore increasingly being required to fulfil the role of Distribution System Operators (DSOs), where they need to perform actions traditionally not required of a network operator.
This includes new ways of managing and coordinating the distribution of electricity and using flexibility to manage power flows across the distribution network.
These DSOs therefore need new tools, including flexibility markets.
Transmission System Operators (TSOs)
While DSOs operate at the local level, TSOs transmit electricity at the national level. For example, the ESO is the electricity system operator in the UK at the transmission level. TSOs can also run flex markets as the buyer, rather than the DSO.
A lot of renewable generation and electrification is connected at distribution. The TSO often tries to access distribution connected assets for their markets at transmission level. Those transmission requests therefore need to be coordinated with the needs of distribution – and this can take place on a flexibility market platform.
Flexibility Service Providers
Flexibility service providers are owners or aggregators of Distributed Energy Resources. They can be generators or demand side – from battery storage to onshore wind, solar parks, and aggregated demand.
Aggregators help optimise energy resources by grouping them together so they can act as a single entity offering capacity into the grid. They aim to facilitate DER owners’ participation in flexibility, and one way is to access price signals through flexibility markets.
How do flexibility marketplaces work?
Flexibility markets can be deployed in a variety of forms, to meet the individual requirements of an area’s system operator. Different regions have different characteristics, and those characteristics will affect the type of market used.
For example, London has a dense population. Demand response markets fit this scenario, as there are lots of consumers and assets to turn down.
In Scotland, there are plenty of windfarms but not as much demand as it’s more sparsely populated. A curtailment market therefore could help manage any congestion when that power is exported.
The four main flexibility market archetypes
Local constraint management
System operators can ask flexibility service providers to change their import or export levels to manage network constraints. This archetype covers both network reinforcement deferral and management of areas of the grid that are under pressure or “constrained”.
Local curtailment
When the system has a surplus of electricity, generators are producing more energy than the demand customers can consume and “constraints” occur. To avoid curtailment – asking the generator to turn down its generation – renewable generators can trade their curtailment obligations or pay demand customers to turn up their use. This avoids wasting renewable energy.
Demand response
This focuses on load shifting and shedding. System operators can ask demand customers to reduce consumption at peak times, whether across the system or in a specific location, to help the system manage its load.
Community energy
This archetype aligns local electricity consumption with local renewable energy production by facilitating the sharing of energy among community members. This approach not only bolsters local energy resilience but also mitigates the effects of fluctuating supply and demand on the grid. A community energy market matches local electricity demand with local renewable generation, asking consumers to use more energy in times of energy surplus and to reduce consumption when generation levels are low.
Consequently, community-owned renewable energy sources can bring both economic and environmental advantages to the local area. Flexibility markets play a crucial role in enabling the peer-to-peer systems required to oversee this process.
Read more about the four main flexibility market archetypes and how they work.
Where does Electron fit in?
Electron provides an user-friendly platform to coordinate flexibility trading. Our flexibility marketplace platform – ElectronConnect – gives system operators across the globe the ability to create, run, and manage local flexibility markets at scale.
This means getting the electricity to where it needs to go at the right time and at the right price – unlocking renewable abundance to accelerate the world’s path to net zero.
Want to learn more? Reach out to our team of experts.
