Distributed resources and flexibility

This is the first installment of the Topic of the Month: Decarbonisation, infrastructure and electricity market design

The first installment of the Topic of the Month on Decarbonisation, infrastructure, and electricity market design focuses on distributed resources and flexibility. We briefly list the relevant regulations for flexibility and the common flexibility products being used. Then, we present some areas where the new network code on demand-side flexibility may bring further guidance.

What is “flexibility”?

The EU and many other countries worldwide are pursuing long-term decarbonisation strategies that include different measures to promote renewable energy, energy efficiency, energy storage capabilities, and hydrogen. Greater penetration of more variable and less predictable electricity generation from renewable sources requires the electricity system to become more flexible. In this context, integrating Distributed Energy Resources (DERs) in electricity systems reduces the need for generation from conventional centralised non-renewable sources, which have been so far the main source of flexibility.

Flexibility could be defined as the ability of a market participant to deviate from its set injection or consumption profile in response to market incentives or price signals in order to provide a service to the system operator. When used by network operators, this could be for different use cases such as network planning or network operation.

There is already a large potential for flexibility in electricity systems. However, such potential is primarily theoretical and it is to be unlocked. Therefore, a key issue to be asked is how to unlock this potential, who should be involved and how it should be organized?

Which regulation for markets/products used to trade “flexibility”?

Multiple markets[1] for flexibility, with different designs, exist in the EU. They aim to ensure a cost-efficient functioning of electricity systems, guarantee resource adequacy[2], and coordinate supply and demand with a national or cross-border scope. They are subject to EU regulatory provisions in EU regulations, such as those stipulated in Regulation (EU) 2019/943[3] and the Electricity Balancing Guideline[4].

New markets have emerged to support the increasing integration of DERs and the resulting more complex power flows, such as markets for network capacity management[5], for congestion management, and for voltage control. These new markets are relevant for Transmission System Operators (TSOs), e.g. for intra-zonal congestion management, and for Distribution System Operators (DSOs), e.g. local congestion management and network capacity management.

The use of flexibility by DSOs has been established by Directive (EU) 2019/944, as an alternative to traditional network investments, when cost-efficient. Such use should be in a coordinated way[6] with TSOs, and other market parties where relevant, to ensure that the activation of one resource to address issues in one part of the system does not create network issues elsewhere.

Local markets for flexibility have popped up in some Member States even before the adoption of Directive (EU) 2019/944[7], as pioneering projects. Following the Directive transposition deadline, they should be subject to national regulations derived from the Directive.

Different flexibility products are used in these markets to respond to system operators’ needs, depending on the use case. Products for short-term needs, e.g. congestion management and unplanned outages, could be similar to balancing products that have also a short-term focus and could therefore fall under the scope of the existing network codes and guidelines, possibly with some adaptation. Medium and long-term needs for flexibility, e.g. for planned maintenance or network investment deferral, would require different types of products. These products would typically be subject to a longer activation period, e.g. a couple of years. Existing regulations do not cover them.

Is there anything missing in the current market design to allow the provision of flexibility by DER?

Member States have initiated the transposition of Directive (EU) 2019/944. However, by December 2020, no Member State has transposed provisions related to DSOs’ flexibility procurement fully. A possible explanation is that the Member States would rather wait for the network code on Demand-Side flexibility, which is currently under development and may bring further rules on DSOs’ flexibility procurement. Therefore, at this point, opting for a detailed national framework for demand-side flexibility, aggregation and storage may lead to situations where the Member States introduce national provisions that might end up being in contrast with the upcoming network code and thus require to be changed later.

Some stakeholders have issued position papers regarding the scope of the new network code on demand-side flexibility and the rules that shall be modified in the current network codes and guidelines, e.g. Electricity Balancing Guideline and Connection Network Codes. Market rules for aggregation[8], data exchange procedures, TSO-DSO coordination schemes, measurement validation and settlement, and standardization/harmonization of product design frequently feature among the topics regularly included in those position papers.

The design of flexibility products is an important parameter to enable the wide participation of actors in flexibility markets. Two views have emerged on flexibility product design and potential needs for harmonization.

The European Smart Grids Task Force Report on demand-side flexibility highlights that the design of flexibility products should be done in concertation with stakeholders, i.e. to take into account existing products. The harmonization of products at the regional or EU level should be addressed to avoid having a situation with diverse and non-comparable products. For instance, locational information should be necessary for congestion management products.

The “Roadmap on the Evolution of the Regulatory Framework for Distributed Flexibility” Report states that the final choice on how to design products should be left to the Member States and their national regulatory authorities so that they can take into account local circumstances inherent to local services such as intra-zonal redispatching. It adds that harmonising flexibility products at the EU level is not necessary due to the diversity of flexibility mechanisms across Member States and in order to keep product innovation and future development open. Nevertheless, some principles and a list of attributes[9] could be defined at the EU level to reduce market barriers for flexibility providers active in different EU markets. Member States can then pick the attributes they deem necessary for specific product definition at the national level.

 

[1] For an overview of the relevant markets for flexibility, see the “Roadmap on the Evolution of the Regulatory Framework for Distributed Flexibility” published ENTSO-E, CEDEC, E.DSO, Eurelectric and GEODE

[2] For a more detailed discussion of the issue of resource adequacy, please check the third installment of this Topic of the Month on Adequacy and Capacity Remuneration Mechanisms

[3] For a more details on Regulation (EU) 2019/943 provisions on resource adequacy and capacity mechanisms, see Leonardo Meeus and Athir Nouicer, 2020. “How to ensure adequate investment in power plants?,” Chapters, in: The Evolution of Electricity Markets in Europe, chapter 7, pages 135-151, Edward Elgar Publishing.

[4] For more details on the Electricity Balancing Guideline provisions, see Leonardo Meeus, Tim Schittekatte and Valerie Reif, 2020. “Who is responsible for balancing the system?,” Chapters, in: The Evolution of Electricity Markets in Europe, chapter 5, pages 84-110, Edward Elgar Publishing

[5] This refers to optimising (distribution) network capacity via an active consideration of DERs in network planning, such as via smart connection agreement or DSO’s tendering for flexibility services to defer network reinforcement. For more information, see CEER  Paper on Distribution System Operator (DSO) Procedures of Procurement of Flexibility, 16 July 2020.

[6] For more information on the TSO-DSO coordination mechanisms, see the TSO–DSO report “An integrated approach to active system management” by ENTSO-E , CEDEC, EDSO for smart grids, EURELECTRIC and GEODE

[7] See FSR Topic of the Month of September 2019 for a summary of Directive (EU) 2019/944 regarding flexibility use in distribution grids.

[8] For a discussion on regulatory models of independent aggregation framework, see Schittekatte, T.; Deschamps, V.; Meeus, L (2021). The regulatory framework for independent aggregators. Electricity Journal

[9] The list of attributes could include the mode of activation, availability Window, Duration of the contract, Locational information, minimum and maximum quantity.

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