How to unlock the flexibility potential in electricity systems: a regulatory debate

In the first event of the new #FSRinsights series, we discussed recent research on flexibility in electricity markets and networks. Here are some takeaways from our online event.

In the first event of the new #FSRinsights series, regulatory experts Pauline Ottoy (VREG) and Jørgen Tjersland (NVE-RME) joined the FSR research team to discuss recent research on flexibility in electricity markets and networks. The debate was organized around three topics: implementation challenges with flexibility markets, compensation for demand-side flexibility and the interaction between implicit and explicit demand-side flexibility.

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Implementation challenges with flexibility markets

The recent CEER paper on DSO Procedures of Procurement of Flexibility recognizes market-based procurement of flexibility to be an important tool to unlock flexibility at lower-voltage levels. Platforms, often called ‘’flexibility markets’’, would need to be set up in order to facilitate this process. However, there are many open issues with the practical implementation of such platforms. The CEER paper discusses several. We picked out three to discuss deeper in the debate and asked the audience and panellists which of the three they think is the main concern. Below you can find the result of the polling.

poll 1

Our regulatory panel confirmed the three open issues we selected are relevant. Regarding the procurement process, there is a concern about the participation of demand at equal footing with other resources. It is clear that the shorter to delivery a market is organized, the easier it is for demand-side flexibility to forecast their ability to deliver flexibility. However, long-term procurement can lead to a more reliable revenue stream. This trade-off has to be taken into account when designing the market. Similarly, the regulatory panel recognized that the way products are designed could favour one resource over another; it was also emphasized that products should be designed per need and not per resource. Standardization to a certain extent, e.g. one standard product per need, to enable enough competition could be a workable compromise. Finally, it is clear that we need to add a locational tag to a resource to enable an efficient function of flexibility markets. Nevertheless, how to define exactly the geographical scope in which different flexibility providers compete to deliver their flexibility is very much an open issue.

Recently, within the framework of the H2020 project INTERRFACE, we looked deeper into the implementation of flexibility markets. In our recent paper, we analyzed four pioneering projects: Piclo Flex, Enera, GOPACS and NODES. Using six design criteria, we compared the four projects. Among these six, we also discuss the procurement process, products and locational tagging. We found that the different projects made different choices, often driven by the specific use cases, the maturity of the project or the local conditions. In the future, a new network code on flexibility could learn from these experiments to harmonize flexibility markets where desirable.

Compensation for demand-side flexibility

If the market-based procurement of flexibility is not deemed efficient, administrative measures for determining the compensation for demand-side flexibility could be adopted. However, according to CEER paper, determining the compensation for demand-side flexibility is not a trivial task from a regulatory point of view. We asked the audience on what they think is the correct level of compensation for curtailment of demand.  Below you can find the result of the polling.

poll 2

The regulatory panel was in favour of an administratively set compensation at a price that is lower or equal to the Value of Lost Load (VoLL). The experts highlighted that VoLL would be different from one consumer to another, but we cannot discriminate between them. It is easier if consumers can reveal the value they attach to consuming through other (market-based) mechanisms.

In our recently published paper on the economics of explicit demand-side flexibility in the distribution grid, we try to estimate the right level of compensation for curtailment. We found that setting compensation at VoLL would lead to lower welfare gain than a compensation lower than VoLL. The reasons for this lay in the strategic behaviours of prosumers that could invest in PV panels and batteries. They anticipate receiving a high compensation by creating peaks that they know will be curtailed (‘’baseline gaming’’). Curtailing at VoLL is too attractive for prosumers. The prosumers value electricity consumption from the grid less than passive consumers due to their ability to rely on PV generation and battery storage.

Interaction between implicit and explicit demand-side flexibility

There are different kind of implicit (e.g. network tariffs) and explicit demand-side flexibility (e.g. demand curtailment at an administratively set price) tools that DSOs may use in combination. The CEER paper states that network users should be exposed to price signals that are cost-reflective. We asked the audience whether they think there is an interaction between the cost-reflectivity of network tariffs and the potential of explicit demand-side flexibility and if yes, how the two interact. Below you can find the polling results.

poll 3

The regulatory panel underlined that the strength and weakness of tariffs is that they have to be non-discriminatory. The panel added that network tariffs should not obstruct flexibility procurement, but that is not clear whether they are the right tool to encourage flexibility. The reason is that is hard to reconcile dynamic (cost-reflective) network tariff with other regulatory principles for tariffs such as fairness and simplicity.

In our paper on the economics of explicit demand-side flexibility in the distribution grid, we show that explicit (curtailment of demand) and implicit demand-side flexibility (network tariffs) do interact. When tariffs are cost-reflective, curtailment in our cases study is mainly used to manage the peaks of the passive consumers that do not react to the network tariffs, while the prosumers do react. When tariffs are highly imperfect, curtailment is also used to correct the peaks created by prosumers in reaction to the network tariff and the opportunity to receive compensation for the curtailment of peaks. The peaks created by imperfect tariffs might even be so severe that it becomes relatively cheaper to solve it with grid expansion than with curtailment.

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