In our final blog about the development of the local flexibility market, we look to understand what the rise of this market means for potential providers.

These blogs draw on the experience of Open Utility’s Piclo Flex platform, which is intended to open the market to a wide range of flexibility providers and to simplify the process by which flexibility is transacted. Open Utility is intending to launch its platform in June.

See our first blog that looks at the live local flexibility trial projects here

See our second blog discussing the benefits for DSOs here

See our third blog discussing the role of the local flexibility market here

See our fourth blog summarising how the local flexibility market platform might work here

In our third blog, we identified five ‘classes’ of potential providers of these services: large energy users, generation asset owners, energy storage operators,community and domestic flexibility and aggregators. For each of these parties, the development of a local flexibility market is an opportunity, either as a new source of financial income for energy assets operated by these parties, or the potential to unlock constrained networks for new developments.

Despite DNOs being ‘technology or approach agnostic’, some parties may be able to extract value from local flexibility markets more directly, more easily or more lucratively than others.

The value of local flexibility is largely unknown given the immaturity of the market, but some estimates are in the range of £10k-25k per MW of flexible capacity per year.

For energy generators, the potential to flex generation assets to respond to a call from a DSO depends on the generation technology. Non-intermittent generators will naturally be more flexible and able to respond for longerperiods than intermittent technologies, especially if the response is a ‘ramp up/demand turn-down’ call. If the largest disruptive load connected to the substation in question is your generation asset (solar, wind, gas power station or otherwise), the response could, in the case of a ‘ramp down/demand turn-up’ call, become essentially a financial reward for voluntarily curtailing generation.

Large energy users with existing assets are in a potentially strong place to provide local flexibility. Certain industrial sites could be among the largest or most volatile individual loads connected to a constrained substation. The energy behaviour of this site could be both one of the causes of and the solution to operational constraints in that substation area. The ability for these sites to perform Demand Side Response (DSR) is nothing new, with a number of national balancing services such as STOR or FCDM being exploited by industries themselves and through aggregators.

With the geographic nature of local flexibility services, the likes of manufacturing warehouses, water industry operational sites, depots and numerous other industrial sites could become strong players in providing local DSR in either demand turn-down or turn-up scenarios. The challenge for a large energy user is whether the reward is worth the hassle of the disruption to their process.

For energy storage operators, earning money from being flexible is the fundamental basis of both their operation and their business model. Often referred to in the sector as ‘the revenue stack’, the return on investment for a storage project relies on several sources of financial benefit. A storage project’s main revenue stream, from either earning income or generating savings, will depend on the class of storage asset (i.e. its generic business model), location (i.e. behind the meter, co-located or standalone) and size (i.e. grid scale, commercial & industrial or domestic). National rapid-response balancing such as frequency response (i.e. FFR and EFR) and the Capacity Market were the staple markets for storage projects. However, with fierce competition in FFR leading to oversubscription and adverse policy decisions around de-rating of short-duration storage in the Capacity Market, storage projects need to diversify their business models once again. Local flexibility markets may be one of the new or alternative sources of revenue that storage projects need. Playing to the strengths of being located near to constrained substations and potentially being sized to meet the needs of the DSO, storage projects (either directly connected or operating behind the meter with a large energy user) could become a dominant technology in local flexibility markets.

Perhaps the most interestingly positioned group is community and domestic flexibility. The concept of your local DSO seeking a local response to local network issues has direct linkages with the local community and its energy behaviour. There is 121 MW of community owned capacity across England, Wales and Northern Ireland operating as of 2017[1]. The capacity entry thresholds proposed in the live expressions of interest from UKPN and ENW for example are significantly lower than that of the national balancing services, opening up the potential for direct contracts between community generation, storage or demand response assets and their DSO.

Enabling households to actively participate in local flexibility is less straightforward. Issues range from household demand requiring aggregation and what load is truly flexible in homes, to the verification of domestic response requiring a much higher coverage of smart meters. The potential to use smart appliances and aggregation technologies to bundle households together to bid into these markets is an exciting, if potentially complicated and challenging prospect. Regen is set to undertake work in this area and we will be sharing our findings later this year.

The role of aggregation is evidently vital to calling on and enacting flexibility at a local level. However, who is to act as an aggregator becomes less clear when you consider how capacity is to be aggregated and contracts are to be signed. Commercial aggregators, who are listed on a National Grid online register, are already active in the national balancing services and therefore well-equipped and well placed to reach down to the next level of flexible load and aggregate smaller local generators/demand customers to bid into DSO tenders. Taking a step back from this level, the role that DSOs are playing to facilitate local flexibility markets and effectively contract with local providers, could act as a type of regional aggregation that they could then offer upwards to the national System Operator. Similarly, parties looking to aggregate smaller, more dispersed domestic loads is a much more granular form of aggregation than is traditionally undertaken. The financial reward versus the cost of hardware control and administration of enacting and verifying domestic response will need to be carefully considered.

From exploring the development of local flexibility and asking ourselves some key questions, we can draw some conclusions:

- Local flexibility is still very much in its early days, with several trials and innovation funded projects being undertaken to allow DNOs to meet the facilitation of local flexibility markets.

- The value of local flexibility is still unknown, with DNOs themselves asking the questions back to the market about how much they want to be paid and what payment structure they would need to deliver their flexibility. However, the upper limit of the value can be estimated from the cost of a network reinforcement solution to a local constraint.

- The needs of the TSO, DSOs and of energy suppliers are likely to be different and in some cases may be in opposition to each other in a given period. Similarly, the needs of one DSO in one region will, by virtue of their differing geography and networks, be different to another. For example, the need for respond to demand peaks in one licence area compared to the need to manage excess generation in another area.

- If they are to be successful flexibility platforms will need to be dynamic, easy to use andcater for multiple procurers and providers of flexibility.

- Different providers of flexibility may be able to participate in the local market in different ways.

We will be continuing the discussion around the role of local flexibility at Smart Energy Marketplace 2018, with leading speakers and exhibitors who are operating in this space. Find out more and how to book your place here: https://www.regensw.co.uk/smart-energy-marketplace

Author: Merlin Hyman