• Distributed Energy Resources
  • Local Flexibility Markets
  • Virtual Power Plants

Local Flexibility Markets Can Boost Virtual Power Plant Participation

Dan Power
Dec 01, 2022

Guidehouse Insights

Local flexibility markets provide a central registration location for distributed energy resources (DER) interested in providing flexibility at the distribution level and offer a mechanism for processing auctions and managing bids. While these markets have primarily been used for distribution grids in Europe, as more variable renewable energy capacity comes online in all regions of the world, power grids everywhere will have increased flexibility needs. Additionally, customer-sited DER continue to proliferate in all business segments, and digitalization is becoming more common in the energy industry. These trends converge in connected DER that are intelligently managed and optimized through DER management systems (DERMSs) or virtual power plants (VPPs). Such intelligent aggregations of customer-sited DER capacity, acquired through local flexibility markets, can efficiently and effectively fill flexibility gaps as centralized fossil fuel generation sources are retired.

DER Flexibility Acts as an Alternative to Traditional Grid Upgrades

As DER costs have continued to decline over the last two decades, so, too, have the costs to manage and optimize DER at the grid edge, opening the door to more innovative grid management techniques from grid operators. Local flexibility auctions have been used by distribution grid operators in the UK to defer or altogether avoid building out traditional distribution grid infrastructure. Typically, new traditional grid infrastructure like poles and wires are needed to accommodate load growth or relieve capacity constraints in specific areas on a distribution network; however, DER flexibility offers a quicker and more cost-effective alternative. Capacity from customer-sited DER connected to the distribution network—such as rooftop solar, behind-the-meter batteries, or EVs made available on local flexibility markets—is used by grid operators to manage increasing loads while staying within the current network’s infrastructure limits. This helps minimize new capital expenditures and can also keep maintenance costs down, resulting in cost savings for ratepayers as well as grid operators. With global DER capacity forecast to steadily grow throughout the next decade, the number of resources installed behind the meter, and therefore already available for use in local flexibility markets, will also increase.

Local Flexibility Markets Create Revenue Opportunities for DER Owners

Enrolling a DER asset in a local flexibility market offers the asset owner an opportunity to earn additional revenue from providing essential grid services. Additional revenue streams can shorten payback periods for assets and encourage more widespread adoption. Some local flexibility markets may also make price data from past auctions publicly available so that prospective market participants like DER asset owners or distribution grid operators can use that data to inform their decisions. For example, during week 35 of 2021, the price per MWh of flexibility on Western Power Distribution’s IntraFlex market ranged from £240 to £300 ($294-$367), with a volume-weighted average price of £296.84 ($363.26).

Because many local flexibility markets have minimum bid size requirements, DER must often be aggregated and bid into the market through a VPP. Establishing local flexibility markets in a region can incentivize DER owners to seek out aggregators or VPP operators so that they can participate in those markets. This may attract participation from customers in areas where, historically, few DER programs have been available through their utility. Developing new revenue opportunities for DER owners could not only boost DER adoption and VPP participation but also help ease the burden of managing the changing energy landscape for distribution utilities and grid operators.