Local Energy Flexibility Markets: The Hidden Key to Solving the Energy Transformation?

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Lead Architect, eaaS, Siemens Smart Infrastructure CTO

2021 Cleanie Award winner. Siemens Smart Infrastructure CTO Office, technologist, distributed energy expert, researcher, author, and climate change warrior. Genuinely focused on doing good for...

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  • Feb 3, 2021

Local Energy Flexibility Markets:  The Hidden Key to Solving the Energy Transformation?

By Eamonn McCormick, Stuart McCafferty, Hans-Arild Bredesen, & David Forfia

These are exciting times in the energy industry. The transition to a sustainable, clean, and distributed grid is underway worldwide. The positive drivers of the energy transition include political climate goals, enormous funding and investment opportunities, and the available technology to integrate buildings, renewables, batteries, controllable loads, and electric vehicles with the grid.  All these drivers are aligned to accelerate the climate transition. Despite there being a nearly “perfect storm” for rapid change and dramatic climate-friendly energy solutions, we remain stuck.  So, what is the problem?

While the drivers are clear, in the US, we still lack an exact blueprint for how a clean distributed energy business model could be implemented. The industry's problem is as much of a business model challenge as it is a technical or policy challenge. How do we transition to a new, flexible and distributed, clean energy future from a business perspective?

This problem is most pressing at the distribution level. In California, more and more munis, Distribution System Operators (DSO), and California Community Choice Aggregators (CCAs) are building sustainable, clean energy ecosystems by integrating grid-scale renewable energy and small Distributed Energy Resources (DER) into the local grid resource mix and promoting the use of microgrids for additional resilience.   For these smaller utility players, this can be a daunting challenge due to:

  1. Resource adequacy – how do they guarantee their energy customers adequate energy available at a reasonable cost when they need it, especially for peak loads in a distributed, intermittent, renewable energy world?  Meeting energy demand for smaller territories can lead to high fluctuations in energy prices and capacity when there are limited resource choices and availability.
  2. Electricity reliability – with the use of intermittent energy resources, especially solar photovoltaics (PV), how reliable are the grid networks under management when the sun doesn’t shine, and the wind doesn’t blow – but the demand is still high?
  3. Energy curtailment – how do we avoid curtailing renewable energy when there is an over-generation electricity at the local level?  This option may seem unlikely, but in fact, countries like Australia and parts of the US are seeing cool sunny days where plenty of power is being produced with limited loads.  In some cases, these events actually create negative pricing for electricity export and can cause damage to grid assets when the thermal ratings are exceeded.

Within the US, public power utilities are community-owned, not-for-profit electric utilities that safely provide reliable, low-cost electricity to more than 49 million Americans.  Public power charters also diligently protect and maintain the local environment for homes and businesses in more than 2,000 communities across the U.S. These small utilities cannot afford to build and spend massively to meet their clean energy targets. The current ERCOT minimum target reserve margin is 13.75 percent of peak electricity demand to serve electric needs for high demand events or to account for unexpected generation plant outages. The cost of resource adequacy for small entities could make them uncompetitive unless they can figure out a better solution. Relying on the bigger Investor Owned Utilities (IOU) to fill the resource adequacy and reliability gaps could be very expensive for local CCAs and Munis.

Even though a great deal of the grassroots clean energy transformation occurs within these smaller utility territories, these issues are enough to derail the smaller players' business viability.  The cost of ensuring resource adequacy for small entities is simply more expensive and complicated than for the IOUs.

Looking to the future, we can also look to our past:  we built customer expectations within our modern society with the promise of available, adequate, reliable energy at an affordable price. Any future where power is unavailable, inadequate, unreliable, or unaffordable is unacceptable.

Is there is a better way forward?

The concept of Distribution System Operators (DSO) and new local flexibility markets is gaining strength in the US and is being piloted in Europe and other parts of the world.  We have written about these subjects before.  What if we could encourage collaboration for reliability and affordability by creating local, sustainable flexibility markets for small entities? What if these markets could ensure local energy availability and resource adequacy at the lowest cost? In other words, what benefits could be achieved if DSOs, CCAs, and munis set up local markets to meet resource adequacy, availability, and reliability requirements? Prosumers and Independent Power Producers (IPP) could perform their own economic modeling and make business decisions with the opportunity to participate in new local markets.  These markets could then solve the resource adequacy and management issue at the local level and roll up those benefits at the distribution and transmission levels. These markets would allow local system operators like municipal utilities, electric cooperatives, and DSOs to trade with flexible service providers in their local areas, solve these crucial problems, and more effectively contribute to the grid's stability as a whole.

Figure 1:  EnergyIoT Reference Architecture

This bottoms-up approach with hierarchical physical grid locations that include both operations AND markets is aligned with our EnergyIoT Reference Architecture and with the Pacific Northwest National Laboratory’s Grid Architecture Methodology – sometimes described as a “laminar decomposition” framework.  It also aligns with FERC Order 2222 to allow aggregators access to the larger transmission wholesale markets.

Shouldn't someone already be doing this?

Figure 2:  Nodes Flexibility Markets (Source:

In parts of Europe, this type of market solution already exists! NODES is an independent marketplace for a sustainable energy future in Europe where local system owners, energy producers, and energy consumers can trade decentralized flexibility and energy. The technology behind NODES was developed in close cooperation with Microsoft and is based on the latest IoT methodologies that are flexible, elastic, easy to manage, and highly scalable. This innovative solution has immediate applicability in the US, especially in states like California. NODES could help solve some of the sticky problems such as resource adequacy, electricity reliability, and energy curtailment for the little guys.  NODES is already delivering Europe's most customer-centric, integrated energy marketplace to unlock the value of local, flexible power resources and support the transformation to a sustainable, emission-free future. This solution can help local entities solve the challenges of resource adequacy and reliability.

A case study in Mitnetz, Germany, involved an issue with excess wind power production, and the wind farms were being shut down (curtailed) to manage the local congestions.  Rather than curtailing the windmills, Mitnetz decided to use a NODES market to test flexibility to increase the load and absorb the excess power through a local industrial facility.  NODES created a mutually beneficial market for the wind farm operators and the industrial complex and created a highly efficient, economical solution for both parties.

In Stockholm, Sweden, NODES was used to test a regional flexibility market to manage capacity shortcomings experienced in the winter months.  The implemented NODES flexibility market was a unique case study involving two regional DSO operators and one Transmission System Operator (TSO).  This solution is operational today and is used to manage the available capacity across the largest region of Sweden using flexible markets to control demand.

In the UK, NODES is being used to manage close to real-time flexibility services.  Western Power Distribution launched IntraFlex to offer flexibility in day-ahead and intra-day market timeframes and also ensure no larger imbalance issues are introduced across the broader electricity ecosystem.

The challenge of resource adequacy, reliability, and overgeneration are real problems for local utilities and CCAs. Local flexibility markets are potentially vital in solving the key energy transition challenges of resource adequacy, curtailment, and reliability.  The European’s NODES flexibility market platform is worth a look.

To learn more about flexible markets and how they are being used to solve critical challenges, please reach out to any of the authors.


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Thank Stuart for the Post!
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