Review of Ofgem’s Call for Input on the Future of Distributed Flexibility

This year, Great Britain’s gas and electricity markets regulator Ofgem released a Call for Input (CfI) on the Future of Distributed Flexibility. Ofgem begins by introducing some of the issues which are resulting in a lower uptake of distributed flexibility on the electricity system than there ought to be. The primary issues identified by Ofgem include barriers to accessibility, a lack of coordination, and a lack of trust in markets for distributed flexibility.  

Ofgem is correct to identify these as significant issues in bringing distributed flexibility online to benefit the system. The current system of providing flexibility is very concentrated and focused on large, centralised generators and large assets. It favours the traditional generate-transmit-distribute style of power system, which will not be appropriate for the future system of high, consistent demand and distributed, renewable generation. The current market set up also provides no technical routes or economic incentives for Consumer Energy Resources (CERs) to participate in the energy system.  

Whilst it is technically possible for flexible, consumer assets to participate in the system, a lack of transparency, confusing set-up of multiple markets, and a lack of understanding functionally prevent consumer assets from taking part. In terms of accessibility, service providers should be able to trade directly with network operators in the market of their choosing. Service providers should have the freedom to participate in local, regional, national, or private marketplaces. The marketplaces’ technical requirements should be easily accessible to prospective service providers and be truly technology agnostic. In this vein, markets should have low fees and transaction costs, including fair calculation of technical losses and other costs, and should incentivise consumers to participate in the markets. Failing to achieve a market design that is technology agnostic risks locking new, potentially superior technologies out of the market, thereby increasing costs and damaging energy security.  

Finally, there should be a recognition that trust is gained and maintained and cannot be achieved solely by the system design. This may mean that the stakeholders are open to new forms of engagements and validations. Transparency around liquidity, fairness, obligations of private parties especially private marketplaces, open access to data available in the public space etc. help in establishing and maintaining trust. There may be technology solutions such as distributed ledger that will enable a broad-based consensus mechanism. 

In terms of co-ordination, all markets should allow aggregation and co-ordination of both generation and demand by private entities. This will allow the system to best harness the benefits of all assets connected to the network and make markets more accessible to smaller consumers with aggregators able to take on the role of market participant on their behalf. There should also be clarity on DSOs’ roles in delivering local flexibility markets, and the FSO’s role as overall system operator and administrator of national markets. There should be a move to co-optimise across these markets, with guidance on stacking, pricing, taxation, etc. There must be clarity and transparency on the processes of bid acceptance and activation, to demonstrate a level playing field for each technology across markets. 

In the CfI, Ofgem asked respondents to consider three archetypes for a common digital energy infrastructure. The proposition of a common digital energy infrastructure is intended to address three market failures Ofgem has identified for flexibility:  delivering market information provision, market coordination of operations and actions and trust and governance. Ofgem calls for respondents to recommend one of three example archetypes, which represent points on a spectrum: a ‘thin’, ‘medium’ or ‘thick’ infrastructure. The thin archetype is a directory which lists market operators and flexibility providers. The medium archetype is an exchange platform which hosts multiple markets to facilitate and coordinate market participation and operation. The thick archetype is a central platform which contains multiple markets, undertaking every step of their process and co-optimising across them.  

The thin system, as a bare minimum intervention, should be implemented immediately. It should put together the current registry of DERs and provide a broad view of CERs penetration by post code using other public datasets.  

As a directory for market participants, it should list flexibility programs in place and flexibility tariffs by suppliers that are already in place. Markets should be accessible to new entrants and those who may want to participate in multiple markets, as this creates competition and lowers prices. To that effect, there should be information available that summarises the as-is and will-be picture of flexibility markets. Ofgem should thereafter start planning the medium archetype immediately and, halfway through the RIIO-ED2 period, should start implementing and rolling out the capabilities to increase transparency and data sharing with market participants. This will build confidence in the system and in the commercial proposition for new entrants.  

However, Ofgem should ultimately implement the thick archetype. This should tie in with RIIO-ED3 and the energy markets reforms (REMA). This should also absorb the existing distribution flexibility (PICLO) system and build a common front-end for all future energy flexibility markets. The thick archetype should be in place by the start of RIIO-ED3. It is very important for market participants, and to achieve the stated aims of accessibility, co-ordination, and trust, for maximum transparency and data sharing to be a feature of the infrastructure. The markets will function best with high-quality data inputs – going beyond clearing prices to also include bid information and data at a more granular level than asset aggregation. 

The thick archetype should be the goal of Ofgem and every market participant. Whilst questions are raised over its feasibility, it is certainly possible to build such a digital infrastructure if the will is there. Though the process will be more involved than the other archetypes, Ofgem and government should commit to building this infrastructure. Without it, it is unlikely net zero can be achieved.