Realizing the smart grid's potential: Defining local markets for flexibility

The technical and economic layers of electricity markets are moving in opposite directions: on the technical side, corrective actions are often needed at a particular place in the distribution grid, while on the economic side, wholesale market solutions at the moment do not provide location-specific solutions. Thus far, system operators have had little involvement in market actions to balance the network or relieve congestion. The Distribution System Operator (DSO) is faced with a need for market tools to enable more active system management through the use of flexibility. This paper discusses market design proposals that would enable access to flexibility contracting to solve network problems and aid in balancing actions at a specific location. Market design is studied in terms of temporal, spatial, contractual, and price-clearing dimensions. Three main approaches to contracting flexibility are analyzed. The first is the possibility to contract flexibility through the existing wholesale markets; the second is the creation of a separate flexibility platform; and the last is a reserve-type market approach. The choice of design depends on possible market power and entry-barrier issues. A semi-competitive reserve-type market approach is suitable for an emerging market and a competitive exchange is recommended for a more mature market. (C) 2016 Elsevier Ltd. All rights reserved.