Reaching the Smart Grid´s Potential: Defining Local Markets for Flexibility

Electricity markets are undergoing a harmonization in economic terms with wider areas of price coupling and trading. On the physical aspect, more renewable energy is being integrated into local distribution grids causing the need to micro-manage the network. The economic layer of electricity markets and the physical layer are moving in opposite directions. Corrective actions are often needed at a particular place in the grid. Wholesale market solutions at the moment do not provide location specific solutions. In order to deal with local issues system operators can take several actions such as grid reconfigurations, re-dispatching of units or curtailment in the short term, grid reinforcements in the long term and market solutions along all time spans. So far, system operators have had little involvement in market actions to balance the network or relieve congestion. This paper defines the economic conditions necessary to form a local market in terms of temporal, spatial, contractual, and price clearing conditions. A local flexibility market is formally defined through a specification of the smallest relevant market where a monopolist or oligopoly could sustain a price increase during an extended period of time. Possible market power issues are posed depending on the sensitivity of the network to participants in the relevant market. Finally, two main approaches to contracting flexibility are described depending on the possibility of market power. One is a semi-regulated local flexibility market approach and the second is a flexibility pool approach. The former one appropriate to avoid market power and entry barrier issues and the latter suitable for a more mature market.status: accepte