What Are Flexibility Markets?

Throughout history, electric systems have been a one-way street with static loads. Flexibility was a concern for athletes, not grid operators, who’ve long planned based on “worst-case scenarios.” System conditions and generating capacities have been established to satisfy the hottest summer days and the coldest winter months, to help ensure there would always be enough energy to satisfy the demand.

These inefficient practices are becoming increasingly uneconomical, as loads decline and Distributed Energy Resources (DER) scale.  Solar, wind, storage, demand response, energy efficiency and electric vehicles (EVs) aren’t only supporting more efficient, resilient, and eco-friendly energy systems – they’re also blowing up the grid-planning game – requiring new, dynamic and more complex strategies for the modern power sector.

With DERs come variability – and with variability comes formidable engineering challenges, as the energy balance is impacted by things like fluctuations in weather and charging-behavior patterns.  We count on grid operators to maintain stability at all times, which means the major focus of energy players as the energy mix evolves is how best to coordinate and control disparate, distributed assets– in other words: how to master and manage these sources of flexibility.

One of the methods being researched and tested around the world today is flexibility markets, where energy buyers (e.g. system operators) can purchase flexibility coming from a variety of energy sources. These markets aggregate energy generated from solar, storage, and demand response programs and then provide that energy in needed quantities. To date, Germany is leading the pack, but now several European countries are beginning to lean in and develop them as well, in order to incentivize generators to participate in the market, allowing them to meet clean power goals and improve overall system resilience in the process.

Virtual Power Plant Technologies Power the Flex Markets

The ‘engines’ behind flexibility markets are “Virtual Power Plant” (VPP) technologies, which make it possible to coordinate and fulfill energy requests from grid operators.  As Aleksandra Radwanska, International Manager for German VPP Next Kraftwerke explains, “VPPs help place distributed energy resources on the market. In Germany we can trade what is called frequency containment reserves (FCRs), or the operating reserves that are directly connected to the grid to maintain constant balance, within 15 seconds of a command from a grid operator. The VPP connects different generation units through various sensors and portals and leverages an algorithmic dispatch method to coordinate the exact amount of energy being requested by the operator, exactly when it needs to be consumed.”

Radwanska notes that Germany is the benchmark for the world today in leveraging VPP technology. While the market could always use some fine tuning, the fundamental work on it has been accomplished and energy flexibility is successfully sourced in daily auctions for blocks of several hours.

One of the fine-tuning exercises Next Kraftwerke is engaging with sonnen GmbH right now is to team up to coordinate and supply those immediate energy supply reserves (FCRs) with aggregated residential battery storage technologies. With successful trials, these products are expected to be added to the list of approved FCR energy sources. Now that both companies are a part of the growing Shell portfolio to advance renewables, more partnerships to engage storage as a viable flexibility reserve are expected.

Solving A Variety Grid Challenges with Flexibility Approaches

While Germany has reached the point of making tweaks and adjustments to enhance its functional flexibility market, many others are still studying the potential applications and working to make the flexibility math pencil. Accenture helped lead such a study for the European Commission, working with EDF and Engie (two large French utilities) in 2019.  The Interflex Project evaluated whether flexibility could help solve real-time congestion challenges and optimize long-term grid planning in France and a few other European markets.

In addition to being the Project Manager, Accenture developed the primary communications portal for aggregation. This ‘marketplace connector’ enabled the two utilities to link their control rooms with the flexibility providers and exchange energy requests and fulfillments. The project was deemed a success from an engineering standpoint in proving the ability to solve challenges with flexibility, and the approach leveraged is now being industrialized across various parts of France where high levels of grid congestion are predicted.

Still, associated questions of market design, especially how to make flexibility markets profitable, must be worked out. Gregory Jarry, an Accenture Energy Consultant involved in Interflex, said “Flexibility will only be profitable if energy markets evolve to develop a viable renewable energy fleet, including wind and solar, and if there’s a strong shift to electrify with EVs that will create volatility and congestion on the grid and therefore increased need for flexibility solutions.” In terms of market findings from the project, Jarry summarizes, “We saw that flexibility is already profitable in Germany, but in France its profitability is limited to certain instances in the countryside, where there is a lot of sun and limited consumption today.”

Flexibility Market Design in the United States

Stateside, the flexibility math is also still a work in progress – though the business case is becoming increasingly clear. Opus One Solutions, an Accenture innovation partner and pioneer in the design and evolution of flexibility, also known as transactive markets in the US, is bullish on flexibility’s future. Founder and CEO, Josh Wong cites recent enabling legislation that will be key to unlocking market potential.  “I see a lot of commonalities between what we are learning globally about flexibility markets that can be applied in the United States. FERC 2222 is significant to applying these lessons, because it puts the US in a similar position to countries in Europe and Australia, requiring that DER will participate directly in the wholesale market and requiring utilities to coordinate this and help connect the DER, as well as understand the impacts of their own DER value stacks on energy market signals.”

Opus One has been involved in several innovative flexibly projects, providing software to design marketplaces, evolving future market design concepts, and helping utilities understand of the impact of DERs on system operations. Opus One recently worked with Southern California Edison (SCE), helping them explore optimization of solar and storage so that the consumer, the utility, and the Independent System Operators (ISOs) all benefit.

Wong notes that flexibility market design takes time, but he believes FERC 2222 is a real regulatory anchor to making all of this work in the United States and will drive more concrete work on DER and market coordination in the next few years. Jason Allen, Utilities Lead for Accenture Research, agrees with the significance of the FERC order on the rise of DER flexibility markets. He notes, “The ISOs will have to standardize their definitions for DER, the role of aggregators, and the framework for participation models. Ultimately, these actions will bring more DERs online, increase their value, and decrease the need for centralized generation.”

What’s Next for Flexibility Markets?

In the past, there was a notable lack of leadership on energy market transition in the United States, but that’s rapidly changing. The Department of Energy is promoting FERC 2222 and there seems to be bipartisan Congressional support for energy system transition and innovation. State regulators of utilities still need to be proactive in supporting them to engage in research pilots that can scale across their operations.

Two significant things that would really drive additional progress on these markets are more widely publicized pilots of Virtual Power Plant technologies that are able to forecast grid needs, connect DER assets and dispatch them according to the needs. These “closed-loop VPP pilots” and validation of the technology ability to meet grid operator demands in US territories are key to determining the real value of DER overall.

Another one is establishing and utilizing more granular measurements of grid conditions associated with the transition to increased DER. Being able to actually measure the amount of inertia on the system or the overall system strength as DER is being added is going to be critical. Accenture recently invested in a company called Reactive Technologies, that is providing these measurements, analyses, and insights to several utilities in Europe and is now making its way to the United States to accomplish the same level of visibility and understanding. Data is the engine of the new digital economy in every industry, energy being no exception, and investing in the right tools to help keep the system in balance as we transition the market to allow for more flexibility will be critical. In short, we’re bullish on flexibility market development – and its ability to change the energy game, creating drivers for VPP configurations to emerge.