Search

New European rules are being developed to shape electricity market design in a way that improves TSO- DSO coordination, makes efficient use of distribution-connected resources, and empowers the smallest network users. This deliverable combines findings and results from INTERRFACE research on demand-side flexibility and interoperability and data access and the INTERRFACE demonstration pilots to identify the need for new European rules and make proposals for their adoption. This project has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 824330

The support of decentralized energy resources under the Fit for 55 package and the REPowerEU plan places distribution grid users and distribution system operators (DSOs) at the center of the future European energy system. Also, the interaction between both types of agents is gaining importance for two reasons. First, DSOs face challenges connecting these new grid users to their network, leading to an increased need for grid investments and congestion management measures. Second, engaging these new grid users can bring opportunities for DSOs to manage their network and its possible congestion more efficiently.

In this paper, we investigate two main schemes for contracting demand-side flexibility by the Distribution System Operator (DSO) at the planning stage: a voluntary demand-side connection agreement where consumers offer their flexibility, i.e., load reduction, to the DSO and a mandatory demand-side connection agreement where the DSO sets the flexibility levels, i.e., load curtailment, to be contracted from residential consumers. A different bilevel equilibrium model is used for each demand connection agreement scheme. In both models, the DSO, in the Upper Level, decides on the flexibility price and network tariffs. Residential consumers react to those signals in the Lower Level. They can be prosumers that invest in solar PV and batteries or passive consumers. The paper answers two regulatory issues. The first is which option to choose for regulators between mandatory and voluntary demand connection agreements. We find that mandatory demand-side connection agreements result in higher welfare gains compared to voluntary ones and a lower price for flexibility. However, such agreements may entail some implementation issues for regulators and different curtailment levels among consumers. This connects with the second issue investigated in this paper on how to implement mandatory demand connection agreements from equity and feasibility perspectives. When introducing a pro-rata constrained mandatory scheme, curtailing consumers equally, we find that welfare levels are still higher than under the voluntary scheme but lower than in the unconstrained mandatory scheme. The difference in welfare and flexibility levels between the two mandatory schemes could represent a potential for a secondary flexibility mechanism, where consumers trade flexibility between themselves.

This paper explores the price setting of demand-side flexibility, modelled as consumers’ voluntary load reduction, in distribution grids. It develops a long-term equilibrium optimization model with a bi-level setting for voluntary demand-side flexibility. In the Upper Level (UL), the Distribution System Operator (DSO) maximizes welfare by deciding the level of network investments and setting the price for demand-side flexibility. The DSO also sets the distribution network tariff in order to recover the network investment and flexibility costs from the Lower Level (LL) consumers. LL’s active residential and commercial consumers react to network tariffs and to the price offered for their flexibility by investing in rooftop solar and batteries and offering a certain volume of demand-side flexibility when requested by the DSO. The passive residential consumers also provide flexibility by decreasing their load, but they do not invest in rooftop solar or batteries. We find that voluntary demand-side flexibility increases welfare and allows significant network investment savings. We also find that the benefits can reach all types of consumers. Besides, it is opportune to apply price differentiation when setting the price for demand-side flexibility, where applicable.

We think that the electricity markets that were developed over the last two decades did what they were supposed to do during this crisis: through higher prices, they convey the message that energy is scarce. “Shooting the messenger” is not going to remove the problem. However, we also learned a lot during this crisis on how electricity markets can be completed and complemented with regulatory instruments, which is why we have three recommendations: First recommendation: Enable and incentivize consumers and suppliers to hedge via well-functioning forward markets (which would complete the sequence of electricity markets). Second recommendation: Give consumers access to cheap renewables with Contracts for Difference (CfDs) and Power Purchase Agreements (PPAs) that are compatible with short-term markets. Third recommendation: De-risk the investments in energy resources AND mitigate affordability concerns for consumers by redesigning Capacity Remuneration Mechanisms (CRMs) or by complementing these mechanisms with other regulatory tools. We finally observe that a broader reform could also aim at accelerating the innovations on the consumers’ side envisioned by the Clean Energy Package. These innovations can bring the much-needed flexibility in decarbonized energy systems.