D2.3: Report on the Flexibility Market

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The deliverable 2.3, Report on the Flexibility Market, was submitted by TrønderEnergi in December 2019. Following, the executive summary of the deliverable:

“This report, deliverable D2.3 of the +CityxChange project Task 2.6, describes a framework for how a local flexibility market (LFM) can be designed. In the context of the Positive Energy Blocks to be created within +CityxChange, LFMs provide market mechanisms to prevent grid congestion and aid with the integration of renewables. Because technological preconditions and objectives for LFMs can vary between locations, the +CityxChange project calls for a general design framework (tool) for how to proceed when considering an LFM in a given location. The report describes our approach to the design framework and applies it to +CityxChange lighthouse cities Trondheim (Norway) and Limerick (Ireland) as examples. The same general method may be used by other cities and locations.

The incentives for trade in LFMs may be implemented by distribution network operators (DNOs) or by local market operators (LMOs). As DNOs in Europe develop into Distribution System Operators (DSOs) they can become both market platform operators and/or buyers of flexibility in LFMs. While LMOs will not have system operation responsibilities, they may, through LFMs, provide services that are valuable to system operators and to those who wish to connect production or consumption to the grid.

The report makes a distinction between different forms of flexibility trading. First, LFM participants may sell flexibility services to an institution, like a DSO, LMO or aggregator. This principle is fairly well established. Second, in line with +CityxChange objectives, we also describe how participants could trade with each other, for purposes that are similar to the objectives of grid tariffs. This is referred to in the report as internal trading, and seems less explored until now. Internal trading generally requires that a DNO/DSO or LMO introduces new, special incentives, explicitly as or akin to special grid tariffs.

The LFM is envisaged to be built around a trading platform, which will be further developed in +CityxChange Tasks 2.3 and 2.5 (deliverables D2.6 and D2.7). The report describes several options for market operation systems, the price-setting mechanisms in the platform. We describe options both for internal trading and trading between flexibility providers and institutions. We identify several challenges with the option of flexibility activation pricing, where flexibility providers can be paid to shift their consumption or production away from a reference point. Without appropriate countermeasures, flexibility activation pricing risks that flexibility providers (including automated systems) are incentivised to shift the reference point itself, in the “wrong” direction. Safeguards against this possibility are therefore given much attention. However, we recommend that further research, detailing, and verification of these safeguards is continued in subsequent tasks – especially Tasks 2.3, 2.5, 4.10, and 5.10.

In applying the market design framework in this report to the +CityxChange pilots in Trondheim and Limerick, we find that several key recommendations tend to recur in both. Our hypothesis is that this also largely applies to the +CityxChange Fellow Cities. However, there are also meaningful differences, mainly linked to long-lived factors such as natural resources and physical infrastructure. As the energy system in Norway in many ways is an outlier in the European context, the +CityxChange Fellow Cities may find more familiarity in the Limerick case. However, the solutions tested in Trondheim may still be relevant.
One expected difference between the LFM design approaches in the Trondheim and Limerick test areas lies in how Limerick aims to test a solution in which the local market’s net position (production minus consumption) cannot be positive. This will allow more production capacity to be connected. In the Trondheim test areas, however, we do not expect the LFM design to include this requirement. This will make it easier to achieve the +CityxChange goal of Positive Energy Blocks with cumulative energy surpluses over a year. The details of the LFM design in the two lighthouse cities will continue in +CityxChange tasks 2.3, 2.5, 4.10 and 5.10, building on the principles in this report. However, much may also depend on regulatory dispensations, the feasibility of which will be tested in Tasks 4.4. and 5.4.”

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