The consultation to decide who will undertake the new role of market facilitator – tasked with coordinating demand flexibility offers – is currently underway.
Ofgem will use the consultation responses to decide whether the forthcoming future system operator, National Energy System Operator (NESO), or Elexon, the not-for-profit organisation which manages the Balancing and Settlement Code (BSC), would be best-placed to take on the new role.
The energy regulator confirmed its intention to create the market facilitator role in November 2023, as part of its proposed reform package for local governance arrangements.
Ahead of the consultation’s close on 7 February, Elexon’s chief executive, Peter Stanley, explains why the role of the market facilitator is needed in today’s flexibility market and what will be required of the role.
Last year, the UK continued to pass new milestones in the transition to a greener electricity system, with the highest-ever amounts of wind and solar generation on the networks recorded in December, and April respectively.
As well as installing cleaner forms of generation, the energy sector must also take steps to make the UK’s electricity system more flexible, using surplus electricity more efficiently when it is available, and smooth out peaks in demand.
What is flexibility and how much of it do we need?
Flexibility refers to generators and users of electricity changing their production or consumption patterns in response to requests and price signals. In the future, more consumers will be providing flexibility, as new products and services will make it easier to do this.
The scale of the flexibility challenge is significant; the government estimates that the UK will need an estimated 30GW of flexibility by 2030, which is around a quarter of the current total installed capacity. Aggregators will play an increasing role in engaging consumers and helping them to provide flexibility by using apps, and other technology (including automation).
Coordinating flexibility markets
Flexibility providers need to access multiple markets including transmission-level balancing services, the Balancing Mechanism (BM), and numerous local balancing services markets managed by the six distribution system operators (DSOs). Different registrations are required for each market, which results in insufficient clarity and transparency, and an overall lack of coordination.
Taking the DSO markets as an example, providers recognise that the DSOs will have differing flexibility needs based on their geographic regions and that DSOs have introduced some helpful standardisation of flexibility processes. However, there are processes such as settlement of flexibility, which still differ among DSOs. The time that providers need to devote to interact with each DSO therefore tends to reduce their appetite to bid to provide services.
The market facilitator role
Ofgem has proposed two reforms to address the above issues. The regulator is consulting on whether Elexon or the NESO should take on a new market facilitator role for flexibility.
The market facilitator would work with new and existing participants and create a common set of rules for access to flexibility markets. Essentially, the market facilitator would make sure that flexibility markets are open, fair and coordinated so that the providers can navigate between markets and optimise their assets.
In spring 2024, Ofgem will decide which organisation will take on the role, with expectations for the role to begin operation in late 2025, or early 2026. It is a fast-track timetable for a decision, which we fully support, as these reforms need to be in place quickly. Ofgem has also put forward options for providing digital infrastructure to support flexibility trading.
Based on our experience, there are four elements for making the market facilitator role a success:
The transmission-level and distribution-level markets must be interlinked through a clear set of rules to allow for interoperability and transparency. The market facilitator can achieve this by developing ‘stacking’ and ‘primacy’ rules for market operators and participants. Stacking rules allows for better revenue forecasting by determining whether a single flexibility asset can deliver multiple products. Primacy rules provide clarity on issues such as which flexibility purchaser takes precedence when the same asset is called-on to provide a service.
The market facilitator must be neutral and independent
Most participants that we talk to believe that as more local flexibility services were procured, the responsibility for governing processes for the markets they compete in must sit with an external party with no vested interests in either flexibility provision or flexibility exchanges.
This party needs to work with all the participants: the FSO (which will be a major buyer of flexibility services regardless of whether it is chosen to be the facilitator or not), the DSOs, the platforms where flexibility is traded and of course, the flexibility services providers.
This neutrality will ensure open and transparent consideration of views and a process leading to mutually agreeable and implementable solutions. Service providers also say that having a neutral facilitator will ensure that if changes to processes are needed, these will be made consistently and transparently, which will encourage them to develop new products and services more quickly.
Easier access to data to help providers
Data is critical to make the right decisions and enable growth in flexibility markets. Providers want to have easier access to data, which includes longer-range forecasts showing where in the UK flexibility services are most needed. This is important so they can make the right investment decisions on where to locate assets to relieve network constraints. That clarity comes through better data provision, and only through this will local flexibility markets be able to grow effectively.
Moving quickly to the new governance arrangements
Moving to a clearer and more standardised approach for trading flexibility will require the market facilitator to work quickly to design an open, transparent, and flexible governance framework. We believe that best practice on industry governance can be adapted to provide a quicker transition. The use of familiar processes should also encourage increased participation and liquidity.
The government has set a challenging target of decarbonising the electricity system by 2035, which is only 11 years away. During that period there will be more low-carbon generation connecting to the networks, and the system will need to manage increasing use of EVs and heat pumps.
We cannot be certain about how we will want to use the system in future either, as new technology and developments will require us to react quickly to unforeseen challenges. This is another reason as to why flexibility is so important. Creating an environment where it can play a much bigger role in meeting supply and demand is essential.
We need to have a simpler, more coordinated and more consistent way for flexibility providers to offer their services and the market facilitator will play a critical part in this.