"The time for flexibility is now"
Testing a local flexibility market in the Energy-Flexible Model Region Augsburg
Augsburg / Paris, 6 August 2024. The rapid expansion of renewable energies in Germany, essential for the energy transition, is increasingly causing regional imbalances in electricity generation and demand due to the slower grid expansion, necessitating massive redispatch measures to manage grid congestions. Those measures include curtailing renewable energies in the North and ramping up conventional power plants in the South of Germany. According to the Federal Network Agency (BNetzA), the associated costs amounted to around 3.1 billion euros in 2023 alone.
Despite the planned expansion of the electricity grid, an increasing need for redispatch is expected in the coming years. Various solutions are currently being discussed concerning the future handling of grid bottlenecks. One approach, which has already been discussed intensively and controversially in the past, is introducing local price signals through a locally differentiated electricity market design. This could theoretically be realised by dividing the German-Luxembourg electricity bidding zone into several zones or by introducing nodal pricing. However, a recent study carried out as part of the Kopernikus project SynErgie indicates that various bidding zone configurations yield only minimal reductions in redispatch costs and demonstrate instability over time. Therefore, a division of the uniform German price zone is justifiably controversial. According to this study, implementing nodal pricing would result in significantly lower redispatch and overall electricity generation costs. However, studies run by the European Commission's Joint Research Centre in the scope of the Electricity Market Design reform have highlighted challenges associated with this market design within the European Union, for example, regarding transition costs and required institutional changes. Therefore, if these two market design alternatives are ruled out and the single price zone in its current form becomes increasingly inefficient, then it should be complemented by local flexibility markets.
A local flexibility market is a marketplace designed specifically to procure flexibility within a geographically defined area with the aim of managing congestion at a local level. Local flexibility markets can help to manage flexibility in a targeted manner or incentivise it precisely where and when it is needed to reduce grid bottlenecks. In our opinion, local flexibility markets, therefore, offer a decisive advantage - especially in view of the current discussions: local flexibility markets represent an interesting opportunity to introduce the urgently needed local price signals while maintaining the single German bidding zone. These local flexibility markets are in line with the electricity market paper just published by the Federal Ministry for Economic Affairs and Climate Action (BMWK) , in which the BMWK commits to maintaining the single German-Luxembourg bidding zone while also emphasizing the need to complement the current electricity market design with a local dimension.
Local flexibility markets are not a new concept: in some neighbouring European countries, such as the Netherlands or the UK, these markets have been established for years. Kora Töpfer, Head of German Public & Regulatory Affairs at EPEX SPOT, says: "The concept of local flexibility markets has proven to be sound both in theory and in practice: Redispatch costs have been demonstrably reduced and load-side flexibility has been efficiently integrated into the electricity system. Commercial applications of local flexibility markets in the Netherlands and the UK show that such markets make it possible to significantly increase the potential of load-side flexibility with relatively little implementation effort. The energy sector has the task of utilising batteries, demand-side response, power-to-X and all types of flexibility in a grid-friendly manner in order to make the energy transition cost-efficient."
In Germany, however, local flexibility markets currently play hardly any role in discussions about the further development of the electricity market design. This is mainly due to the fact that the emergence of market power and the so-called "inc-dec gaming", i.e., strategic bidding behaviour, represent fundamental challenges that need to be addressed and resolved when implementing local flexibility markets. However, as the successfully implemented examples from neighbouring European countries indicate, these theoretical challenges can also be managed in practice through suitable market designs and targeted monitoring, among other measures.
Read the full paper here in English and German or see PDFs attached.
For more information contact Kora Töpfer, Head of German Public & Regulatory Affairs at EPEX SPOT, at k.topfer@epexspot.com