The transition from a power system traditionally dominated by large synchronous conventional generation units to a system with high levels of variable non-synchronous renewable technologies results in challenges that might endanger the safe and reliable operation of the power system both in the transmission and distribution grid. Innovations in product and market design support the ongoing evolution where system operators implement a more active approach to system management. But which innovations are necessary to design cost efficient flexibility markets for the future, free of distortions?

Written by Helena Gerard, Senior Researcher at EnergyVille/VITO


The transition from a power system, traditionally dominated by large synchronous conventional generation units, to a system with high levels of variable non-synchronous renewable technologies results in challenges that might endanger the safe and reliable operation of the power system both in the transmission and distribution grid. The increasing share of distributed energy resources in the distribution grid provides challenges and opportunities to accommodate and use the resources for the overall benefit of system operators (TSOs and DSOs), market participants and end consumers. The future system needs, focused on system adequacy, frequency control, congestion management and voltage control, will drive necessary innovations in the field of system services and market design and consequently, lead to new opportunities for market participants to provide a wide range of services.

Historically, system services were centred around products based on active power, providing frequency control services to the transmission system operator (TSO). While recent evolutions in system services have mainly focused on new technologies that could provide similar services, less attention has been paid to a fundamental change in product and market design. Although the existing services and market design might be well suited for the ongoing system challenges, they are not yet adapted to a future system dominated by large shares of variable renewable sources of electricity.

Innovations in product and market design support the ongoing evolution where system operators implement a more active approach to system management. In the following talk, we discuss three important topics for innovation: product design, market design, and coordination between system operators.

Innovations in products

Innovations in product design range from changing the parameters of existing products to introducing new products or fundamentally changing the concept.

Technology neutrality is a key requirement for sound product design. New technologies might be necessary to guarantee a sufficient level of flexibility provided at reasonable price. Existing product requirements might need to be adapted in order to account for new technologies to participate.

An example is the requirement of 100% availability for some products which makes the participation of RES challenging. Another example is the absence of ramping constraints for some products which might be added to guarantee a safer and more reliable use of the procured system services.

New products are currently under development or will be introduced in the coming years to answer the needs that arise in case of high RES penetration. For example, looking at the existing range of frequency products, it is obvious that in the future, an evolution towards faster reacting reserves for frequency control will be necessary in order to react to the short-term volatility of generation and demand. Furthermore, products will need to be developed for emerging system needs such as voltage control and congestion management (both at transmission and distribution level). Today, these services are mostly not provided by flexibility providers but as their need will gain importance, a more concrete view on their characteristics (procurement method, duration, availability,…) will be necessary. Specifications for new products such as congestion management will be largely influenced by the operational processes defined by system operators.

Fundamental changes in the energy landscape might require a more fundamental rethinking of the way we organize products and markets for system services. The need for new types might in the worst case lead to a large set of different products with different specifications and market arrangements. This might increase complexity from the perspective of both system operator and the service provider. How can we ensure transparency leading to a safe and secure operation of the grid?  A more disruptive way to look at innovations in product design is the ‘Supermarket Concept’ developed in the H2020 project EU-Sysflex: a concept where system-service providers do not offer flexibility for a single product or market organization (respecting the required specifications), but, on the contrary, offer their flexibility independent of a product or a market and only by indicating the specifications of their flexibility pool (size, activation speed, ramping constraints…). System operators shop around for flexibility, driven by their actual needs on the one hand and the available offers (including a wide range of different specifications) on the other hand. The pricing is less obvious and should be carefully designed. Evolutions in the field of artificial intelligence can support these disruptive concepts by supporting the selection of flexibility by the system operators on the one hand and the pricing mechanism on the other hand.

Innovations in market design

Complementary to the design of new products, there is a need to bring innovation into the future market arrangements for the procurement and activation. Besides innovations at the level of products and services, system operators will need to rethink the design of future proof flexibility markets. Different market concepts will allow to serve the needs of both TSOs and DSOs at the level of investment, operational planning and real-time solutions. Innovations in market design are a key enabler for a smooth integration of changes.

Current markets are most often characterized by a centralized market design, organized and operated by the TSO. Future market organizations will be a mix of centralized, decentralized or even peer-to-peer markets, dependent on the system needs that should be mitigated. The development of system services for local issues (e.g. local congestion management or voltage control), the rise of flexibility sources connected to the low and medium voltage grid, and the increased empowerment of the end consumer (e.g. the uptake of different kinds of energy communities) will lead to more decentralized and distributed market organizations. In particular for decentralized market organizations, it is essential that the chosen configuration guarantees sufficient liquidity and limits the emergence of market power. The figure below shows different possible market organizations.

market organizations

Figure 1 Market organizations for system services (Source: EU-Sysflex project)

For some system services, it will be even necessary to complement the market solutions with additional regulation due to their nature. This is for example the case for system services that are essential for the stability of the power system (e.g. inertia). It can be debated under which conditions the security of the grid is a valuable argument to call for more regulated arrangements (e.g. via network codes) instead of market-based solutions. Depending on the chosen market design, the roles and responsibilities, interactions and information exchange between TSOs and DSOs will differ.

The design of flexibility markets should discourage the emergence of different kind of market distortions. Examples of market distortions are the presence of market power, unwanted strategic gaming behavior of market participants or barriers for certain technologies. In particular small, local markets often suffer from a lack of liquidity and as such result in non- competitive prices. Consequently, smart market design should avoid too many small and fragmented markets. In some cases, for example to solve congestions at the low voltage level, it might be more beneficial, instead of organizing a market for flexibility, to rely upon other market-based instruments such as dynamic tariffs (implicit demand response) or dynamic connection agreements. Another example of a possible market distortion is linked to the strategic behavior of market participants. Illustrative for this case was the observation in Germany where the selection of frequency reserves was based on the reservation price only, leading to a situation where flexibility providers were submitting bids with artificially low reservation prices, which, ones selected, were compensated with extremely high activation prices.

Other innovations might also be expected in the design of energy and flexibility markets in case of further harmonization of markets within Europe, for example the harmonization of intraday markets of markets for specific system services. Moreover, the inclusion of different carriers (gas, heat and electricity) or the combination of markets (e.g. joint procurement of congestion management and balancing services) will lead to more options for both flexibility providers and system operators. However, in order to function in an efficient way, at the lowest possible operational cost, smart design of markets is essential and further research and innovation is required in the coming years.  

Towards Increased Coordination

The need for increased coordination is widely recognized in Europe. Increased interactions between network operators will allow a better use of flexibility from DRES. Not only will TSO’s and DSO’s support each other in an efficient operation of their grids, system operators will also avoid that actions, taken in one network, will counteract actions in another. Within the H2020 project Smartnet, five models for increased TSO-DSO interaction were defined[1]. The Centralized AS market model presents a centralised market, operated by the TSO, that respects constraints in the distribution grid. The Local AS market model starts from a local market organized by the DSO, that aggregates resources and transfers them to the TSO. In the Shared balancing responsibility model, the DSO takes over the responsibility of the balancing of the DSO-grid, according to a predefined schedule with the TSO. In the Common TSO-DSO AS market model, the TSO and DSO jointly organize a flexibility market that satisfies both needs from transmission and distribution grid and minimizes the cost of procuring these flexible resources. In the Integrated flexibility market model, TSOs , DSOs and commercial market players compete in a common flexibility market. Each of the coordination models has advantages and attention points (see table) and the choice which coordination model is optimal will depend on factors such as the national organization of system operators, the system services involved and the existing regulatory framework.

energy markets

Nevertheless, a smooth collaboration between system operators will impact business processes, information exchanges and communication channels. This also implies new roles, responsibilities and tools for system operators. Especially for the DSO, significant changes might occur. Today, DSOs are not contracting any flexibility for themselves. They are also barely involved in the procurement processes of AS by the TSO. In future DSOs will not only use flexibility for their own local operation (as an alternative for grid expansion), they will also support the TSO in an efficient procurement process of AS connected at the distribution grid. In addition, as a result of these new roles and responsibilities, an appropriate ICT infrastructure needs to be installed to guarantee a smooth and efficient sharing of information. In case TSO and DSO will collaborate in real-time for the procurement and activation of flexibility, there is an increased need to quickly share large amounts of data in a secure way. These developments obviously relate to the ongoing debate of privacy and cybersecurity.

[1] Gerard, H., Rivero Puente, E.I., Six, D., 2018. Coordination between transmission and distribution system operators in the electricity sector: A conceptual framework. Utilities Policy 50, 40–48. https://doi.org/10.1016/j.jup.2017.09.011

Would you like to know more about innovations in future-proof energy markets? Contact Helena Gerard or Thomas Polfliet




Helena Gerard

Senior Researcher at EnergyVille/VITO
Thomas Polfliet


Thomas Polfliet

Business Developer Flexibility, Grid- & Market design at EnergyVille/VITO