The economics of flexibility service contracting in local energy markets

Electricity networks require reinforcing to accommodate increasing electrification of heating and mobility and increasing penetration of intermittent generation. The nature of these reinforcements depends on the scale and depth of flexibility services available to solve a constraint in a particular area at a particular voltage level. Great Britain’s Local Energy Oxfordshire project (Project LEO) sought to determine this potential by developing a proof-of-concept local energy market which piloted the provision of such flexibility services to both the distribution system operator and third parties. Using insights from transaction cost economics, this research analyses the distribution and nature of transaction costs, production costs, and contract revenues in the establishment of such local energy markets and the delivery of flexibility service contracts therein. This market trial revealed that under current circumstances, uncertainty around when and how often flexibility services might be contracted, limited contract revenues accruing to flexibility service providers, and unfamiliarity with the entire process resulting in high transaction costs, make it difficult to establish a business case for flexibility service provision in local energy markets. Our findings identify standardisation and regulation to lower transaction costs in the establishment of local energy markets, and automation and aggregation to lower transaction costs and increase contract revenues of flexibility service delivery. These findings help improve the viability of local energy markets and flexibility service contracting therein as cost-effective alternatives to costly network reinforcements.