In March 2023, the UK regulator Ofgem kick-started a critical discussion on how to tackle some of the ingrained and systemic issues facing flexibility and energy markets in its “Call for Input: The Future of Distributed Flexibility”.
In this, Ofgem set out issues facing the sector including the lack of coordination, the high barriers to entry and participation and the inability or difficulty to stack revenues across markets. And although these issues are widely agreed upon, the best way to approach solving these challenges remains unclear. However, two thing remains clear: the pace of flexibility roll-out needs to increase; and we need to unlock this greater potential in a way which doesn’t undermine the significant progress already happening.
Understanding the root of the problem
Understanding how best to approach solving these problems requires getting to the crux of the issue - are the right incentives in place? At the core of market progress and development are the market operator and system operator activities, incentives and penalties - often underpinned by the regulator. When these are aligned, action and results are delivered. For flexibility buyers (System Operators), the incentives in their license conditions must be aligned with the desired market outcomes. However, there has also been a lack of focus on aligning the right behaviours across market operators (such as flexibility platforms). When taken together, these have resulted in market developments happening in largely uncoordinated silos - with different processes, APIs, data requirements, timeframes and more. So what is the best way to approach changing this?
Driving the right behaviour
To drive the right behaviour across markets, an agreed set of rules for participation and operations that market platforms, network and system operators, and other relevant parties sign up to and qualify for must be established.
We’ve called this concept a “Market Governance Framework”, which is essentially a code of conduct to better align parties where they are not aligned currently. At a high level, an “MGF” would establish, ingrain and qualify parties to enable all assets to simply and easily interact and participate. This would include common standards and accountability, aligned processes and protocols, open data standards, API-driven and operational transparency and coordination.
Whilst such an initiative could be voluntary to start with, the MGF could soon qualify interacting parties - this means that if MGF set aspects are not followed by participants, then they would not qualify as an “MGF operator”. Furthermore, to provide this with additional teeth, System Operators could also be required to follow and only use MGF-qualified entities, such as market platforms.
Establishing a Market Governance Framework
Seeking to design, agree and implement a perfect solution for energy markets would be both time-consuming and high-risk. Consequently, establishing an MGF could be done incrementally, first defining the objectives before living, iterating and growing the scope of the standards. The first iteration of aligning markets should be an easy step, tackling low-hanging fruit and quick wins to get things moving, before increasingly upping the ambition, efforts and complexity of the problems trying to solve.
We believe that through prioritising this incremental approach, a lot of the outlined issues facing the energy system would end up being solved by aligning the behaviours and functionalities of the existing market participants - with a “thin” layer of centralised digital infrastructure such as common APIs providing significant value to the industry. However, the important feature of an MGF is that it doesn’t presuppose the best way to solve these issues upfront - it does not prescript the use of new, additional centralised functionality nor does it predefine the best solution. It draws the expertise and efforts of a variety of roles, governance and market participants to incrementally improve energy and flexibility markets.
Furthermore, an MGF starts with the reality of the energy system we exist in and builds on the progress achieved to date bottom-up. In areas already covered by existing workstreams, the MGF would not replicate these or replace proposed roles (such as a Market Facilitator) but would seek to tie in and expedite the adoption of these industry-agreed standards across market participants and platforms - and provide the teeth required to do so. Indeed, the Market Facilitator role will be critical to the success of such a framework and the setting of ambitious timeframes.
The benefits of an MGF approach
This approach will help establish the right incentives for all marketplaces, buyers and participants to work together to drive markets forward iteratively, collaboratively and at pace.
Through such an incremental and adaptive approach, it capitalises on the successful approaches and technology in flexibility markets that have placed the UK at the forefront of these markets globally and would benefit participants in the short term through early-targeted “low-hanging fruit” improvements, which would continue as the process and iterations advance.
But at its core, the benefit of the MGF is that it doesn't presuppose what the right solution is to a problem or try to define the perfect technological solution upfront. Such a collaborative approach reduces the risk of over-centralisation of functionality where it is not necessary and enables the development of innovative, competitive value propositions and new solutions can continue to be offered and integrated into the ecosystem by a variety of companies and business models.
Having kick-started this discussion at an important time in flexibility market development, Ofgem has a clear consensus from the industry that change is needed (93% of respondents to their CfI agreed with this) and a near-universal consensus that it is essential to deliver flexibility market “enablers”. Ofgem continues to have a role to play in facilitating these discussions moving forward and we look forward to engaging collaboratively with them and peers across the industry on such pivotal workstreams.
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