Turning grid challenges into opportunities
11 min read • viewpoint

Turning grid challenges into opportunities

Harnessing the power of flexibility

By Lukas Vylupek, Tomas Sedlacky, Matouš Zaradička, Arpad Toth
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MEET THE AUTHORS

Lukas Vylupek

Czech Republic • Partner

Tomas Sedlacky

United Arab Emirates • Principal

Matouš Zaradička
Arpad Toth

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Distribution system operators (DSOs) have long been considered stable businesses, but this is no longer the case. The need for flexibility on both the supply and the demand side is forcing DSOs to dramatically change the way they operate. The days when power flowed only from large power plants to end customers are in the past, and DSOs must recognize the potential risks from this flexibility and use available tools to mitigate them. This Viewpoint explores how DSOs can turn these flexibility challenges into valuable opportunities.

WHAT IS FLEXIBILITY?

DSO flexibility involves supply points deviating from their usual supply or consumption profile in response to market incentives or price signals. The deviation can be driven by the need to provide service to a market participant (e.g., a system operator or aggregator) or for strategic reasons (e.g., lower power prices). 

Flexibility lets the energy system maintain balance, stability, and reliability in the presence of intermittent renewable energy sources, fluctuating demand, and unforeseen disruptions. With the recent increase in renewable sources, general electrification, and increasing power demand in households with electric vehicle (EV) chargers, heat pumps, and batteries, the demand for flexibility is on the rise.

Flexibility can be categorized based on power-flow direction:

  • Positive flexibility — a service to increase production or reduce electricity consumption 

  • Negative flexibility — a service to reduce production or increase electricity consumption

On the generation side, flexibility is nothing new. Historically, transmission system operators (TSOs) purchased frequency-support services from large, grid-connected resources to ensure grid balance. These were — and still are primarily — coal- and gas-fired power plants. With the gradual closure of these resources and the growth of intermittent-generation sources (mostly wind and solar), there is an increasing need to secure these services from new sources. This trend resulted in flexibility being developed on the demand and supply sides of smaller generation sources and consumption points across all distribution voltage levels. This creates threats for DSOs, including greater instability of power flows on their networks and grid congestion. It also provides opportunities: a DSO can now purchase flexibility services for its own needs rather than limiting its customers.

Aggregators that gather a large number of “small” end customers and generators are entering the market. Their business model is based on using aggregated flexibility for their own needs (mainly trading on the wholesale spot market); they also sell support services (mainly to TSOs but to some degree DSOs). These are often established players, whether energy suppliers or independent aggregators, that must abide by market rules and the grid’s technical limitations. 

There is also a new flexibility force on the horizon. Residential supply points’ installed capacity on low voltage is increasing exponentially, driven by EV charging, heat pumps, photovoltaic panels, and batteries. This creates so-called wild flexibility (because these high-power customers are not aggregated), but they can have a major impact on the grid and are starting to behave in sync due to market impulses.

THE REGULATORY PUSH

Driven by legislative changes aimed at liberalizing the market and promoting sustainable energy practices, the European energy market is undergoing a significant transformation. The shift began with the market liberalization that separated distribution companies from other market participants and evolved to include the rise of energy aggregators, the smartification of the grid, and the emergence of active customers and prosumers. 

EU Directive 2018/2001, along with updates Fit for 55 and REPowerEU, is setting the direction for the EU’s energy trends, focusing on renewable energy, electromobility, and energy aggregation. DSOs are facing increased pressure to integrate renewable energy sources into the grid, which could locally exceed network capacity. Prosumerism, demand aggregation, and the installation of heat pumps, EV charging stations, and batteries are causing power flows to shift from a top-down approach to a more horizontal one. At the same time, dynamic supply tariffs are making residential customers more responsive to market impulses, leading to greater power-flow volatility.

EU Regulation 2019/943 and Directive 2019/944 emphasize the internal electricity market’s competitiveness and customer orientation. They require smart meter installation, allow market redispatch, and stress the need for DSOs to prioritize market-based solutions over direct management of production and consumption. Furthermore, DSOs are banned from owning and operating battery systems and must coordinate with aggregators and other market players to ensure service flexibility. The Framework Guideline on Demand Response outlines principles for demand response, including rules on aggregation, energy storage, and demand containment. It mandates DSO co-ownership of storage technology only if no market solution exists and calls for a platform for data sharing among market participants, as well as mandatory coordination between TSOs and DSOs for strategy planning and operations.

Similar transformations are occurring outside the EU, including in Australia and the US. In these regions, there is a significant push toward integrating renewable energy sources, enhancing grid flexibility, and promoting prosumerism. Both countries are updating their energy policies and infrastructure to accommodate the increasing demand for cleaner, more sustainable energy solutions. This global shift underscores widespread recognition of the need for a resilient, sustainable energy future driven by both technological innovation and regulatory frameworks.

FLEXIBILITY IMPACT ON DSO OPERATIONS 

Voltage levels greatly impact DSO flexibility. Based on our evaluation of legislation and common practices across Europe, high-voltage networks should not experience significant disruptions, since DSOs only connect assets that the grid can handle up to their maximum flexibility potential. However, some DSOs, including France’s Enedis, are taking a more adventurous approach by connecting assets over the grid capacity and stating in the connection contract that those assets can be disconnected if the grid’s stability is in jeopardy.

In contrast, medium- to low-voltage networks are expected to be significantly affected, primarily due to the increased penetration of renewable energy sources and highly fluctuating demands in certain areas caused by the aggregation of smaller assets, such as battery storage, heat pumps, and EV charging stations. These household assets are often operated by “wild” customers who operate a majority of these capacity-intensive appliances. One such customer on low voltage does not present a problem, but when multiple households under one transformer station get these appliances, overloading is a real possibility. Today, both aggregators and wild customers can cause significant overloading in areas such as high-income house communities around large cities.

Whether activated by an aggregator or multiple households in sync due to market impulses, the impacts are significant. The power demand for a single household with all modern appliances can increase from the typical 0.6 kW to an astounding 24.6 kW (potentially more). 

To assess the potential impact on DSOs, Arthur D. Little (ADL) created a simple model showing an increasing representation of high power-consumption points (see Figure 1). This scenario assumes simultaneous load across consumption points. This simultaneity can arise from normal behavior such as returning from work or specific price signals (e.g., spot contracts in which customers concurrently react to a very low or negative price). These situations lead to significant stress on the distribution system and require robust management by the DSO. Figure 1 shows the impact on the grid if DSOs expand their grid without looking for new ways to manage consumption.

Figure 1. Grid impact if DSOs expand without improved consumption management
Figure 1. Grid impact if DSOs expand without improved consumption management

Historically, a 400 kVA transformer served up to around 667 consumption points. Today, with fully equipped consumption points, the same transformer only serves 16. Looking at the issue from the DSO perspective, this means 41x more transformer stations — simply doubling transformers with these capacities does not come close to addressing the maximum potential of wild flexibility. Solely expanding the network is not economically feasible, not to mention that the attached medium-voltage network would require significant reinforcement. Millions of kilometers of low-voltage networks across the world are not prepared for this.

POTENTIAL SOLUTIONS

DSOs have two main choices for managing flexibility (see Figure 2):

  1. Implicit. These include actions such as tariff structures that influence the supply or consumption profile of the end customer with the objective of removing peaks at no cost to the system operator but with no certainty of success. 

  2. Explicit. The system operator purchases a specific measurable service with precise delivery parameters (e.g., volume, time, location) with an associated cost but a certainty of success.

Explicit solutions mainly consist of market and non-market solutions, in which the DSO activates a specific flexibility service on the market, either on a market (i.e., existing contractual terms) or non-market (i.e., restriction without prior agreement) basis. The second key solution is tariffs, which enable implicit control of customer behavior, especially at the low-voltage level. The foundation for those services is the supporting tools, thanks to which DSOs have a better awareness of the current and future state of the network, thus identifying the need for flexibility services and enabling their activation. Individual tools can be used for various market segments (e.g., dynamic distribution tariffs for customer management at low-voltage levels or redispatch at medium- and high-voltage levels).

Figure 2. ADL framework to determine flexibility impact
Figure 2. ADL framework to determine flexibility impact

Market & non-market solutions

Market solutions are employed on an as-needed basis, are sourced commercially, and must be prioritized before resorting to non-commercial solutions. EU Regulation 2019/943 defines redispatch as a measure that includes resource curtailment, activated by one or more TSOs or DSOs to modify generation or load patterns (or both) to change physical flows on the electricity system, relieve congestion, or ensure system security. 

The primary goal of market redispatch is making connecting new customers faster in a less expensive way while offering support during outages and failures. Market-based redispatch can be used across all voltage levels. Below are the three main types of market redispatch:

  1. Market platform. In the Netherlands, DSOs and TSOs are using online trading of geographically specific flexibility from flexible assets or aggregators through a joint project called GOPACS. The platform matches demand for a certain flexibility activation in a certain location with a flexibility of opposite direction in the exact same amount elsewhere. Let’s say DSO Liander needs to decrease consumption on a specific medium-voltage feeder by 1 MW. The platform finds an asset operator in a different location willing to increase its consumption by 1 MW for a fee. The overall balance of the grid remains unchanged, and Liander solves its local issue, all without the need to find specific long-term providers and sign contracts.

  2. Tendered long-term contracts. In the UK, for example, DSOs went in a slightly different direction. Flexibility demands (for multiple types of specific services) are posted on Piclo, including price ranges, expected activation frequencies and durations, and other technical requirements. Suppliers that can provide the required flexibility can apply, and the DSO sets a long-term contract for the provision of the specific service.

  3. Connection contracts. Pressure to connect renewables may clash with existing infrastructure capacities. For example, Enedis lets assets connect to the grid over their capacity but reserves the right to limit the asset’s production during imminent congestion. The customer is responsible for deviations. If the contract is not acceptable, the applicant must wait for network reinforcement in the area. This speeds up connections to renewable sources while giving DSOs the tools they need to keep the grid operational.

The last main instrument is non-market-based redispatch, which serves as a last-resort solution to prevent network collapse. It means that curtailment of production or consumption is activated without prior agreement/contract for the provision of this service. Thus, the end customer’s consumption or production is curtailed without consent and without pre-agreed payment. As this is an unarranged restriction of the end customer’s operation, it must be financially compensated. For instance, Liander outlines the prioritization of various redispatch instruments, placing the non-market redispatch instrument in the last position. Activation of this instrument necessitates subsequent compensation for the impacted resource. Similar to a market-based instrument, it can be used across all voltage levels. 

Distribution tariffs

Tariffs can be used on a low-voltage network to continuously influence end customer’s supply/consumption profiles without requiring any recurring costs for the DSO. Tariffs are priced based on either a flat rate, the energy consumed, or contracted capacity measures. Tariff composition differs significantly across Europe, from the Netherlands’ capacity-driven tariffs to France’s energy-consumption ones.

Tariff structures tend to stir up heated debate. The average consumer expects an energy bill based on “the more I consume, the more I pay.” The problem is that DSO costs are far from variable. About 95% of a DSO’s costs are fixed, as thousands of kilometers of infrastructure must be built and maintained, no matter how much energy flows through them. The remaining 5% of variable costs are mainly related to energy losses. 

This cost structure would be better reflected with a capacity-based bill, but it is hard to explain to customers that they must pay regardless of how much they consume over the year. 

In the Czech Republic, a proposal by a regulator to move from energy-based bills to capacity-based ones caused such turmoil that the Ministry of Energy forced the regulator to abandon the shift. Nevertheless, the Netherlands and Belgium are venturing into the capacity payment world. 

Supporting tools

DSOs rely on a variety of tools to effectively monitor and manage the electrical grid at all voltage levels to ensure stability and efficiency. For example, a “grid traffic light” assesses network load and coordinates interactions between DSOs and market participants. It plays a crucial role in maintaining grid stability by controlling flexible trading and managing consumption and generation in specific areas. It is being used by several notable operators, including Schleswig-Holstein Netz AG in Germany and Terna in Italy.

The demand and supply power control includes devices like limiters in Advanced Metering Management (AMM). It helps regulate energy supply and consumption across various assets, managing both frequency-related controls (e.g., shutting down an EV charger) and non-frequency controls (e.g., voltage management through household battery inverters). Comprehensive metering across all voltage levels (from high-voltage feeders to end customers) is critical for gaining a clear, real-time overview of grid activities. Additionally, predictive models significantly enhance DSOs’ ability to forecast energy flows, identify potential network issues, and implement both market and non-market solutions, such as redispatch and network-reinforcement planning. 

These tools are not inexpensive, but they are indispensable to successful DSO operation in today’s dynamic energy landscape. Without them, managing the complexities of modern electrical grids would be an insurmountable challenge.

Conclusion 

3 STEPS TO SUCCESS

Flexibility is no longer a looming threat: the increasing penetration of renewable energy sources, aggregators, and prosumers with high demands means the threat has arrived. Regulatory pushes will only accelerate the trend, such that DSOs will face more imbalances and overloads, especially in areas with high household demand. Fortunately, DSOs now have tools to manage both direct and indirect impacts of flexibility at their disposal, enabling them to view flexibility as a valuable opportunity. We recommend the following three steps to success:

  1. Conduct an impact study to determine flexibility impacts in the short and medium term.

  2. Define a flexibility strategy by assessing the best tools to use under new conditions to minimize costs.

  3. Adjust the target operating model by determining how the chosen tools will likely impact the model.

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