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Glossary · Energy industry & energy transition

Flexibility market

flexibility market flexibility Demand response storage Aggregator

A flexibility market is an organised mechanism through which time-limited changes in electricity generation, electricity consumption or storage are offered, demanded, priced and called upon. What is traded is not simply electricity, that is, a kilowatt hour at any given time. What is traded is the ability to shift, increase, reduce or adjust more quickly the feed-in or withdrawal of electricity. This ability is called flexibility.

Technically, a flexibility market usually refers to power, that is, kilowatts or megawatts. In addition there are a duration, an activation time, a direction and often a location. A battery, for example, can feed in additional power or absorb electricity for a quarter of an hour. A heat pump can shift its consumption if the building has sufficient thermal inertia. An industrial plant can start a process earlier, run it later or briefly throttle it, provided that quality, production planning and occupational safety allow it. From these characteristics a product emerges: how much power, for how long, with what lead time, at which grid point and how reliably.

A flexibility market must therefore be distinguished from an ordinary electricity market. On the wholesale market, electrical energy is bought and sold for specific delivery periods. On a flexibility market, the subject is the changeability of the schedule. A provider thus sells the possibility of deviating from expected behaviour. This deviation must be measurable, contractually regulated and technically callable. Without a metering concept, a reference value and clear responsibility, flexibility is not a tradable good but merely a theoretical potential.

Distinction from balancing energy, redispatch, dynamic tariffs and capacity markets

The term flexibility market is used for very different instruments. As a result, it often remains unclear what task a mechanism is meant to fulfil. Balancing energy markets serve frequency maintenance: transmission system operators procure there balancing capacity (the standby readiness held available) and balancing energy (the energy actually called upon) in order to offset short-term imbalances between generation and consumption across the entire grid area. Balancing energy is thus a special, highly standardised form of flexibility procurement in which the exact location of the plant usually plays no role.

Redispatch, by contrast, serves to relieve grid congestion. Grid operators change the operating mode of generation plants, storage units or loads so that lines are not overloaded. Here location is decisive: a plant may be cheap from a market perspective and still cause additional problems at an overloaded grid node. In Germany, redispatch under Sections 13 and 13a of the Energy Industry Act (EnWG) is predominantly organised as a regulated intervention with financial compensation and not as a free market with bids. German law expressly clarifies that these instruments remain unaffected by market-based flexibility procurement in the distribution grid.

Dynamic electricity tariffs give end customers price signals that are oriented, for example, to exchange prices. In the narrower sense they are not a flexibility market as long as neither binding callability nor a committed power nor grid-serving control has been agreed. A household with a dynamic tariff may respond to low prices, but it does not have to. For grid operation and security of supply, this difference is significant.

A capacity market is also something different. There, the availability of firm capacity is paid for, usually with a view to scarcity situations. A flexibility market can contribute to firm capacity if flexible loads or storage units can be reliably called upon. However, it primarily remunerates the ability to adjust over time and not the mere existence of a plant.

Legal framework in the EU and in Germany

At EU level, Article 32 of the Electricity Market Directive (EU) 2019/944 obliges Member States to create a regulatory framework. This framework is to allow distribution system operators, and give them incentives, to procure flexibility services, including congestion management, in their area in order to make the operation and development of the distribution grid more efficient. Under the Directive, final customers as active customers are also to be allowed to participate in flexibility schemes. With the 2024 reform, the consolidated version additionally contains a framework for flexible grid connection agreements in areas with scarce grid capacity. This is a related but separate instrument: here flexibility is already agreed upon at the grid connection and not traded case by case.

In Germany, Section 14c EnWG implements this requirement for operators of electricity distribution networks. If they procure flexibility services in order to make the operation and development of their network more efficient, this must be done in a transparent, non-discriminatory and market-based procedure. The specifications and standardised market products are developed by the distribution system operators. The Federal Network Agency (Bundesnetzagentur) must approve them or can itself prescribe them by determination. It can also permit exceptions if market-based procurement would not be economically efficient, would seriously distort the market or would aggravate congestion. Services under Section 12h EnWG, that is, non-frequency-related ancillary services, are not covered.

Important for the status of applicability: under Section 118(28) EnWG, the obligation under Section 14c is suspended until the Bundesnetzagentur has approved or determined specifications for the first time. At the end of 2023, in its determination on Section 14a EnWG, the Bundesnetzagentur expressly stated that neither Section 14a nor Section 14c results in a mandatory obligation to already now lay down requirements for market-based flexibility procurement. The grid-oriented control of controllable consumption devices such as heat pumps and wallboxes under Section 14a is therefore not a flexibility market. It is a mandatory control regime with reduced grid charges as consideration. A nationwide, regulated local flexibility market in the German distribution grid does not exist as matters stand. In addition there are pilot projects and voluntary platforms.

Why flexibility markets are becoming more important in the electricity system

With the growing share of wind energy and photovoltaics, the task in the electricity system is changing. Formerly, generation largely followed consumption: power plants were ramped up or down to offset load changes. In a system with more renewables, a large part of feed-in fluctuates with the weather. At the same time, electricity demand is rising through heat pumps, electric cars, electrolysers and electric industrial processes. This gives rise to new load profiles and new congestion.

Flexibility markets can help coordinate these changes economically. When there is a lot of solar power, it can make sense to charge storage units, produce hot water, charge electric vehicles or bring industrial processes forward. When electricity is scarce or a grid section is heavily loaded, consumption can be reduced or shifted. What is decisive then is not only how many kilowatt hours are consumed per year, but when, where and with what connection capacity.

The difference between system-wide and local flexibility is particularly important. A low exchange price usually indicates a large electricity supply in the entire market area. But it does not say that sufficient line capacity is available in every distribution grid. An illustrative example: in a residential area, dozens of wallboxes and home storage units start at the same time on a sunny midday because the price falls. The local grid transformer can then be overloaded even though electricity is abundant nationwide. A flexibility market that is meant to take grid concerns into account therefore needs information on location and clear rules on who may access which plants. This is precisely the case – local procurement by the distribution system operator – that the European and German regulations have in view.

The role of aggregators and metering

Many flexible units are individually too small to participate directly in markets. An electric car, a household battery or a heat pump offers only limited power. Together, however, such plants can become relevant. An aggregator pools many small flexibilities, forecasts their behaviour, markets them and assumes certain obligations towards the market or the grid operator.

For this pooling to work, several questions must be clarified. Who may control a plant? How is the customer's consent obtained? What comfort limits apply for heat or mobility? And how is it determined what would have happened without a call? This reference, often called the baseline, is central to settlement. If an industrial plant sells a load reduction, it must be clear against which expected consumption it is measured. Incorrect reference values can trigger remuneration without the electricity system actually being helped. One example is an artificially high baseline whose reduction is then paid for.

Balancing group responsibility also plays a role. Suppliers must forecast and balance the feed-in and withdrawal of their customers. If an aggregator intervenes in consumption at short notice, it may change a supplier's balance. A viable flexibility market therefore needs rules on how such interventions are treated, remunerated and delineated for balancing purposes. Technical controllability alone is not sufficient.

Typical misunderstandings

A widespread misunderstanding equates flexibility market with storage. Storage units are important sources of flexibility, but not the only ones. Shiftable loads, controllable generation, electrolysers, heating networks, industrial processes and charging infrastructure can also provide flexibility. Conversely, not every storage unit is automatically system-serving. If a battery storage unit uses exclusively price differences on the wholesale market, it can aggravate local grid congestion or play no role for frequency maintenance.

Another misunderstanding consists in treating every technical potential as available flexibility. An electric car is often parked for many hours, but not every vehicle is plugged in, not every user accepts interventions and not every charging point is controllable. A heat pump can shift consumption, but only within thermal limits. A factory can adjust its load, but not arbitrarily often, not without costs and not independently of delivery obligations. Flexibility has opportunity costs, wear effects, comfort limits and organisational constraints.

The notion that a uniform price could solve all flexibility problems also obscures important differences. Prices can coordinate behaviour if the relevant scarcity is contained in the price. However, many grid congestions do not show up directly in the wholesale price, because market areas such as the German-Luxembourg bidding zone are larger than individual physical grid restrictions. This gives rise to situations in which a deployment that makes sense from a market perspective is unfavourable for the grid. The conflict lies where technical possibility, market rule and responsibility diverge.

Institutional and economic classification

Flexibility markets touch on the responsibilities of many actors: transmission system operators, distribution system operators, suppliers, balance responsible parties, aggregators, plant operators and regulatory authorities. Each of these roles has its own objectives and obligations. Transmission system operators ensure the stability of the overall system. Distribution system operators must keep local equipment within the permissible range. Suppliers procure energy for their customers. Aggregators unlock flexibility. Plant operators expect reliable revenues and limited interventions.

This raises a design question: who may procure flexibility, under which rules, with what priority and with what cost allocation? If a distribution system operator uses load shifting to avoid grid expansion, this has a different benefit than a deployment for arbitrage on the electricity market. If the same battery is to participate in several markets, it must be prevented that the same power is sold several times. A plant can combine several revenue sources, but it can reliably commit a given power in a given period only once. Coordination between the transmission and distribution levels is therefore a core issue that EU law expressly addresses.

Economically, flexibility markets pay off if they avoid or reduce expensive alternatives. These include fuel for peak-load power plants, curtailment of renewable energy, unnecessarily high grid expansion or expensive balancing energy. However, they cannot completely replace these measures. An electricity system continues to need grids, firm capacity, protection technology, forecasts and clear responsibilities. Flexibility markets are an instrument of coordination, not a substitute for physical infrastructure.

The term flexibility market thus describes a specific task of electricity supply: changeability becomes a tradable and callable contribution. Its value does not arise from the mere existence of flexible devices. It arises from their measurable, reliable and rule-compliant integration into operation and the market. Anyone who uses the term properly separates technical potential from actually available flexibility, market price from grid need, and individual optimisation from the contribution to a secure electricity supply.

Sources

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Edited by eCMS on 12.11.2026 05:05

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