IEEE Power & Energy Magazine - January/February 2021 - 61

The value of flexibility resources in reducing the low-carbon
generation investments required for the achievement of carbon
targets is not currently captured by any European market design.
level playing field with large-scale generation (e.g., shorter
contract lengths).
Furthermore, European balancing and ancillary services
markets generally ignore the time-coupling operating properties of DSR since each ancillary service product is cleared
independently. As a result, market outcomes are not fully
cost reflective and may overestimate the value of some flexible resources. As an example, a study conducted by Imperial College London has quantified the value of frequencyresponse service provided by thermostatically controlled
loads in the Great Britain system under the independent and
simultaneous clearing of frequency response and reserve
services. In this example, a case when refrigeration provides
the primary frequency control by reducing its consumption
will be naturally followed by a load recovery effect (i.e., the
demand in a subsequent period will be higher than the level
it would follow if the provision of frequency response had
not taken place to restore temperature at the desired setpoint), implying that the secondary reserve requirements of
the system may increase. Therefore, the actual value of the
frequency regulation service when accounting for this effect
is visibly lower than the one projected by the current independent clearing approach.
Moreover, the location-specific component of the distribution network charges constitutes a very small proportion of the overall charges in most European countries, and
the largest amount of network costs is socialized, preventing distributed flexibility resources from taking actions
to avoid/defer distribution network reinforcements. Last
but not least, the value of flexibility resources in reducing the low-carbon generation investments required for
the achievement of carbon targets (which constitutes the
most significant value stream in the low-carbon future,
as illustrated in Figure 6) is not currently captured by
any European market design, to the best of the authors'
knowledge, and constitutes a key market design challenge
going forward.

Geographical Integration of Electricity
Markets: The European-Wide Approach
and Local Energy Markets
As previously discussed, a cost-effective transition to the
low-carbon energy future involves a combination of largescale renewable generation and the deployment of smallscale distributed flexibility resources at the local level.
In this context, another major policy challenge lies in the
introduction of suitable market mechanisms at multiple geojanuary/february 2021	

graphical levels, ranging from the European-wide level to
the local community level.
Concerning the former, previous work has demonstrated
that a coordinated European-wide approach for the integration of renewable generation can offer very significant benefits compared to a member state-centric approach by taking
advantage of the significant geographical diversity of renewable energy resources' availability, including the higher
capacity factors of wind generation in Northern Europe and
the higher capacity factors of solar generation in Southern
Europe. Specifically, if such diversity is combined with a
full harmonization and integration of the different countries'
electricity markets, the same amount of renewable energy
can be produced with 150 GW fewer renewable generation
capacity with respect to the member state-centric approach,
entailing around €200 billion of savings in capital investments until 2030. Although such a European-wide approach
has been outlined in the European Renewable Energy Directive, it has not yet been realized. Furthermore, interconnections to the Middle East and Africa could potentially further
increase these benefits by exploiting the high solar generation availability in those regions.
At the other end, despite the massive value of distributed flexibility resources enabled by the digitalized energy
paradigm, the effective integration of large numbers of
such small resources in electricity markets is extremely
challenging due to scalability limitations and privacy concerns raised by the end consumers/prosumers. In this context, local energy markets (LEMs) constitute a new market mechanism attracting continuously increasing interest.
LEMs enable the direct trading of energy and flexibility
among the end users of a local community, coordinated
either in a centralized fashion (e.g., by an independent community manager) or in a fully distributed fashion through
emerging peer-to-peer trading architectures.
Beyond addressing scalability and privacy concerns,
a LEM promises a number of significant benefits, including a) limiting the energy dependency of active consumers/
prosumers on the incumbent electricity retailers and consequently enhancing the competitiveness of the latter; b) avoiding distribution network reinforcements as a result of matching local demand with local generation; c) enhancing the
engagement of local end users in system operation by creating a local identity and promoting social cooperation; and d)
revitalizing the local economy by shaping opportunities for
local investment, creating new jobs at the community level,
and promoting self-sufficiency. The EC has recognized these
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IEEE Power & Energy Magazine - January/February 2021

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