Summary and conclusions

Photo: Unsplash.com

Project aim: Knowledge basis for regulation to facilitate and promote demand-side flexibility

Flexibility from smart appliances can contribute to ensuring a stable power system, along with the accelerating adoption of renewable energy sources. To succeed, the product design of smart appliances must be developed alongside the procurement solution, including both technical solutions and market design. The main aim of this project is to provide an updated knowledge basis for Nordic government authorities’ and policy makers’ efforts to develop regulatory approaches that may facilitate and promote the adoption of efficient flexibility solutions, and thus, to inform national Nordic and European legislative activities. The analysis is based on a mapping of different initiatives to develop local flexibility mechanisms that exploit demand-side flexibility (DSF) and in-depth studies of the experience from 10 such cases across the Nordics. A particular focus is devoted to barriers and enablers for the efficient use of local demand-side flexibility from smart appliances.

Current utilisation of demand-side flexibility in the Nordics

Flexibility can be incentivised and procured in different ways. Conditional connections are used or piloted in all countries. Time-of-use or power-based grid tariffs are also being implemented. Local demand-side flexibility markets are the most sophisticated procurement method, and several versions of these are piloted or implemented in all countries. To account for the variety in scope, duration, and focus, we call these flexibility initiatives. In total, we have identified 45 finalised or ongoing demand-side flexibility initiatives across the Nordic countries. Norway is the most active country with 20 initiatives. Sweden is the only country with examples of permanent demand-side flexibility solutions. Most of the flexibility initiatives are technical demos that demonstrate that particular technical solutions work, or pilots that also include payment, verification of delivery, etc.

Whether a country has rolled out smart meters and implemented HAN portals and data hubs is affecting how demand-side flexibility can be procured. All the Nordic countries have rolled out smart meters. The roll-out of second-generation smart meters (AMR 2.0) has already started in Finland and is under preparation in Norway and Denmark. We also see that both HAN ports and data hubs have been or are being established, except for a data hub in Sweden.

Home Area Network, enabling monitoring and control of energy usage

Utilising local flexibility is one of many ways DSOs can handle grid issues. The goal of the local flexibility initiatives can therefore be to find out if local flexibility can be a profitable solution to local grid issues, or to test the use of demand-side flexibility both technically and commercially. The main objective of 17 of the 45 initiatives was to solve specific grid issues, while the objective of 13 of the initiatives was to understand and develop solutions. We also identified some other purposes, including establishing a marketplace or a microgrid.

A range of different flexibility sources have been tested across the initiatives, although many of them only once. Smart appliances are included in most of the flexibility initiatives. The flexibility sources that have been tested the most are EV chargers (17) and heat pumps (8). PVs, ESWHs, and batteries have all been tested in six flexibility initiatives.

Barriers and enablers of demand-side flexibility are investigated through 10 case studies

We selected 10 of the initiatives for in-depth case studies. The main selection criteria were that they should focus on flexibility from a range of smart appliances, and that the solutions should have reached a certain level of maturity. We also wanted to study cases with innovative mechanisms that used smart appliances in novel ways, and with some variation across different products, flexibility sources, and providers. Moreover, all the Nordic countries should be represented. The selected case studies are:

Byggfleks (Norway), 2019-2023. Focus on testing technical solutions and systems. Loads from commercial buildings. Knowledge and results were transferred and continued in new pilots.
Battflex (Norway), 2019-2024. Demonstration of the potential of utilising flexibility to address grid issues. Loads include ESWHs and grid-connected batteries. Findings have been integrated into new initiatives and products.
Norflex (Norway), 2019-2023. Aimed to increase the use of flexibility to manage local grid bottlenecks via market-based solutions. Loads from households and industrial, and commercial buildings. Followed up by the ongoing Euroflex project.
Sthlmflex (Sweden), 2020-2023. Focus on a lack of grid capacity in the Stockholm region. Privately owned loads, mainly EV chargers but also heat pumps. Discontinued due to low market liquidity and low demand from DSOs.
Effekthandel väst (Sweden), Permanent market-based solution. Established as an alternative to investments in grid capacity to handle future grid issues due to increasing electricity demand. Loads include batteries, EV chargers, fridges, and freezers. The DSOs plan to expand the solution to new loads.
E.ON Energidistribution’s flexibility markets (Sweden), Permanent from 2023/2024. Nine local demand-side flexibility markets are established to solve grid issues. Loads include heat pumps, EV chargers, battery storage, ventilation units, backup generators, and lighting systems.
FUSE (Denmark), 2020-2023. Established to integrate smart EV charging into the energy system, exploring how dynamic charging management can help stabilise the grid. Loads include home, workplace, and semi-public chargers.
EcoGrid (Denmark), 2016-2019. Exploring and developing a market-based approach to demand-side flexibility in an isolated energy system (Bornholm). Loads from household customers, like electric heating systems.
Helen and Fingrid’s marketplace (Finland), 2025-2027. A live common marketplace for congestion management. Loads include generation, consumption, and storage. The long-term target is to establish a common national marketplace.
Elenia’s smart meters (Finland), from 2020. DSOs offer a service where loads of household customers with smart meters are adjusted according to the spot prices. The load control solution will be commercialised in 2026 and built into the data hub. Flexibility providers can then control aggregated loads for use in electricity and local demand-side markets. Includes loads from single-family and two-family homes like ESWHs and underfloor heating.

Table 1 summarises the estimated potential per appliance, case study, and country. The potentials are in the same order of magnitude as the installed capacities in some of the largest power plants in the Nordic countries.

Table 1: Rough Estimates of the National Overall Potential of Different Smart Appliances

	Potential	ESWH	Ventilation	Underfloor heating	EV charging	Heat pumps	Freezers and fridges
ByggFleks*	∽ 1 GW	X	X	X
BattFlex	2,5 GW	X
Norflex/Euroflex	1-6 GW				X
Sthlmflex	2-8 GW					X
Effekthandel Väst	0,6 GW						X
E.ON Energidistribution’s flexibility markets	N/A
FUSE	0,9 GW				X
EcoGrid	0,2 GW					X
Helen Electricity Network	1,7-3 GW					X
Elenia	∽ 1 GW	X		X

Barriers related to smart appliances and market design are intertwined and should be considered collectively.

A host of barriers can hinder the provision and use of economically profitable demand-side flexibility sources in helping solve grid challenges. The result is that DSOs choose more expensive alternatives like grid investments or using flexibility from more expensive sources. This makes grid costs, paid by the grid customers, higher than they need to be. It is crucial to remember that we do not necessarily want to achieve the full flexibility potential of all the different flexibility sources, but we do want to exploit the economically profitable flexibility. This implies identifying and removing barriers related to market and regulatory failures along the value chain.

In the majority of case studies, the actors report that it is difficult to make the provision of demand-side flexibility from smart appliances profitable. Aggregators need to make various investments and other efforts to be able to aggregate and offer a portfolio of loads to the marketplace. The remuneration is usually not very high. Thus, one of the main findings from the case studies is that the lack of profitability is a general and significant barrier.

Other barriers are mainly related to the flexibility of and operation of smart appliances, the market design, including access to the marketplace and to the DSOs’ platforms. We emphasise that the barriers are intertwined and should be considered collectively. We see that identified issues can be solved by improving the abilities of smart appliances or by changing the requirements to participate in the market. From the case studies, we have identified enablers and learnings that can address the barriers.

Several policies and industry standards are under development and address many of the identified barriers. The Nordic countries should take action to help accelerate their progress.

A comprehensive set of rules and regulations that aims at efficient utilisation of DSF in the Internal Energy Market (IEM) is (still) on the drawing board. The challenge of unleashing demand-side flexibility is approached from several angles – from the market angle by facilitating market access (and reducing transaction costs) for flexibility providers and strengthening the incentives (or requirements) on TSOs and DSOs demand for DSF, and from the flexibility product design angle by developing technical requirements and industry standards for potentially smart appliances.

However, a comprehensive and harmonised EU regulatory framework for DSF is still under development. Early regulations tend to be broad and evolve as technologies mature. The Code of Conduct (CoC) for smart appliances is a key initiative promoting interoperability, but it remains voluntary and lacks a clear timeline for integration into binding EU regulations. The absence of standardised requirements for appliance flexibility and communication protocols poses a risk to DSF development. Despite slow regulatory progress, EU rules do not prevent proactive member states from advancing DSF. Nordic countries, with their experience from pilots and demos, are well-positioned to lead. To accelerate progress, we recommend developing a roadmap with clear milestones for appliance standardisation and interoperability, including defining flexibility criteria and setting minimum requirements.

Policy Recommendations: Six “Messages” to the Nordic Authorities and Policy Makers

Increasing demand-side flexibility (DSF) requires investments from both providers and users, which will only occur if there is a viable business case. Profitability can be improved by reducing costs, such as making appliances smart and responsive to market signals. The ultimate goal is a standardised “plug-and-play” solution. However, premature standardisation may hinder innovation in a still-maturing market. Remuneration for flexibility provision can be increased by DSOs using local DSF markets more actively. DSOs have traditionally relied on grid investments alone, and the economic regulation was developed according to traditional grid operation. During the transition to also trusting market measures to deliver necessary flexibility at the right time and place, excess grid capacity and uncertainty about future revenues represent barriers. Profitability can also be improved by enabling value stacking across platforms and recognising that flexibility providers can also earn income from adapting to spot prices and grid tariffs, not just from explicit TSO and DSO markets.

The 10 case studies highlight both barriers and enablers for demand-side flexibility (DSF) in the Nordic markets, offering valuable insights for future regulation, though the fragmented knowledge base makes it premature to propose concrete measures. Effective policy development should consider the larger picture, including both explicit and implicit flexibility, address the lack of standardised appliance requirements, and ensure access to all relevant market platforms to reduce uncertainty and improve profitability.

Corresponding to the recommendation that the Nordic countries take a lead in developing a roadmap with clear milestones for appliance standardisation and interoperability in the EU, a similar roadmap and work plan should be developed for the other elements necessary to advance the use and provision of flexibility. Our recommendations for the focus of such a road map and for the principles or factors that should guide its development are:

1. DSO regulation should be technology-neutral. DSOs should be incentivised to choose the most cost-effective solutions, whether grid investments or operational measures. Current economic regulations have been identified to favour infrastructure investments over demand-side flexibility.

2. Stronger DSO commitment to use flexibility solutions. When deciding to establish a local DSF market or mechanism, the DSO’s commitment to its development is crucial. DSOs must invest in building market liquidity by guaranteeing minimum compensation and long-term engagement. Sweden’s E.ON case exemplifies this approach.

3. Focus new initiatives on the strengthening of coordination among actors. The cases we have studied show that barriers experienced in early pilots are being addressed in subsequent and ongoing flexibility initiatives. However, the pilots are often fragmented and limited in scope and time. We see improved TSO-DSO and DSO-DSO coordination as essential for enabling value stacking, harmonising market designs, and addressing technical barriers like rebound effects.

4. Simplify verification requirements for small loads. DSOs and TSOs should consider simplifying verification requirements for smaller loads like smart appliances in buildings, where complex requirements related to baselining, individual measurement, and verification requirements would make participation in flexibility markets too costly. Incentivising readiness to respond to signals can be more effective for small loads. For these loads, the most effective strategy may be to incentivise their ability to respond to market signals rather than verifying each activation. This could involve compensating all qualifying resources registered in a flexibility register, with forecasting models later helping estimate actual availability for activation.

5. Rethink risk in grid operation. Accepting calculated risks – enabled by digitalisation – can improve grid utilisation and reduce costs. This includes tolerating some uncertainty in DSF activation.

6. Consider alternatives to market-based procurement. Conditional connections, bilateral agreements, and grid tariffs may be more efficient than complex markets in certain contexts. Such alternatives do not generally involve bidding and activation, eliminating many important barriers. The main goal should be to develop demand-side flexibility to make the system more flexible, not whether it is offered through explicit or implicit flexibility.