Competition Risks in Flexibility Aggregation Services

1. Introduction

Flexibility aggregation services combine the electricity capacity of many small resources and use them as a larger market resource. These resources may include batteries, rooftop solar systems, electric vehicles, smart appliances, demand-response facilities and small generators.

An aggregator may combine these resources and participate in wholesale electricity, balancing or ancillary-service markets. Aggregation can improve efficiency and help integrate renewable energy. However, it can also create new competition risks if a small number of aggregators control a large amount of flexible capacity.

Competition law is therefore important for ensuring that aggregation markets remain open and fair.

2. Meaning of Flexibility Aggregation

An aggregator combines multiple small electricity resources into one portfolio.

For example:

1,000 batteries may be combined into one virtual resource;

household demand may be reduced during peak periods;

electric vehicles may provide balancing services; and

distributed solar and storage may participate in wholesale markets.

The aggregator then offers the combined flexibility to electricity markets or system operators.

3. Market Concentration

One major risk is concentration.

If only a few companies control most flexible resources in a particular geographic or balancing market, they may acquire significant bargaining or market power.

This could allow an aggregator to influence:

balancing prices;

ancillary-service prices;

capacity payments;

availability;

dispatch decisions; and

access to customers.

Market share should not be considered alone. Network constraints, entry barriers and availability of alternative flexibility providers are also important.

4. Exclusion of Smaller Aggregators

Large aggregators may have advantages because they possess:

sophisticated software;

large customer databases;

forecasting technology;

trading expertise; and

established relationships with utilities.

These advantages are not automatically unlawful. However, a dominant aggregator could potentially use its position to prevent smaller aggregators from entering the market.

Possible exclusionary conduct includes:

refusing access to necessary platforms;

discriminatory technical requirements;

exclusive customer agreements;

predatory pricing; and

restricting access to important market information.

5. Customer Exclusivity

Aggregation depends on obtaining customers.

An aggregator may sign long-term exclusive agreements with households, businesses or battery owners.

Exclusivity can provide legitimate investment certainty. However, where a dominant aggregator locks up a large percentage of potential customers, competitors may be unable to obtain sufficient resources to compete.

Competition authorities may therefore examine:

contract duration;

exclusivity provisions;

termination costs;

switching arrangements; and

the aggregator's market position.

6. Senwes Case

The Constitutional Court decision in Competition Commission of South Africa v Senwes Ltd provides useful principles by analogy.

Senwes operated important grain-storage facilities and participated in related markets. The case examined whether conduct by a dominant firm could disadvantage competitors.

The broader principle is relevant to aggregation: control over an important input or facility can affect competition in related markets.

If a dominant aggregator controls access to a large portfolio of batteries or flexible customers, its conduct may therefore require competition-law scrutiny.

7. Data and Information Advantages

Aggregation services depend heavily on data.

Aggregators may collect information about:

customer electricity consumption;

battery capacity;

charging behaviour;

demand patterns;

location;

market bids; and

flexibility availability.

A dominant aggregator could potentially use information obtained from customers or market platforms to disadvantage competitors.

Competition concerns may arise where commercially sensitive information is used to:

favour affiliated businesses;

exclude rival aggregators;

manipulate bids; or

prevent customers from switching.

Data portability and transparent information rules can help reduce these risks.

8. Vertical Integration

An aggregator may also own:

battery systems;

electricity-generation assets;

a retail electricity business;

a trading platform; or

an electricity-supply company.

Vertical integration may create efficiencies, but it can also create incentives for foreclosure.

For example, an integrated retailer could give its own aggregation business preferential access to customer flexibility while making it harder for independent aggregators to compete.

9. Market Manipulation and Strategic Bidding

Aggregators control many small resources simultaneously.

A large aggregator could potentially influence market outcomes by changing the charging, discharging or demand-response behaviour of thousands of participating resources.

Strategic behaviour is not automatically unlawful. Competition authorities must distinguish legitimate market optimisation from conduct that unlawfully manipulates competition or prices.

Relevant evidence may include:

bidding patterns;

capacity withholding;

market share;

technical constraints;

communications between competitors; and

actual market effects.

10. Waco Africa Case

The Competition Commission v Waco Africa case provides an important South African competition-law example concerning collusive tendering connected with Eskom procurement.

The Competition Tribunal considered conduct falling under section 4(1)(b) of the Competition Act, including allegations concerning collusive tendering.

Although Waco did not concern flexibility aggregation, it demonstrates the importance of preventing coordination between competitors in electricity-related markets. The same principle can apply where competing aggregators coordinate bids or market strategies.

11. Network Access

Aggregation requires access to electricity-system infrastructure and market platforms.

If a system operator or dominant market participant discriminates between aggregators, competition may be distorted.

Rules should therefore provide:

transparent participation requirements;

objective technical standards;

non-discriminatory access;

transparent fees; and

clear settlement arrangements.

12. Competition and Energy Regulation

Flexibility aggregation is both a competition issue and an electricity-regulation issue.

Sector regulators may regulate:

licensing;

grid connection;

metering;

system balancing;

technical standards; and

market participation.

Competition authorities focus on:

dominance;

exclusionary conduct;

collusion;

restrictive agreements; and

mergers.

Coordination between these institutions is important because an apparently technical market rule can sometimes affect competition.

13. Merger Risks

Large aggregators may acquire competing aggregators or companies controlling batteries and distributed-energy resources.

Competition authorities should consider whether the merger could:

increase control over flexible capacity;

eliminate an important emerging competitor;

restrict customer choice;

increase access barriers; or

strengthen vertical foreclosure.

This is particularly important in developing markets where today's small competitor may become an important future rival.

14. Conclusion

Flexibility aggregation can make electricity systems more efficient by allowing small energy resources to participate collectively in electricity markets. However, competition risks can arise from market concentration, customer exclusivity, data control, vertical integration, strategic bidding, network access restrictions, exclusionary conduct and mergers.

The Senwes case provides useful principles concerning control over important inputs and exclusionary conduct, while Waco Africa illustrates the importance of preventing coordination in electricity-related procurement.

The appropriate legal approach is not to restrict aggregation itself. Instead, competition law should ensure that aggregators compete fairly, customers can change providers where appropriate, market information is handled properly, and no dominant aggregator can unlawfully use control over flexible resources to exclude competitors.