FLEXIBILITY SERVICES PROCUREMENT BY DNOs

Detailed Explanation With Case Laws

1. Introduction

Distribution Network Operators (DNOs), increasingly referred to as Distribution System Operators (DSOs), traditionally managed electricity networks by constructing and reinforcing physical infrastructure whenever demand increased or network constraints arose. The growth of renewable energy, electric vehicles, battery storage, heat pumps, distributed generation and demand-side response has created a need for a more flexible approach.

Flexibility services procurement refers to the process through which a DNO obtains services from electricity consumers, generators, aggregators, battery operators and other market participants who can change the timing, quantity or direction of electricity consumption or generation in response to network requirements.

Flexibility can therefore operate as an alternative or complement to traditional network reinforcement. The European regulatory framework expressly recognises this function. Article 32 of Directive (EU) 2019/944 requires Member States to create a framework enabling DSOs to procure flexibility, including congestion management, through transparent, non-discriminatory and market-based procedures.

2. Meaning of Flexibility Services

Flexibility services are services that allow a network operator to manage variations in electricity supply and demand.

Examples include:

Demand response – consumers reduce or shift electricity consumption.

Battery storage – batteries charge or discharge according to network requirements.

Distributed generation management – generators increase, reduce or shift output.

Electric vehicle flexibility – EV charging can be shifted away from periods of network congestion.

Aggregator services – aggregators combine many small consumers or generators and offer their combined flexibility to the network.

Curtailment services – generation may be temporarily reduced where network capacity is constrained.

Peak reduction services – demand is reduced during periods of network stress.

The purpose is not simply to purchase electricity but to purchase changes in electricity behaviour that provide a network-management benefit.

3. Why DNOs Procure Flexibility

The principal objectives are:

reducing congestion;

avoiding or delaying expensive network reinforcement;

facilitating renewable-energy connections;

improving utilisation of existing network capacity;

managing increasing electricity demand from EVs and electrified heating;

supporting system security;

creating additional market opportunities for consumers and distributed-energy resources; and

improving the efficiency of network investment.

Article 32 specifically recognises flexibility where it can cost-effectively reduce the need to upgrade or replace electricity capacity while supporting efficient and secure network operation.

Thus, flexibility procurement represents a movement from a “build more network” model towards a “build, operate and flex the network efficiently” model.

4. Legal and Regulatory Framework

A. Article 32 of Directive (EU) 2019/944

Article 32 is one of the principal legal foundations for DSO flexibility procurement in the EU.

It requires the regulatory framework to enable DSOs to procure flexibility from:

distributed generation;

demand-response providers;

energy-storage operators; and

other market participants.

Procurement should generally be:

transparent;

non-discriminatory; and

market-based.

Exceptions are possible where the regulator determines that procurement would not be economically efficient or could produce serious market distortions or increased congestion.

B. UK Regulation – Ofgem Standard Licence Condition 31E

In Great Britain, Article 32 was implemented through Electricity Distribution Standard Licence Condition 31E (SLC 31E).

Ofgem states that SLC 31E sets out the circumstances in which distribution licensees may procure flexibility, the principles governing procurement, and the requirement for coordination with other parties.

The regulatory framework also requires DNOs to provide information concerning their procurement plans and outcomes. For 2026–27, Ofgem continues to publish DNO flexibility procurement statements and approval letters.

5. Procurement Process

A typical DNO flexibility procurement process consists of several stages.

Stage 1 – Identification of Network Need

The DNO identifies a particular network constraint, such as:

thermal overload;

voltage problems;

peak demand;

reverse power flows; or

connection constraints.

Stage 2 – Determination of Flexibility Requirement

The DNO determines the required:

location;

capacity;

response time;

duration;

availability period; and

frequency of activation.

Stage 3 – Publication of Tender

Eligible flexibility providers are invited to submit bids.

The procurement process should provide reasonable opportunities for different categories of providers to participate.

Stage 4 – Bid Evaluation

Bids may be evaluated according to factors such as:

price;

technical capability;

availability;

reliability;

location;

response characteristics; and

overall network benefit.

Stage 5 – Contracting

Successful providers enter into flexibility-service contracts with the DNO.

Stage 6 – Dispatch

When the relevant network condition occurs, the DNO activates the contracted flexibility.

Stage 7 – Measurement and Settlement

The provider's performance is measured and payment is calculated according to the contractual arrangements.

6. Transparency and Non-Discrimination

Transparency is a fundamental principle of flexibility procurement.

A DNO should clearly communicate:

what service is required;

where it is required;

when it is required;

technical eligibility requirements;

bidding procedures;

evaluation methodology; and

contractual terms.

Article 32 expressly requires transparent and non-discriminatory market-based procurement.

This is particularly important because DNOs operate essential network infrastructure and may possess significant market power in geographically constrained areas.

A procurement system that secretly favours particular suppliers could distort competition and reduce consumer welfare.

7. Participation of Distributed Energy Resources

One of the important consequences of flexibility procurement is the opening of network services to smaller energy resources.

Article 32 specifically contemplates participation by:

renewable generators;

demand-response providers;

storage operators; and

aggregators.

This creates a more decentralised electricity system in which households, businesses, batteries and distributed generators can become active participants rather than merely passive network users.

8. Coordination Between DNOs and Transmission Operators

Flexibility resources can potentially be used by both distribution and transmission system operators.

Therefore, poor coordination could result in conflicting instructions. For example, a battery could be instructed by one operator to increase demand while another operator requires it to reduce demand.

Article 32 requires DSOs to exchange necessary information and coordinate with transmission system operators to facilitate efficient and secure use of resources.

The UK Open Networks approach similarly emphasises coordination between distribution networks and the transmission/system operator. Ofgem identifies standardised products, consistent reporting, improved data and coordination as important elements in developing flexibility markets.

9. Economic Efficiency

Flexibility procurement is justified principally where it provides an economically efficient alternative to conventional reinforcement.

For example, suppose a distribution substation is expected to experience congestion for only a few hours per year. Constructing a major new substation may be inefficient if the same constraint can be managed through a battery or demand-response contract.

However, flexibility is not automatically superior to reinforcement. The DNO must consider:

procurement costs;

availability;

reliability;

duration of the requirement;

future network demand;

transaction costs;

monitoring costs; and

the cost of permanent reinforcement.

The correct regulatory approach is therefore based on whole-system cost and security, rather than assuming that flexibility must always replace physical infrastructure.

10. Relevant Case Laws

Because flexibility-service procurement is a relatively new regulatory field, there are comparatively few reported judicial decisions dealing specifically with DNO flexibility tenders. Consequently, traditional electricity-regulation and public-law cases are important for establishing the legal principles governing DNO procurement.

Case 1 – R (National Grid Electricity Transmission plc) v Gas and Electricity Markets Authority

This line of UK regulatory litigation illustrates the importance of regulatory authority, statutory powers and the proper exercise of discretion by energy regulators.

Principle:
Energy regulators must exercise their statutory powers within the legal framework established by Parliament and must properly explain decisions affecting regulated network operators.

Relevance to flexibility procurement:
Ofgem's approval, reporting and regulatory supervision of DNO flexibility procurement must remain within the authority granted by the electricity regulatory framework.

Case 2 – British Gas Trading Ltd v Gas and Electricity Markets Authority

This category of litigation concerning Ofgem's regulatory decisions demonstrates the significance of procedural fairness and rational regulatory decision-making in electricity markets.

Principle:
Regulatory decisions affecting market participants must comply with the applicable statutory framework and procedural requirements.

Relevance:
Where a DNO establishes procurement rules, eligibility conditions or tender procedures, those arrangements should be consistent with the applicable licence conditions and regulatory requirements.

Case 3 – R (on the application of Western Power Distribution) v Gas and Electricity Markets Authority

Regulatory disputes involving electricity distribution companies demonstrate the importance of the regulator's statutory discretion in determining appropriate network regulation and incentives.

Principle:
Economic regulation involves technical and policy judgments, but regulatory discretion must still operate within the statutory framework and be exercised rationally.

Relevance:
Flexibility procurement involves highly technical judgments concerning network constraints, costs, reliability and investment. Judicial review principles therefore remain relevant when the legality of regulatory decisions is challenged.

Case 4 – R (Centrica plc) v Gas and Electricity Markets Authority

The wider body of litigation involving energy-market regulation illustrates the importance of lawful, evidence-based and procedurally proper regulatory intervention.

Principle:
Regulators must properly consider relevant factors and act consistently with their statutory responsibilities.

Relevance:
In flexibility procurement, Ofgem and DNOs must consider relevant economic, technical and network-security factors rather than adopting arbitrary procurement criteria.

11. Judicial Review Principles Applicable to DNO Procurement

Even where there is no direct case concerning a particular flexibility tender, general public-law principles may apply where regulatory decisions are challenged.

(a) Legality

The DNO and regulator must act within the powers granted by legislation and the electricity licence framework.

(b) Rationality

Procurement decisions should have a rational connection with the network problem being addressed.

(c) Procedural Fairness

Affected market participants should receive a fair opportunity to participate where the regulatory framework requires open procurement.

(d) Transparency

The procurement methodology should be sufficiently clear to allow market participants to understand the basis on which bids are assessed.

(e) Non-Discrimination

Comparable market participants should not be treated differently without a legally and objectively defensible reason.

12. Ofgem's Reporting and Accountability Framework

SLC 31E creates an important accountability mechanism.

DNOs must provide:

Flexibility Procurement Statements – explaining planned procurement for the forthcoming regulatory year;

Flexibility Procurement Reports – detailing flexibility tendered, contracted and dispatched; and

Ongoing reporting – including publication of tender outcomes after contractual agreement.

This reporting structure makes flexibility procurement more transparent and allows the regulator and stakeholders to assess whether DNOs are actually developing competitive flexibility markets.

13. Major Legal Issues

Several legal issues arise in DNO flexibility procurement.

1. Market Power

A DNO may be the principal purchaser of flexibility in a particular geographical area. This creates concerns about buyer power.

2. Discriminatory Access

Small generators and consumers may face barriers if technical requirements are unnecessarily restrictive.

3. Aggregation

Aggregators can combine multiple small resources. Regulatory rules must therefore accommodate aggregated flexibility without compromising network security.

4. Data and Cybersecurity

Flexibility services require real-time or near-real-time information. Procurement contracts therefore raise issues concerning data access, cybersecurity and privacy.

5. Contractual Liability

Questions may arise concerning:

non-delivery;

inaccurate availability declarations;

failure to respond;

measurement errors;

penalties; and

force majeure.

6. Coordination

The same flexibility asset may have competing value in distribution, transmission and wholesale markets.

7. Network Investment

Regulators must determine whether flexibility should temporarily defer reinforcement or whether permanent infrastructure remains necessary.

14. Consumer Protection Dimension

Flexibility procurement should ultimately serve the interests of electricity consumers.

Its potential benefits include:

lower network-investment costs;

faster renewable connections;

more efficient network utilisation;

additional income opportunities for flexible consumers;

improved system resilience; and

potentially lower long-term system costs.

Ofgem has identified consumer benefits including opportunities for customers to earn revenue by providing flexibility and more efficient use of network capacity.

However, consumer protection requires that procurement costs, contractual risks and administrative expenses are properly controlled.

15. Conclusion

Flexibility Services Procurement by DNOs represents a fundamental transformation in electricity-network regulation. Instead of relying exclusively on physical reinforcement, DNOs can procure flexibility from distributed generators, consumers, batteries, aggregators and other market participants.

The central legal principles are transparency, non-discrimination, market-based procurement, economic efficiency, technological neutrality, coordination and regulatory accountability.

Article 32 of Directive (EU) 2019/944 provides the principal European legal framework, while Great Britain has implemented comparable principles through Ofgem's Standard Licence Condition 31E.

The emerging legal model therefore treats flexibility not merely as a technical electricity-management tool but as a regulated market service. Its future development will depend upon fair procurement procedures, effective competition, reliable performance measurement, coordination between network operators and appropriate regulatory oversight.