1. Introduction

Local Flexibility Markets (LFMs) are emerging electricity-market mechanisms through which Distributed Energy Resources (DERs) can be paid to modify their electricity generation, consumption, charging, or storage in response to local network requirements.

DERs include:

• rooftop solar PV;
• battery energy-storage systems;
• electric vehicles and smart charging;
• demand-response loads;
• heat pumps;
• small wind and other distributed generators;
• flexible industrial and commercial loads;
• aggregations of household resources.

The central idea is that instead of solving every distribution-network constraint by constructing additional wires, transformers and substations, a Distribution System Operator (DSO) can procure flexibility from DERs where that is technically and economically efficient.

This is particularly important because electrification of transport, heating, distributed solar and storage can create local congestion, voltage problems and capacity constraints even when the wider electricity system has adequate capacity.

EU electricity law expressly recognises this model. Article 32 of Directive (EU) 2019/944 requires Member States to establish frameworks allowing DSOs to procure flexibility, including congestion-management services, from distributed generation, demand response and storage through transparent, non-discriminatory and generally market-based procedures. Eur-Lex

2. Meaning of Local Flexibility

Flexibility is the ability of an electricity resource to change its normal operating pattern in response to an external signal.

For example:

A battery normally charges between 12:00 and 3:00 PM. If a local distribution transformer becomes congested at 1:00 PM, the DSO may procure flexibility requiring the battery to reduce charging or discharge electricity.

Similarly:

• an EV charger can postpone charging;
• an industrial consumer can temporarily reduce consumption;
• a battery can discharge;
• a solar-plus-storage system can alter its export;
• an aggregator can coordinate hundreds of household devices.

The DSO therefore obtains a service rather than simply purchasing electricity.

3. Why DER Integration Requires Flexibility Markets

Traditional distribution networks were largely designed around:

central generation → transmission → distribution → passive consumers.

DER integration changes this structure:

generation + storage + flexible demand + consumers ↔ distribution network.

A local network can therefore experience:

A. Thermal congestion

Too much electricity flowing through a transformer or distribution line can exceed its safe operating capacity.

B. Voltage constraints

Large amounts of rooftop solar exporting electricity can cause voltage to rise above permissible levels.

C. Reverse power flows

Distribution networks designed primarily for electricity consumption can experience electricity flowing back toward higher-voltage networks.

D. EV charging congestion

Large simultaneous charging loads can create significant evening peaks.

E. Renewable intermittency

Solar and wind output can change rapidly, increasing the value of storage and flexible demand.

Local flexibility markets provide a mechanism for responding to these problems without automatically relying on conventional network reinforcement.

4. Structure of a Local Flexibility Market

A typical LFM can contain five principal actors.

1. Distribution System Operator

The DSO identifies a local network constraint and determines:

• location;
• timing;
• required MW/MWh;
• response time;
• duration;
• minimum bid size;
• technical requirements.

2. Flexibility Service Provider

This may be:

• a battery owner;
• industrial consumer;
• commercial building;
• EV fleet;
• renewable generator;
• aggregator;
• community energy organisation.

3. Aggregator

An aggregator combines many small DERs into one commercially viable portfolio.

For example:

1,000 households × 5 kW flexible batteries = potentially 5 MW of aggregated flexibility.

Aggregation is particularly important because individual household resources may be too small to participate independently.

4. Market Platform

The platform allows participants to:

• register;
• submit bids;
• receive dispatch instructions;
• measure performance;
• settle payments.

5. Regulator

The regulator establishes:

• market rules;
• procurement principles;
• consumer protections;
• DSO incentives;
• data rules;
• settlement arrangements;
• dispute mechanisms.

5. Main Products in Local Flexibility Markets

Local flexibility does not necessarily represent a single product.

Capacity flexibility

A resource promises to make a specified capacity available.

Example:

Battery agrees to provide 2 MW of discharge capability between 6–8 PM.

Energy flexibility

Payment is based on the actual amount of energy modified.

Congestion management

DERs alter consumption or generation to relieve a particular network constraint.

Voltage management

DERs provide reactive power or modify active power to maintain voltage within permitted limits.

Peak reduction

Consumers reduce demand during predetermined periods.

Constraint avoidance

Flexibility is contracted to prevent a future network constraint from occurring.

6. Relationship Between DERs and Local Flexibility

DERs are the physical resources.

Flexibility markets are the economic and regulatory mechanism through which those resources can provide system services.

Thus:

DER + communication + measurement + market access + appropriate regulation = usable local flexibility.

Without market access, thousands of DERs may exist but remain largely unavailable to the DSO for network-management purposes.

7. EU Legal Framework

The EU framework is particularly important because Directive 2019/944 directly addresses flexibility procurement.

Article 15 gives active customers rights to participate in flexibility schemes and permits them to operate directly or through aggregation. Eur-Lex

Article 32 requires Member States to enable DSOs to procure flexibility services from:

• distributed generation;
• demand response;
• energy storage.

Such procurement should generally be:

• transparent;
• non-discriminatory;
• market-based.

The legislation also requires flexibility-service specifications to permit effective participation by renewable-energy providers, demand-response providers, storage operators and aggregators. Eur-Lex

This is a major legal shift because distribution networks are no longer viewed exclusively as infrastructure to be reinforced. Flexibility itself becomes a regulated network-management resource.

8. DSO Neutrality and Market Power

A major legal issue is that the DSO can simultaneously be:

1. the network operator;
2. the entity identifying the constraint;
3. the purchaser of flexibility.

This creates a potential conflict of interest.

A DSO could theoretically design technical requirements that favour particular technologies or affiliated companies.

Consequently, EU law requires DSO procurement rules to be objective, transparent and non-discriminatory. DSOs must also coordinate with TSOs and other market participants. Eur-Lex

This creates an important principle:

The DSO should be a neutral procurer of flexibility rather than a privileged market participant.

9. Coordination Between DSO and TSO

DERs increasingly participate in both local and national markets.

For example, a battery might provide:

• local congestion relief to the DSO;
• balancing services to the TSO;
• wholesale-market services.

This creates a problem of double dispatch.

Suppose:

DSO needs a battery to discharge at 6 PM because of local congestion.

At exactly the same time:

TSO needs that battery to charge to balance the national system.

Without coordination, the two instructions could conflict.

Article 31 of Directive 2019/944 therefore requires DSOs and TSOs to cooperate concerning the participation of resources connected to distribution networks in retail, wholesale and balancing markets. Eur-Lex

10. Network Investment Versus Flexibility

One of the most important legal-economic questions is:

When should a DSO build new infrastructure, and when should it purchase flexibility?

Consider a transformer that will become congested for only 100 hours per year.

Traditional solution:

Upgrade transformer → large capital expenditure.

Alternative:

Purchase local battery/EV/demand flexibility → potentially lower-cost solution.

Article 32 specifically recognises flexibility where it can cost-effectively avoid or defer network capacity upgrades. Eur-Lex

However, flexibility cannot replace network investment in every circumstance. A permanent structural constraint may require physical reinforcement.

Therefore, regulatory frameworks should compare:

Flexibility cost + reliability risk + transaction cost

against

Network reinforcement cost + financing cost + construction time.

11. United Kingdom Approach

The UK provides an important practical example.

Ofgem decided to establish a Market Facilitator for flexibility markets. Elexon was selected as the delivery body in July 2024. The objective is to create more accessible, transparent and coordinated flexibility markets. Ofgem

Ofgem subsequently established a framework under which the Market Facilitator would standardise local flexibility markets and improve coordination with national flexibility markets. The Market Facilitator went live in December 2025. Ofgem

This development illustrates an important governance principle:

Local flexibility markets require common rules and coordination rather than completely fragmented DSO-specific markets.

Ofgem's wider local-energy governance reforms also separate three functions:

• strategic energy planning;
• market facilitation of flexible resources;
• real-time network operations.

Real-time operations remain with DSOs, while market facilitation is coordinated centrally. Ofgem

12. France: Local Flexibility Markets

France provides another significant example.

The French energy regulator CRE approved experimental rules in July 2026 for local flexibility markets using a common Flexibilities Portal operated by RTE and Enedis.

The experiment began on 1 September 2026 and covers several French departments, with a minimum duration of two years. It seeks to simplify participation and improve liquidity in local flexibility procurement. Commission de régulation de l'énergie

France had already developed local flexibility arrangements. In 2018, CRE approved an Enedis local flexibility-service contract for distribution-network purposes. Commission de régulation de l'énergie

The French experience demonstrates the evolution from individual network experiments toward integrated flexibility-market platforms.

13. Indian Legal Context

India does not yet have an equivalent nationwide local-flexibility-market framework as developed as the EU Article 32 model, but several elements of the Electricity Act 2003 and regulatory framework are relevant.

The legal architecture includes:

• Electricity Act, 2003;
• CERC regulations;
• State Electricity Regulatory Commission regulations;
• Renewable Purchase Obligations;
• open-access mechanisms;
• demand-management mechanisms;
• renewable-energy and storage regulations;
• deviation-settlement mechanisms;
• grid-code requirements.

The Indian Grid Code framework has historically recognised demand management and demand response as mechanisms available to system operators during congestion, frequency problems and supply-demand imbalance. Indian Kanoon

CERC's current regulatory framework also continues to develop deviation-settlement and renewable-energy rules, including amendments in 2026. CERC India

The next legal development for India is likely to involve greater integration of:

rooftop solar + batteries + EVs + demand response + aggregators + smart meters + distribution-level markets.

14. Important Case Laws

Because local flexibility markets are a relatively new regulatory institution, there are few reported judicial decisions dealing specifically with a modern DSO flexibility auction. Consequently, relevant case law is often derived from broader electricity-market, renewable-energy, regulatory and network-access disputes.

A. PreussenElektra AG v Schleswag AG, C-379/98

This is an important EU electricity-law case.

The CJEU considered German legislation requiring electricity suppliers to purchase renewable electricity at minimum prices.

The Court accepted the compatibility of the renewable-purchase mechanism with the applicable EU legal framework at that time. curia

Relevance to DER integration

The case demonstrates that electricity legislation can impose market-structuring obligations to facilitate renewable generation.

Its relevance to modern flexibility markets lies in the broader principle that electricity regulation may establish mechanisms that alter conventional market arrangements in pursuit of energy-policy objectives.

However, PreussenElektra did not decide the legality of modern local flexibility markets; its relevance is principally structural and historical.

B. ENGIE Deutschland GmbH v Landesregulierungsbehörde, C-293/23

This CJEU case is especially relevant to distributed electricity systems.

The dispute concerned an energy facility containing a combined heat-and-power plant and an electricity wiring system supplying tenants in a residential complex.

The legal issue included whether such an arrangement constituted a distribution system and whether its operator qualified as a DSO under Directive 2019/944.

The CJEU judgment was delivered on 28 November 2024. InfoCuria

Relevance

The case is significant because DER integration increasingly creates private, communal and behind-the-meter electricity networks.

The legal question becomes:

When does a local energy system remain a private energy arrangement, and when does it become a regulated distribution system?

That distinction affects:

• licensing;
• network access;
• non-discrimination;
• regulatory supervision;
• consumer protection;
• DSO obligations.

15. Indian Case Law: Hindustan Zinc Ltd v Rajasthan Electricity Regulatory Commission

The Supreme Court considered challenges to Rajasthan's Renewable Energy Obligation framework.

The case concerned the authority of the State Commission to impose renewable-energy obligations on captive generators and other obligated entities. The dispute involved interpretation of Sections 61, 66, 86(1)(e) and 181 of the Electricity Act, 2003. Indian Kanoon

Relevance to DER integration

The case illustrates the importance of statutory authority for regulatory intervention in electricity markets.

A local flexibility market similarly cannot simply be created by a network operator without a proper legal basis.

The regulatory authority must identify:

• the enabling statute;
• delegated regulatory power;
• tariff authority;
• procurement authority;
• market-participant rights;
• enforcement powers.

16. Southern Power Distribution Co. v Green Infra Wind Solutions Ltd (2026)

A recent Supreme Court decision concerned whether a State Electricity Regulatory Commission could consider a Generation Based Incentive when determining renewable-generation tariffs.

The Court emphasised the statutory role of SERCs in tariff determination and discussed the need to balance energy security, consumer interests, investment stability and environmental objectives. Indian Kanoon

Relevance

Although the case does not concern a local flexibility auction directly, it is relevant to the regulatory design of DER markets.

Flexibility prices and DER participation rules must operate within the statutory jurisdiction of electricity regulators.

It demonstrates the broader principle that electricity regulation involves balancing multiple statutory and public-interest considerations rather than treating one market participant's interest in isolation.

17. Legal Problems in Local Flexibility Markets

1. Market access

Small DERs may be technically capable of providing flexibility but unable to satisfy minimum bid requirements.

Solution: aggregation and standardised products.

2. Discriminatory procurement

A DSO might favour particular technologies.

Solution: transparent procurement rules and regulatory oversight.

3. Data privacy

Smart meters and DER platforms generate highly detailed consumption data.

Solution: data minimisation, cybersecurity and clearly defined data-access rights.

4. Double participation

A DER may simultaneously participate in wholesale and local markets.

Solution: coordination mechanisms and dispatch-priority rules.

5. Baseline disputes

Demand response requires determining what the consumer would have consumed without the flexibility event.

Incorrect baselines can result in overpayment or underpayment.

6. Consumer protection

Households participating through aggregators require protection against:

• unfair contracts;
• unexpected dispatch;
• excessive penalties;
• inadequate remuneration.

7. Network neutrality

DSOs must not use their network position to distort competition.

18. Aggregators and DER Integration

Aggregation is perhaps the most important institutional mechanism for DER integration.

Suppose 10,000 homes each have:

• rooftop solar;
• a battery;
• an EV.

Individually, each household is too small for a local flexibility auction.

An aggregator can combine them into:

20 MW virtual flexibility portfolio

and offer it to the DSO.

EU law specifically recognises the right of active customers to participate directly or through aggregation. Eur-Lex

This transforms the legal position of consumers from:

passive electricity users

into:

active market participants capable of supplying system services.

19. Role of Smart Meters

Local flexibility markets require reliable measurement.

A flexibility transaction may depend on:

baseline consumption − actual consumption = delivered flexibility.

Smart meters therefore provide the evidentiary foundation for settlement.

A robust regulatory framework should define:

• metering standards;
• data intervals;
• cybersecurity;
• data ownership/access;
• baseline methodologies;
• verification;
• dispute resolution.

20. Storage and Multi-Service Participation

Battery storage is particularly valuable because it can provide multiple services.

A battery could potentially:

1. participate in wholesale markets;
2. provide balancing services;
3. provide local congestion relief;
4. provide voltage support;
5. provide backup power.

EU law recognises that active customers owning storage should be able to provide multiple services where technically feasible and should not face disproportionate licensing requirements or certain forms of double charging. Eur-Lex

This is important because preventing multi-market participation could make DER investment economically inefficient.

21. Local Flexibility as an Alternative to Grid Expansion

The principal regulatory-economic question can be expressed as:

Traditional model

Network constraint → infrastructure investment

Flexibility model

Network constraint → flexibility procurement

Hybrid model

Temporary constraint → flexibility

Permanent constraint → network reinforcement

The hybrid model is often the most institutionally realistic because flexibility and infrastructure investment are complementary rather than mutually exclusive.

22. Regulatory Design Principles

A mature local flexibility market should contain:

23. Future Legal Architecture

The future electricity system is likely to move from a one-directional network model toward a multi-sided flexibility platform.

The legal framework will increasingly need to recognise:

• prosumers;
• aggregators;
• energy communities;
• storage operators;
• EV fleets;
• smart buildings;
• virtual power plants;
• flexibility platforms;
• local energy markets.

The role of the DSO will consequently evolve from simply operating wires to operating a network while facilitating competitive flexibility procurement.

Ofgem's recent reforms illustrate this transition: the UK has created a dedicated market-facilitation function intended to coordinate local and national flexibility arrangements. Ofgem

24. Conclusion

Local Flexibility Markets and DER Integration represent a major transformation in electricity-law architecture.

The basic concept is straightforward: instead of treating distributed generation, storage and flexible demand merely as sources of additional network complexity, regulation can treat them as marketable network resources.

The principal legal requirements are:

1. open access for DERs;
2. transparent and non-discriminatory procurement;
3. DSO neutrality;
4. aggregation rights;
5. TSO-DSO coordination;
6. consumer and data protection;
7. appropriate remuneration;
8. clear regulatory authority;
9. effective measurement and settlement; and
10. coordination between flexibility procurement and conventional network investment.

EU Directive 2019/944 provides one of the clearest statutory models, expressly requiring frameworks for DSO procurement of flexibility from distributed generation, demand response and storage. Eur-Lex The UK's market-facilitator reforms and France's 2026 Flexibilities Portal experiment demonstrate how these principles are being translated into operational market institutions. Ofgem

For India, the existing Electricity Act and regulatory framework already contain important building blocks through demand management, open access, renewable-energy regulation, grid codes and regulatory commissions. The future challenge is to develop these elements into a coherent distribution-level flexibility framework capable of integrating rooftop solar, batteries, EVs, smart loads and aggregators while preserving grid reliability and consumer protection. Indian Kanoon