Reforming The Legal Framework For Flexibility Markets In The UK

1. Introduction

The UK's electricity system is moving from a relatively predictable generation-and-consumption model towards one characterised by variable renewable generation, batteries, electric vehicles, heat pumps, demand-side response, distributed generation and digitally controlled assets. Ofgem has identified flexibility as increasingly important for balancing supply and demand, reducing system costs and making better use of existing network infrastructure.

Legal reform must therefore move beyond traditional electricity regulation and establish a framework in which consumers, aggregators, storage operators, generators and network users can provide flexibility services on transparent and non-discriminatory terms.

2. Existing Legal Framework

The principal statutory foundation remains the Electricity Act 1989, supplemented by the Energy Act 2004, Energy Act 2013, Energy Act 2023, electricity licences, the Balancing and Settlement Code (BSC), Connection and Use of System Code (CUSC), Distribution Connection and Use of System Agreement (DCUSA), Grid Code and other industry arrangements.

The Energy Act 2023 strengthened the institutional architecture for the future electricity system, including powers concerning licence and code modifications and information requirements associated with the Independent System Operator and Planner framework.

However, flexibility markets expose structural weaknesses in rules originally designed around conventional generators and suppliers.

3. Creation Of A Unified Flexibility Market Architecture

A central reform is the creation of a coordinated national framework for local and national flexibility markets. Ofgem appointed Elexon as the delivery body for the Market Facilitator in July 2024. Its mandate is to standardise local flexibility markets and align them with national arrangements.

Ofgem subsequently developed a policy framework under which the Market Facilitator would coordinate market arrangements, develop deliverables and operate performance arrangements.

The reform should legally define:

• the Market Facilitator's statutory and regulatory responsibilities;
• DNO and NESO obligations;
• common procurement standards;
• interoperability of flexibility platforms;
• data-sharing requirements;
• dispute-resolution mechanisms; and
• regulatory oversight by Ofgem.

The objective is to prevent fragmented local markets from creating unnecessary barriers to participation.

4. Equal Market Access And Competition

Flexibility regulation should guarantee technology-neutral and non-discriminatory access. Batteries, aggregators, EVs, industrial demand response and distributed generators should be capable of competing where they provide equivalent services.

Procurement rules should require transparent technical requirements, standardised tender documentation, publication of outcomes and safeguards against preferential treatment by network operators.

This is particularly important because network operators simultaneously control network constraints and procure flexibility. Regulation must therefore prevent conflicts between network ownership, market facilitation and procurement decisions.

5. Aggregators And Consumer Flexibility

The legal framework should expressly recognise independent aggregators capable of combining thousands of small assets into a commercially meaningful flexibility resource.

Reform should address:

Consumer consent: customers must understand what automated control they authorise.

Settlement: flexibility delivered by aggregated assets must be measured accurately.

Data: access to consumption and operational data must respect privacy and cybersecurity requirements.

Compensation: consumers providing flexibility should receive transparent remuneration.

Switching: consumers should be able to change suppliers or aggregators without disproportionate barriers.

6. Network Constraints And Flexibility Procurement

Flexibility markets should complement—not replace—necessary network investment. DNOs should be required to demonstrate why flexibility is being procured instead of, or alongside, reinforcement.

Ofgem's market-facilitator reforms specifically respond to earlier concerns about inconsistent DNO practices, unequal information and inadequate coordination between local and national markets.

A reconstructed framework should consequently require cost-benefit assessments, locational transparency, competitive procurement and auditability.

7. Case Law

Case Name/Citation

R (SSE Generation Ltd) v Competition and Markets Authority [2022] EWCA Civ 1472

Facts: GEMA approved changes to electricity transmission charging arrangements, including an interim methodology. SSE challenged the regulatory approach.

Legal Issue: Whether a regulator could adopt an interim measure while working towards full legal compliance.

Judgment: The Court of Appeal recognised that energy regulation may require staged implementation where immediate full compliance is impracticable, provided the regulator acts within its statutory framework and has a rational route towards compliance.

Legal Principle/Ratio: Regulatory duties must be interpreted in their practical statutory context; complex energy regulation can legitimately require transitional arrangements.

Significance: Flexibility markets will inevitably require staged reforms as technology, market rules and system needs evolve.

Case Name/Citation

Tempus Energy Ltd v European Commission, Case T-793/14; Commission v Tempus Energy, Case C-57/19 P

Facts: Tempus challenged the UK's electricity capacity-market design, arguing that demand-side response had not been adequately considered.

Legal Issue: Whether the Commission could approve the capacity-market scheme without a formal investigation despite potential concerns about its compatibility with EU State-aid rules.

Judgment: The EU courts required closer examination of the potential effects of the capacity-market design, particularly in relation to demand response.

Legal Principle/Ratio: Regulatory market design must properly consider relevant alternative technologies and competitive effects.

Significance: The case provides an important legal lesson for flexibility markets: demand-side resources cannot simply be treated as secondary participants where they can perform comparable system functions.

8. Future Reform Model

The UK's flexibility framework should ultimately combine technology-neutral participation, standardised market rules, aggregator recognition, dynamic procurement, transparent network constraints, data governance, consumer protection, cybersecurity and effective regulatory enforcement.

The central legal transformation is therefore from regulating electricity supply as a largely one-directional service towards regulating a multi-directional flexibility ecosystem in which electricity users, generators, storage and networks continuously interact.