UK ENERGY LAW AND ELECTRICITY SYSTEM – DISTRIBUTED ENERGY MARKET CLEARING AND LOCAL PRICING SYSTEMS

1. Introduction

Distributed energy market clearing concerns mechanisms through which distributed energy resources (DERs)—including batteries, rooftop solar, electric vehicles, demand response and small generators—offer electricity or flexibility services and those offers are matched with network or system requirements. Local pricing then attaches economic value to electricity or flexibility according to factors such as location, timing, congestion and network need.

Great Britain does not presently operate a comprehensive nodal wholesale electricity market. However, local flexibility markets increasingly provide location-specific economic signals within distribution networks. Ofgem has examined broader locational wholesale pricing as part of electricity-market reform, including how alternative market designs could affect consumers, generators and system operation.

2. Statutory and Regulatory Framework

The principal statutory framework remains the Electricity Act 1989, supplemented substantially by the Energy Act 2023. Activities including generation, distribution and supply remain subject to statutory licensing requirements where applicable.

The Energy Act 2023 additionally reforms electricity-code governance and provides for licensed code managers. Electricity codes are particularly important because detailed rules governing network access, balancing, settlement and market participation frequently operate below the level of primary legislation.

The Act also embeds objectives relating to secure supply and the promotion of efficient, coordinated and economical electricity transmission and distribution systems.

3. Distribution System Operation and Local Markets

Distribution Network Operators increasingly perform Distribution System Operation (DSO) functions. These include forecasting local network conditions, identifying constraints and procuring flexibility instead of automatically reinforcing physical infrastructure.

Under RIIO-ED2, Ofgem's DSO incentive seeks to encourage DNOs to operate networks efficiently and consider flexible alternatives to conventional reinforcement.

A local market might therefore allow a DNO facing congestion at a particular substation to procure temporary demand reduction or battery discharge. The resulting payment produces a local scarcity signal: flexibility is worth more where and when network constraints are greatest.

4. Market Clearing Mechanisms

Local flexibility markets may use auctions, tenders or platform-based procurement. Participants submit information concerning available capacity, location, timing and price. A clearing mechanism determines which resources should provide the required flexibility.

Project LEO in Oxfordshire illustrates this development. Its trials combined a physical distribution-system coordination platform with a Neutral Market Facilitator marketplace for buying and selling flexibility. Its commercial models considered price floors, ceilings, baselines and settlement arrangements.

Market clearing must therefore address baseline accuracy, metering, verification, settlement, transparency and non-discriminatory participation.

5. National Coordination and Market Facilitation

Fragmented local markets can increase transaction costs and make participation difficult for aggregators operating across several networks. Ofgem consequently decided that market facilitation should be assigned to a single expert entity, while real-time network operations remain with DNOs.

In 2024, Ofgem appointed Elexon as the delivery body for market facilitation. Its 2025 policy framework aims to make local and national flexibility arrangements more accessible, transparent and coordinated and to reduce barriers to participation.

This creates an important governance principle: local price discovery should operate coherently with national balancing and system requirements rather than developing as isolated markets.

6. Local Pricing and Consumer Protection

Locational signals can promote efficiency because they reveal where generation, storage or demand reduction has the greatest system value. However, highly granular pricing can also raise concerns about complexity, market power and unequal regional impacts.

Ofgem's work on locational wholesale pricing specifically examines these wider consequences. Network price controls provide another safeguard: Ofgem's RIIO framework controls network revenues while incentivising reliability, innovation, environmental performance and value for consumers.

7. Case Law

R (UK Power Networks Services (Contracting) Ltd) v Gas and Electricity Markets Authority [2014] EWHC 3678 (Admin)

Facts: The proceedings concerned Ofgem's treatment of electricity distribution-related activities within the statutory and licensing framework.

Legal Issue: The dispute raised questions about the interpretation and application of regulatory arrangements governing participation in electricity distribution activities.

Judgment: The High Court considered Ofgem's approach within the structure of the Electricity Act 1989 and the specialist electricity regulatory regime.

Legal Principle/Ratio: Innovative commercial arrangements within electricity networks remain governed by statutory licensing boundaries and regulatory rules.

Significance: Distributed-market platforms cannot bypass electricity regulation merely because trading is decentralised or technologically innovative.

R (British Gas Trading Ltd) v Gas and Electricity Markets Authority [2019] EWHC 3048 (Admin)

Facts: British Gas challenged aspects of Ofgem's implementation of the statutory energy price-cap regime.

Legal Issue: The case concerned whether Ofgem had lawfully exercised its specialist economic regulatory powers.

Judgment: The High Court reviewed the regulator's methodology under ordinary public-law principles while recognising the technical nature of energy regulation.

Legal Principle/Ratio: Complex economic regulation remains judicially reviewable, although specialist regulators possess substantial technical and evaluative responsibilities.

Significance: Future regulatory methodologies governing local clearing, pricing and flexibility procurement must therefore remain rational, procedurally lawful and within statutory powers.

8. Conclusion

Distributed market clearing is transforming the UK electricity system from predominantly centralised coordination toward multi-level markets linking consumers, DERs, DNOs and national system operation. Local flexibility procurement can reveal the value of resources at particular locations and times, while market facilitation seeks to standardise participation and coordinate local and national markets. The Electricity Act 1989, Energy Act 2023, licence conditions, electricity codes and Ofgem's regulatory framework collectively ensure that decentralised price discovery remains compatible with competition, network security and consumer protection.