This journal article was originally published in Renewable and Sustainable Energy Reviews.
Electricity networks require reinforcing to accommodate increasing renewable energy generation and increasing electrification of heating and mobility. The nature of these reinforcements depends on the scale and depth of demand reductions and flexibility services available to solve constraints. Local energy markets are posited as a means to capture, aggregate and trade flexibility services in network constrained areas.
Using insights from transaction cost economics, this review adapts a theoretical model to analyse the contractual arrangements underpinning both local energy markets, the delivery of flexibility services therein, and the end-to-end process of flexibility service delivery. By identifying, analysing, and comparing the relative magnitude of associated transaction and production cost variables, it helps identify factors which determine their viability.
This model is tested on Great Britain’s Local Energy Oxfordshire (LEO) project. Project LEO sought to establish the potential for flexibility service provision to support the transition to a renewables-based electricity system by developing a proof-of-concept local energy market. It reveals transaction costs which significantly outweigh contract revenues at this stage of market development. Automation, aggregation, standardisation, and regulation are required to improve the economics of flexibility service contracting in local energy markets:
Furthermore, if the business case was thus rendered more viable for the delivery of transmission-level flexibility services, the additional transaction costs of flexibility contracting in local energy markets would be marginal and such service provision might improve the overall business case.
On the other hand, significant market distortions such as energy price caps increase the risk for both suppliers and flexibility providers. They risk lowering the overall viability of establishing forward markets, especially if such distortions dampen temporal price swings resulting from the technological supply mix, as opposed to external factors such as geopolitical uncertainty.
Less blunt mechanisms are required to shield vulnerable consumers while also ensuring that temporal price swings remain sufficient to incentivise flexibility provision in local energy markets from an increasingly diverse range of sources.
Colin Nolden, Nicholas Banks, Jack Irwin, David Wallom, Bryony Parrish. 2025. The economics of flexibility service contracting in local energy markets: A review. Renewable and Sustainable Energy Reviews. https://doi.org/10.1016/j.rser.2025.115549.