DER Participation in Balancing Markets

1. Introduction

DERs (Distributed Energy Resources) are small or medium-sized energy resources connected close to consumers rather than only at large central power stations. Examples include rooftop solar, batteries, electric vehicles, small generators, heat pumps and flexible electricity demand.

DER participation in balancing markets means allowing these resources to help the electricity system maintain a balance between electricity supply and electricity demand.

This is increasingly important because modern electricity systems have many small and variable resources. In Great Britain, the Balancing and Settlement Code (BSC) provides the framework through which electricity balancing and financial settlement operate. The balancing mechanism allows the system operator to buy or sell additional electricity close to real time to maintain system balance and manage network constraints. (Bailii)

2. Meaning of Balancing Markets

Electricity cannot normally be stored in unlimited quantities on the grid. Therefore, electricity generation and consumption must remain closely balanced.

When demand suddenly increases, the system may need more electricity.

When renewable generation suddenly falls, additional resources may also be required.

DERs can respond by:

increasing generation;

reducing electricity consumption;

discharging batteries;

charging batteries when demand is low; or

changing the operation of flexible equipment.

Therefore, DERs can provide flexibility and balancing services.

3. How DERs Participate

A single household battery may be too small to participate directly in some markets.

This problem can be solved through aggregation.

An aggregator combines hundreds or thousands of small resources and operates them as a larger portfolio.

For example:

1,000 home batteries → aggregator → balancing market → system operator

The aggregator can coordinate the batteries and offer their combined flexibility to the market.

Ofgem has recognised the potential for independent aggregators to give consumers and small resources direct access to additional electricity markets, while highlighting the need for appropriate rules concerning access, measurement, pricing, balancing responsibility and delivery risk. (Ofgem)

4. Demand-Side Participation

DER participation does not always mean producing more electricity.

A consumer can provide balancing services simply by changing when electricity is consumed.

For example:

an EV can delay charging;

a heat pump can temporarily reduce consumption;

an industrial facility can reduce production for a short period;

a battery can stop charging during a system shortage.

This is called demand-side response (DSR).

It can be particularly valuable because it may reduce the need to start additional conventional generation.

5. The Role of Aggregators

Aggregators are important because they connect small consumers and DER owners with electricity markets.

Their functions may include:

combining small resources;

forecasting available flexibility;

sending control instructions;

measuring performance;

submitting market bids;

managing financial settlements; and

distributing payments to participating consumers.

However, aggregation creates legal questions about who is responsible if the promised flexibility is not delivered.

Ofgem has specifically identified balancing responsibility and delivery risk as important issues when designing market access for independent aggregators. (Ofgem)

6. Measurement and Baselines

A major legal and technical issue is measurement.

Suppose a household normally consumes 5 kWh during a particular period. If it consumes only 3 kWh after receiving a flexibility instruction, the market needs to determine whether the 2 kWh difference represents genuine flexibility.

This requires a baseline.

Accurate measurement is therefore necessary for:

calculating delivered flexibility;

determining payment;

preventing overpayment;

preventing manipulation; and

allocating balancing costs correctly.

Ofgem has identified baselining and balancing impacts as important issues in developing demand-side participation. (Ofgem)

7. BSC and DER Participation

The Balancing and Settlement Code (BSC) is central to the GB electricity market.

It establishes rules for:

balancing;

metering;

settlement;

imbalance arrangements; and

financial obligations between market participants.

The Court of Appeal described the BSC in R (SSE Generation Ltd) v Competition and Markets Authority [2022] EWCA Civ 1472. The court explained that the balancing mechanism enables the system operator to buy or sell additional energy close to real time, while the settlement arrangements deal with differences between contracted and actual electricity positions. (Bailii)

Relevance

This case is important because DER participation must eventually fit within these balancing and settlement arrangements.

8. Removing Barriers to Small DERs

A major problem has been that traditional market rules were designed around larger generators and suppliers.

For example, Ofgem approved BSC Modification P483 in 2025, removing a requirement that customers must be half-hourly settled before certain flexibility from their assets can be traded. The change was designed to reduce a barrier affecting domestic and small-business flexibility. (Ofgem)

This is important for DER participation because many household resources are small and cannot easily satisfy rules originally designed for larger market participants.

9. Microgrids and DER Participation

DERs can also operate within microgrids or private networks.

In 2024, Ofgem approved BSC Modification P455, which introduced an on-site aggregation methodology to facilitate third-party access for domestic and small-business consumers connected to certain microgrids. (Ofgem)

This shows that balancing-market participation is expanding beyond traditional large generators and suppliers.

10. Consumer Protection

DER participation must not treat consumers simply as market assets.

Consumers need protection concerning:

informed consent;

payment arrangements;

data use;

automated control;

equipment safety;

exit rights; and

unexpected financial consequences.

For example, an aggregator controlling a household battery should clearly explain when the battery may be charged or discharged and how the consumer will be compensated.

Therefore, market access must be combined with consumer protection.

11. Competition and Equal Market Access

DER participation also raises competition issues.

If balancing markets are designed only for large generators, small resources may face unnecessary barriers.

Ofgem has stated that independent aggregator access can potentially benefit consumers, but market arrangements need careful design to address measurement, pricing and responsibility issues. (Ofgem)

The legal objective should therefore be technology-neutral and proportionate market access, while maintaining system reliability.

12. Recent BSC Developments

DER participation is continuing to evolve.

In 2026, Ofgem approved P504, bringing Virtual Trading Parties within the BSC performance-assurance framework. This allows Elexon to apply relevant performance-assurance techniques to them. (Ofgem)

Ofgem also approved P511 in August 2026, changing eligibility boundaries for certain generation participation arrangements under P415. The change followed concerns about potential double remuneration and costs being shared across consumers. (Ofgem)

These developments demonstrate an important principle: opening balancing markets to new participants must be accompanied by safeguards against inaccurate settlement, excessive compensation and unfair costs.

13. Local and National Flexibility

DERs can provide services at different levels.

Local level

A distribution network operator may need flexibility to manage local congestion.

National level

NESO may need flexibility to balance the wider electricity system.

The same battery or EV fleet could potentially provide different services, provided market rules allow this.

Ofgem's market-facilitator framework aims to improve coordination between local and national flexibility markets and reduce barriers to participation. (Ofgem)

14. Legal Challenges

DER participation creates several legal questions:

Who can access balancing markets?

What technical standards must DERs satisfy?

Who measures the flexibility provided?

Who bears imbalance costs?

How should aggregators be regulated?

Can the same resource participate in multiple markets?

How should consumers be compensated?

How should cybersecurity and data protection be maintained?

These questions require coordination between electricity licences, the BSC, distribution arrangements and market rules.

15. Conclusion

DER participation in balancing markets is an important part of modern electricity regulation. Rooftop solar, batteries, EVs, flexible demand and other small resources can collectively provide significant system flexibility.

The main legal mechanisms include:

aggregation;

access to balancing markets;

accurate metering;

baseline methodologies;

BSC participation;

performance assurance;

consumer protection; and

coordination between local and national flexibility markets.

The SSE Generation v CMA case explains the legal and operational importance of the BSC and balancing mechanism, while recent Ofgem reforms such as P483, P455, P504 and P511 demonstrate how the regulatory framework is being adapted to accommodate smaller and aggregated resources. (Bailii)

The central idea is simple: DERs should be allowed to contribute to electricity balancing, but market access must be supported by accurate measurement, fair settlement, consumer protection and strong system-security rules.