1. Introduction

Local Flexibility Markets (LFMs) are market-based mechanisms through which a Distribution System Operator (DSO) or Distribution Network Operator (DNO) procures flexibility from distributed energy resources (DERs) to manage local electricity-network constraints.

Traditionally, distribution networks were designed around relatively predictable one-way electricity flows from large generators to consumers. The growth of solar PV, batteries, electric vehicles, heat pumps, demand response, community generation and prosumers has changed this model. Local networks can now experience congestion, voltage problems and reverse power flows.

Instead of solving every constraint by immediately constructing new substations, transformers or lines, a DSO can purchase a flexibility service from customers or aggregators. For example, an EV charging operator may reduce charging during a constrained period, a battery may discharge, or an industrial consumer may temporarily reduce demand.

The European Union has expressly recognised this model. Article 32 of Directive (EU) 2019/944 requires Member States to create a regulatory framework enabling DSOs to procure flexibility services, including congestion management, from distributed generation, demand response and storage through transparent, non-discriminatory and generally market-based procedures. Eur-Lex

2. Meaning of a Local Flexibility Market

A local flexibility market can be defined as:

A regulated or market-based arrangement through which a DSO purchases changes in electricity generation, consumption or storage behaviour from eligible market participants in a particular geographic area to manage distribution-network requirements.

The important point is that the DSO is not primarily buying electricity as an energy commodity. It is purchasing a change in the behaviour of a connected resource that has value for network operation.

Examples

The flexibility may be required for:

• thermal congestion;
• voltage management;
• transformer constraints;
• reverse power flow;
• local network balancing;
• connection capacity;
• contingency management;
• postponement of network reinforcement.

3. Why DSOs/DNOs Operate Local Flexibility Markets

The fundamental economic rationale is “flexibility versus reinforcement.”

Suppose a distribution transformer will become overloaded for only 50 hours a year because of EV charging. The DSO has two broad options:

1. replace or reinforce the transformer; or
2. procure flexibility from EVs, batteries or other resources during those 50 hours.

If flexibility is technically reliable and economically efficient, the second option may reduce the immediate need for capital expenditure.

Ofgem's UK Open Networks work explicitly identified network reinforcement, smart-grid solutions and third-party flexibility services as alternative tools for addressing distribution constraints. Ofgem

The legal importance is that flexibility should not simply become a discretionary activity of a monopoly network operator. Rules concerning competition, transparency, neutrality and regulatory oversight are therefore essential.

4. DSO/DNO as Market Operator

The DSO occupies a special legal position.

It controls an essential infrastructure network while simultaneously creating a market in which independent flexibility providers participate. This creates a potential conflict of interest.

A DSO therefore has several distinct functions:

A. Network planner

It identifies future network constraints.

B. Flexibility buyer

It determines where flexibility is required and procures services.

C. System operator

It dispatches contracted flexibility when the relevant network condition occurs.

D. Market facilitator

It provides information and access to flexibility markets.

E. Regulatory entity

It must comply with licence conditions, regulatory directions and market rules.

The DSO should generally not use its network position to discriminate in favour of affiliated generators, retailers or aggregators.

This is one reason EU law requires flexibility procurement to be transparent, non-discriminatory and market-based. Eur-Lex

5. Legal Architecture of DSO-Operated Flexibility Markets

A mature legal framework normally contains several layers.

Layer 1: Primary legislation

Parliament or the legislature establishes:

• DSO duties;
• regulatory authority;
• network-access rights;
• competition requirements;
• consumer protection;
• licensing.

Layer 2: Regulatory rules

The energy regulator establishes:

• flexibility procurement procedures;
• standard products;
• qualification rules;
• settlement rules;
• reporting;
• performance requirements;
• penalties.

Layer 3: DSO licence conditions

The DSO receives enforceable obligations concerning:

• network operation;
• flexibility procurement;
• transparency;
• information provision;
• neutrality;
• data management.

Layer 4: Market rules

These establish:

• who can participate;
• minimum asset size;
• bidding procedure;
• pricing;
• dispatch;
• baseline methodology;
• settlement;
• dispute resolution.

6. EU Legal Framework

The most important legal foundation is Directive (EU) 2019/944 on common rules for the internal market for electricity.

Article 32

Article 32 requires Member States to provide a regulatory framework that allows and incentivises DSOs to procure flexibility services, including congestion management. The services may be obtained from:

• distributed generation;
• demand response;
• energy storage;
• other flexibility providers.

The procurement should generally use transparent, non-discriminatory and market-based procedures, subject to specified regulatory exceptions. Eur-Lex

Article 32 also requires flexibility-service specifications to be established through a transparent and participatory process involving relevant system users and transmission system operators. Eur-Lex

This is important because the DSO cannot simply design a flexibility product that only one preferred market participant can satisfy.

7. Network Development Planning

Flexibility markets are not merely short-term trading platforms.

Article 32 also connects flexibility with long-term network planning. DSOs must publish network development plans and identify medium- and long-term flexibility requirements alongside planned investment. Eur-Lex

This creates the legal concept of:

“Flexibility as an alternative to network reinforcement.”

The DSO should therefore consider whether a network problem can be addressed through:

Reinforcement + flexibility + demand response + storage + energy efficiency

rather than automatically treating network construction as the only solution.

8. UK DNO-to-DSO Development

The UK provides an important practical example.

The traditional DNO model has gradually evolved toward the Distribution System Operator (DSO) model, with distribution companies facilitating flexibility markets and coordinating with the national electricity system operator.

UK regulatory rules specifically provide for Distribution Flexibility Services.

Under Condition 31E, a distribution licensee must procure and use distribution flexibility services where economically and efficiently appropriate, and procurement must generally follow objective, transparent and market-based procedures. Legislation.gov.uk

The relevant flexibility services can address:

• distribution constraints;
• voltage;
• reactive power;
• inertia;
• local stability;
• black start;
• island operation.

9. UK Local Flexibility Market Example

UK network companies have developed flexibility markets in which distributed assets can offer services to DSOs.

Ofgem's DSO performance reporting records continuing development of these markets, including standardised flexibility products, qualification requirements, third-party platforms, settlement arrangements and efforts to lower barriers to participation. Ofgem

The regulatory direction has also moved toward greater standardisation.

Ofgem established a Market Facilitator role, delivered by Elexon, with a mandate to standardise local flexibility markets and improve alignment with national flexibility markets. Ofgem

This illustrates an important principle:

Local flexibility markets may be geographically local, but their legal and technical rules increasingly require national coordination.

10. Market Design

A DSO-operated flexibility market generally follows the following process:

Step 1 — Constraint identification

The DSO identifies a network constraint.

Step 2 — Flexibility requirement

It specifies:

• location;
• required capacity;
• duration;
• response time;
• availability period;
• direction of flexibility.

Step 3 — Prequalification

Potential providers demonstrate:

• technical capability;
• metering capability;
• communication capability;
• reliability;
• minimum performance standards.

Step 4 — Bidding

Flexibility providers submit offers.

Step 5 — Procurement

The DSO selects qualifying offers according to the applicable market rules.

Step 6 — Contract

The successful provider enters into a flexibility agreement.

Step 7 — Dispatch

When the constraint arises, the DSO activates the service.

Step 8 — Measurement

Actual performance is compared with the contractual baseline.

Step 9 — Settlement

The provider receives payment based on availability, utilisation, performance or a combination of these.

11. Local Flexibility Products

Common products include:

Availability service

The provider receives payment for being available when required.

Utilisation service

The provider is paid when its flexibility is actually dispatched.

Scheduled flexibility

The provider agrees in advance to change its consumption or generation according to a schedule.

Dynamic flexibility

The DSO can request a response in accordance with defined operational conditions.

UK DSO practice has increasingly moved toward standardised products and settlement methodologies. Ofgem

12. Role of Aggregators

One of the most important legal developments is the participation of aggregators.

A household battery may be too small to participate independently. An aggregator can combine:

• 100 batteries;
• EV chargers;
• heat pumps;
• commercial loads;
• solar-plus-storage systems.

The aggregated portfolio can then provide a larger flexibility service.

This raises legal questions concerning:

• consumer consent;
• contractual authority;
• data access;
• baseline calculation;
• responsibility for imbalance;
• settlement;
• cybersecurity;
• double procurement.

EU law specifically requires flexibility frameworks to facilitate participation by market participants engaged in aggregation. Eur-Lex

13. Neutrality of the DSO

A central legal principle is DSO neutrality.

A DSO should not:

• favour an affiliated generator;
• discriminate against independent aggregators;
• restrict access to the market unnecessarily;
• manipulate technical requirements to exclude competitors;
• use confidential network information selectively.

This is closely connected with the wider EU principle of open and non-discriminatory access to electricity networks.

14. Case Law

There is not yet a large body of judicial decisions specifically titled “local flexibility markets.” However, several electricity-market cases establish legal principles directly relevant to DSO-operated flexibility markets.

Case 1: citiworks AG v Flughafen Leipzig/Halle GmbH, Case C-439/06

The Court of Justice of the European Union considered third-party access to electricity systems under Directive 2003/54.

The case concerned an exemption from open access for certain electricity supply systems. The Court emphasised the importance of third-party access in the internal electricity market and rejected overly broad exemptions that undermine that principle. Eur-Lex

Relevance to local flexibility markets

A DSO-controlled flexibility market should not become a closed marketplace.

The principle supports:

• open participation;
• non-discriminatory access;
• objective eligibility criteria;
• justified restrictions where technically necessary.

Thus, where a DSO establishes a local flexibility market, its market-access rules should be objectively defensible.

15. Case 2: Sabatauskas and Others, Case C-239/07

In Sabatauskas, the CJEU considered the obligation to provide third-party access to electricity transmission and distribution systems.

The case concerned the interpretation of EU electricity-market rules relating to open access to networks. Eur-Lex

Legal principle

The case reinforces the significance of non-discriminatory third-party access within electricity markets.

Application to DSO flexibility

A flexibility market operated by a DSO should therefore avoid:

• arbitrary exclusion;
• discriminatory qualification criteria;
• preferential treatment;
• unjustified access restrictions.

The DSO's monopoly over the physical network should not automatically translate into monopoly control over the competitive flexibility market.

16. Case 3: Essent Belgium NV v Vlaams Gewest, Case C-492/14

In Essent Belgium, the CJEU examined regional electricity measures involving renewable electricity and access to distribution networks.

The judgment concerned, among other things, non-discriminatory access to distribution systems, public-service obligations and proportionality. Eur-Lex

Relevance

Local flexibility markets may involve public-policy objectives such as:

• renewable-energy integration;
• decarbonisation;
• network security;
• consumer protection.

The Essent Belgium reasoning is relevant because regulatory objectives do not automatically justify discriminatory treatment of market participants. Measures affecting market access must remain consistent with applicable EU electricity-market principles.

17. Case 4: E.ON Czech Holding / Electricity Market Cases

The broader CJEU electricity jurisprudence concerning network access establishes that distribution networks are regulated infrastructure rather than ordinary commercial assets.

The courts have repeatedly treated non-discriminatory access, competition and proportionality as important principles of electricity-market regulation.

These principles provide the legal background against which newer flexibility-market arrangements should be designed.

18. Transparency and Non-Discrimination

A DSO-operated market should publish sufficient information concerning:

• location of constraints;
• required flexibility;
• technical requirements;
• procurement timetable;
• product specifications;
• qualification criteria;
• award methodology;
• contract terms;
• settlement rules.

Without transparency, the DSO could potentially use its informational advantage to distort competition.

The EU framework expressly requires transparent and participatory processes for flexibility-service specifications. Eur-Lex

19. Competition Law Dimension

Local flexibility markets create an unusual competition problem.

The DSO is generally a regulated natural monopoly in network infrastructure but can act as a buyer in a potentially competitive flexibility market.

This creates two separate markets:

Physical network market

→ naturally monopolistic

Flexibility services market

→ potentially competitive

The legal framework must prevent the DSO from transferring monopoly power from the first market into the second.

Potential concerns include:

• discriminatory procurement;
• excessive qualification requirements;
• preferential treatment;
• exclusionary technical standards;
• withholding network information;
• self-preferencing.

20. Consumer Protection

Households can become flexibility providers through:

• smart thermostats;
• EV chargers;
• batteries;
• solar PV;
• smart appliances.

Consumer law therefore becomes important.

Contracts should clearly explain:

• when flexibility can be activated;
• how much control the provider receives;
• expected financial compensation;
• penalties;
• cancellation rights;
• data use;
• privacy;
• technical risks.

The objective should be to make participation voluntary and understandable rather than allowing complex flexibility contracts to obscure the practical effect on consumers.

21. Baseline Regulation

One of the most difficult technical-legal questions is:

How can the DSO prove how much flexibility a provider actually delivered?

For example, if an industrial consumer normally consumes 10 MW but consumes 7 MW during a flexibility event, the DSO needs a methodology for determining whether the 3 MW reduction was actually caused by the flexibility instruction.

Therefore, market rules require a baseline methodology.

Possible approaches include:

• historical baseline;
• forecast baseline;
• metered baseline;
• nomination baseline;
• control-group methodology.

UK flexibility trials have specifically worked on historical and forecast baselines to verify delivery. Ofgem

22. Settlement and Performance

A legally robust market must specify:

Payment = availability payment + utilisation payment ± performance adjustment

The precise formula differs between markets.

Performance rules are important because otherwise a provider could bid cheaply but fail to deliver when the DSO needs flexibility.

Legal rules should therefore address:

• under-delivery;
• over-delivery;
• failure to respond;
• communication failure;
• force majeure;
• inaccurate metering;
• dispute resolution.

23. Coordination Between DSO and TSO

Flexibility resources can potentially serve both:

• distribution-level requirements; and
• transmission-level balancing requirements.

This creates a risk of double procurement or conflicting dispatch instructions.

For example:

A battery could be simultaneously required by:

• the DSO to reduce local congestion; and
• the transmission system operator to provide balancing energy.

Therefore, coordination mechanisms are essential.

EU law expressly requires DSOs to exchange information and coordinate with TSOs to ensure secure and efficient use of resources. Eur-Lex

24. India: Emerging Legal Context

India does not yet have a fully developed nationwide local flexibility-market framework equivalent to the mature European DSO flexibility model.

However, several existing regulatory concepts provide foundations for future development:

• demand-side management;
• smart metering;
• renewable-energy integration;
• distributed generation;
• energy storage;
• open access;
• time-of-day tariffs;
• demand response;
• grid modernisation.

At the state level, regulators have already developed demand-side-management frameworks. For example, the Delhi Electricity Regulatory Commission lists its Demand Side Management Regulations, 2014 among its regulatory instruments. Derc

A future Indian local flexibility framework could potentially combine these mechanisms with:

DISCOM + aggregator + DER + smart meter + local flexibility platform

25. Legal Issues for India

If Indian DISCOMs begin operating local flexibility markets at scale, important legal questions would include:

1. Statutory authority

Does the DISCOM have sufficient authority to procure flexibility?

2. Regulatory approval

Would SERC approval be required for market rules and procurement mechanisms?

3. Tariff treatment

How should flexibility payments be recovered?

4. Aggregation

Who can aggregate small DERs?

5. Consumer participation

How should residential flexibility providers be protected?

6. Storage

How should batteries be classified for regulatory purposes?

7. Data

Who owns smart-meter and DER operational data?

8. Settlement

Which entity is responsible for measuring and paying for flexibility?

9. Distribution-transmission coordination

How should local flexibility interact with national and state-level markets?

10. Competition

How can DISCOMs avoid favouring affiliated or incumbent market participants?

26. Regulatory Governance Model

A sound DSO flexibility framework can be represented as:

Energy Regulator

↓
Sets market rules and safeguards

DSO/DNO

↓
Identifies local constraints

Flexibility Platform

↓
Receives bids

Aggregators / DER Providers

↓
Offer flexibility

DSO

↓
Selects and dispatches flexibility

Metering & Settlement System

↓
Verifies performance and makes payment

This structure separates regulatory oversight from commercial procurement.

27. Major Legal Principles

The most important principles governing DSO-operated local flexibility markets are:

Principle 1 — Market-based procurement

Flexibility should normally be procured through competitive procedures where economically appropriate.

Principle 2 — Non-discrimination

Equivalent providers should receive equivalent treatment.

Principle 3 — Transparency

Market rules and procurement requirements should be publicly accessible.

Principle 4 — Neutrality

The DSO should not favour particular market participants.

Principle 5 — Proportionality

Technical requirements should correspond to actual network needs.

Principle 6 — Consumer protection

Residential and small commercial participants require clear contractual protection.

Principle 7 — Coordination

DSOs must coordinate with TSOs and other market actors.

Principle 8 — Technology neutrality

The regulatory framework should generally allow different technologies to compete on the service they provide.

Principle 9 — Data governance

Smart-meter and flexibility data must be handled according to applicable privacy and cybersecurity rules.

Principle 10 — Regulatory accountability

DSO flexibility procurement should remain subject to regulatory monitoring and review.

28. Advantages

Local flexibility markets can provide:

1. Reduced network congestion
2. Better utilisation of existing infrastructure
3. Deferred network reinforcement
4. Integration of renewable generation
5. Greater EV hosting capacity
6. Additional revenue for DER owners
7. Consumer participation
8. Improved network efficiency
9. More competitive procurement
10. Greater system flexibility

Ofgem's UK case studies identify additional consumer revenue opportunities and the possibility of using flexibility to defer infrastructure reinforcement. Ofgem

29. Legal and Regulatory Challenges

Despite the benefits, several problems remain.

A. Market liquidity

A geographically constrained flexibility market may have only a few providers.

B. DSO market power

The DSO has significant informational and infrastructural advantages.

C. Baseline manipulation

Providers may have incentives to manipulate their baseline.

D. Double counting

The same flexibility may be sold simultaneously to different markets.

E. Consumer complexity

Small consumers may not understand sophisticated flexibility contracts.

F. Regulatory fragmentation

Different regions may develop incompatible products.

G. Cybersecurity

Digitised flexibility markets increase dependence on communications infrastructure.

H. Distributional effects

The costs and benefits of flexibility may not be distributed equally among consumers.

30. Relationship Between Flexibility and Network Investment

The central regulatory question is not:

“Flexibility or network investment?”

Instead, the better legal-economic question is:

When should flexibility be used instead of, or together with, conventional network reinforcement?

A DSO may use a build-and-flex approach:

Short-term constraint → flexibility

Persistent structural constraint → reinforcement

Mixed constraint → reinforcement + flexibility

This approach is increasingly reflected in UK regulatory policy, where Ofgem's 2026 flexibility roadmap discusses integrating consumer-led flexibility into distribution-level planning and investment decisions. GOV.UK

31. Conclusion

Local Flexibility Markets Operated by DSOs/DNOs represent a major transformation in electricity-network governance. The DSO moves beyond its traditional role as a passive network operator and increasingly becomes a purchaser and coordinator of distributed flexibility.

The legal challenge is to obtain the operational benefits of this model without allowing a regulated network monopoly to distort competitive flexibility markets.

The central legal framework therefore rests on:

• transparent procurement;
• non-discriminatory access;
• competitive market procedures;
• DSO neutrality;
• consumer protection;
• TSO-DSO coordination;
• transparent settlement;
• regulatory oversight; and
• integration of flexibility into network planning.

EU Directive 2019/944, particularly Article 32, provides one of the clearest statutory models for DSO procurement of flexibility. Eur-Lex The CJEU decisions in citiworks (C-439/06), Sabatauskas (C-239/07), and Essent Belgium (C-492/14) provide important underlying principles concerning open access, non-discrimination and proportionality in electricity-network regulation. Eur-Lex

For India, the concept is particularly relevant to the future evolution of DISCOMs into more active distribution-system operators, especially as smart meters, rooftop solar, EVs, batteries, demand response and distributed energy resources expand. The existing demand-side-management framework can provide part of the regulatory foundation, but a comprehensive local flexibility market would require more detailed rules on procurement, aggregation, data, settlement, consumer protection and DISCOM neutrality. Derc