Welfare-maximizing market procurement of flexibility services for distribution network planning

Abstract

The ability of a power system to balance network investment with demand flexibility services is key to a decarbonized energy system. However, integrating flexibility services into distribution network planning raises challenges of procurement design and market structure. This paper addresses the research gap concerning the economic implications of local flexibility markets where the distribution system operator (DSO) acts as the single buyer. We propose a procurement mechanism that embeds counterfactual investment valuation into a pay-as-bid clearing rule and determines equilibrium through Marshallian surplus maximization. The methodology is illustrated with numerical case studies that compare procurement outcomes under complete and incomplete supply offers. Results show that, even when some bids exceed the DSO's valuation threshold, accepting them can increase welfare, thereby delivering efficient and rational price signals. These findings challenge the view that monopsony inevitably distorts markets: when disciplined by transparent and auditable valuation, it can support neutrality and efficiency. The framework aligns with the forthcoming Network Code on Demand Response and Distribution Network Development Plans disclosed, offering regulators and DSOs a practical tool for market-based procurement and a ready candidate for regulatory sandboxes.