Principles for Profit Sharing in the Explicit Flexibility Value Chain

This paper proposes principles for how to distribute the profits generated in flexibility market between the stakeholders in the explicit flexibility value chain. The principles are rooted in contract design theory. Revenue-sharing and profit-sharing contracts are discussed, in addition to one-part and two-part linear contracts. The model for the value chain is proposed with four categories of stakeholders, in addition to the flexibility marketplaces: the aggregator, the aggregator platform provider, the energy management system provider and the households. Motivation and added cost from participating in the explicit flexibility business based on households are discussed, and different contract models are proposed. Finally, a simplified, yet realistic, example is provided assuming a portfolio with 1 MW flexibility sold at the flexibility market and at the balancing market as manual frequency restoration reserve, yielding a yearly gross profit of 0.15 million euro, based on the Norwegian markets. The example shows how the revenues can be split between all stakeholders and provides a good reference point for further improvements of the profit-sharing principles.