Optimizing Local Markets for Ancillary Services Procurement: A Case Study on Flexibility Markets in Italy

Local flexibility markets (LMFs) provide opportunities for both DSOs and distributed energy resources (DERs), enabling them to manage the grid while ensuring security of supply for the former and increasing revenues for the latter. This study delves into Italy's pilot LFMs, which employ a hybrid payment scheme blending capacity and energy activation payments. It explores how DSOs should strategically define the market tenders for flexible resource procurement basing on load forecasts and considering the impact of the associated uncertainty on decision-making. The aim is to minimize the overall expected cost composed by the sum of capacity payments, cost of activated energy, and the value of the expected lost load, thus seeking a tradeoff between resources cost efficiency and grid adequacy. It also highlights potentials and barriers for national regulatory authorities in setting price caps and emphasizes the importance of understanding and optimizing the procurement process as local flexibility markets expand.