Paper short abstract:

The energy transition is creating demand for new sources of energy system flexibility. The paper analyses how flexibility is being constituted as an asset suitable for investment. The redesign of markets for flexibility in Europe is a political negotiation largely conducted in national contexts

Paper long abstract:

Stored fossil energy has been as the main source of energy system flexibility but its use needs to be curtailed to reduce carbon emissions. In Europe policy makers are seeking to construct markets which enable investment in new sources of flexibility, including electricity and thermal storage, market interconnection, peaking plant and demand side management.

The paper analyses a debate about how best to design such markets and to constitute flexibility as an asset suitable for long-term investment. Some argue that price spikes experienced during periods when renewables output is curtailed will be adequate to remunerate investors in the capital intensive technologies required to deliver flexibility. The alternative argument is that relying on 'scarcity pricing' will be inadequate to reassure investors and that government-backed capacity contracts are needed to create certainty in the market.

Knight's (1921) distinction between 'risk' and 'uncertainty' is proposed as a useful lens through which to view the debate: A risk lens implies that the electricity market should function as normal and market participants bear responsibility for calculating the extent and reliability of future returns. Investment in flexibility as an uncertainty implies that risks cannot be revealed through the operation of the market, rather government intervention is required to create the conditions for investment.

Through a comparison of the UK and Germany, the paper outlines how processes of redesigning electricity markets are embedded in the politics of energy in nation-states and as a consequence the European Union's ambition of a harmonized electricity market is seen as problematic.