EC LFM Specification and Design Criteria (VITO, 2025)

European Commission final report on the specification and design criteria for Local Flexibility Markets, authored by VITO (Kris Kessels, Janka Vanschoenwinkel, Anibal Sanjab, Wicak Ananduta, Helena Gerard) for DG Energy Unit C3 – Internal Energy Market. Completed November 2025, published 2026. This is the most comprehensive EU-level analysis of LFM design currently available, covering 37 initiatives across Europe.

Manuscript completed: November 2025 (published 2026)

EC contact: Thomas Kawam, Thomas.kawam@ec.europa.eu

Summary

The study provides a unifying design framework for LFMs across Member States, building toward NC DR national terms and conditions. It analyses 37 LFM initiatives through a four-category classification framework (general information, product design, market design, governance), applies an eight-objective assessment framework, extracts key success features, and formulates policy recommendations with explicit NC DR compliance mapping.

Scope and definitions

LFM definition used: markets where local services are traded to address grid-related needs; buyers are DSOs and TSOs; the services have a distinctly local character; and both dedicated markets and bids placed in wholesale markets are in scope. This aligns with ACER’s NC DR proposal definition.

Scope: market-based procurement with at least one local SO service (CM or VC) from distributed resources. 37 initiatives across Austria, Belgium, Cyprus, Czech Republic, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Norway, Portugal, Slovenia, Spain, Sweden (3), Switzerland, Netherlands, UK.

LFM landscape — 37 initiatives

The 9 operational live markets

9 of 37 initiatives carry the status “Live market (in operation)” as of the report (per Table 2-1):

Lithuania’s OneNet LFM is not one of the 9 — the report’s summary table (Table 2-1) lists it as “Live market (in preparation)”, and its own ID-card status is “Live Market (but inactive)”; the report states explicitly that “the kick-off of the live market did not take place yet” because Lithuania has no significant congestion needs yet. SthlmFlex is classified as “Live market (finalised)” — a formerly operational live market (2020–2024), now inactive. Sweden thus has 2 of the 9 currently-operating entries (plus the finalised SthlmFlex), making it one of the strongest LFM countries in Europe.

Market maturity context

The study estimates LFM maturity phases:

• ST development: up to 2–3 years when initiating
• Mature LFM: 3–5 years of operation
• Target harmonised LFM: 5–8 years

E.ON/SWITCH has operated continuously since the first CoordiNet demonstration winter (V2019/20), with V2025/26 marking 7 consecutive seasons (project origin early 2019). At 7 years, E.ON SWITCH sits at the transition between “mature” and approaching the harmonised target phase — placing it among the most experienced LFMs in Europe alongside UKPN, GOPACS, and Fluvius.

Country DSO concentration

Sweden is classified as “Low” DSO concentration — mainly small, local DSOs; the three largest DSOs deliver less than 50% of distributed power. This is the most fragmented category and distinguishes Sweden from countries like the Netherlands (Medium) or Slovenia/Greece (Very high). The ~155 Swedish DSOs create an inherent challenge for coordination frameworks requiring per-DSO prequalification.

General LFM findings

• Most LFMs still in pilot/preparatory stages — only 9 fully operational live markets of 37; reflects growing interest and ongoing learning
• DSO-only initiation is dominant — most LFMs started by a single DSO for manageability; examples of TSO-DSO and multi-DSO cooperation are growing
• CM focus — congestion management dominates; voltage control markets are rare due to technical complexity and liquidity challenges
• MV/HV focus — LV grid flexibility remains limited due to monitoring challenges; “several initiatives are beginning to explore this area”
• Both in-house and commercial platforms are used; balance between external expertise and retaining operational control

Product design findings

• Multiple products for the same service are common (not a single unified product)
• Simplicity prioritised over harmonisation with wholesale/balancing markets in early stages
• Active power dominant; reactive power products rare in practice despite theoretical potential
• Capacity + energy combinations are common; free bids also widely available
• Aggregation widely allowed but constrained by technical and locational requirements

Market design findings

Prequalification

• Most LFMs use simple PQ requirements (legal, administrative, commercial eligibility); financial checks rare
• ~80% use a flexibility register at the LFM level
• Grid PQ (impact on neighbouring grids) is limited; only a few initiatives apply dynamic grid checks per session

Procurement

• Capacity often procured well in advance; energy close to real time (DA or intraday)
• LT procurement: tenders dominate
• ST procurement: closed-gate auctions dominate; continuous markets in specific cases
• Pay-as-bid pricing is the dominant model in European LFMs (~40% also provide SO willingness-to-pay indication to improve participation)
• This contrasts with Svk’s balancing market, which shifted to marginal pricing in February 2024

Activation

• Mostly manual activation requested by the SO, but often delivered via an automated signal channel: 21 of 37 initiatives use some form of automated signal (SCADA, API, MQTT, 4G); 6 use a hybrid automated/manual system; 3 rely on a plain phone call

Settlement

• Baseline choice is considered the most challenging settlement dimension
• Most initiatives support multiple baseline approaches; simpler methods preferred to encourage participation
• Nomination baselines (FSP proposes own baseline) are common
• Capacity-limiting products used in some cases to avoid baselines entirely — EC report formally endorses this as a legitimate approach
• Penalties for non-delivery are uncommon; some pro-rata schemes; most initiatives lack mature penalty frameworks

Governance findings

• Most LFMs: separate DSO-led markets — no coordination with TSO or other DSOs
• Growing interest in TSO-DSO and multi-DSO coordination as markets mature
• Bid forwarding not yet common — but seen as a future tool for liquidity and coordination
• Information sharing developing toward transparency; trend toward publishing congestion maps and flexibility needs
• Independent MO: when multiple buyers are present, a third-party LMO is the preferred option; automated clearing essential to demonstrate neutrality

Four TSO-DSO market coordination models

The study provides the clearest EU-level taxonomy of how LFMs relate to TSO markets:

~50% of EU LFMs are separate SO markets; as of the report, 27% of the 37 initiatives (11 total) already implement sequential or common markets — 5 sequential DSO-TSO markets (Spanish regulatory sandbox, SthlmFlex, Euroflex, FinFlex, E.ON Energy Networks Sweden) and 6 common markets (SF2.0, OneNet Northern Demonstration Finland, Flex.on LFM, GOPACS, Opentunity Greek demo, TDC LFM Switzerland). Sweden’s operational markets (E.ON SWITCH, Effekthandel Väst) represent the two most prevalent models.

Key success features (three-tier)

ST no-regret features (universal, from first day)

• Technology-neutral, non-discriminatory product design; allow spatial aggregation
• Follow common EU list of product attributes (optional list, not mandatory prescription)
• Market objective = minimise total procurement costs; all prices market-based
• Automatic verification of delivery against baseline
• Value stacking support; information sharing with connecting and impacted SOs
• Coordinated design of implicit (tariffs) and explicit (markets) flexibility mechanisms
• Market rules publicly available

ST transitional features (early-stage, accept temporary simplicity)

• Local context-adapted, simpler product definitions
• Flexibility register at LFM level (before national FIS exists)
• Simple PQ requirements limited to strictly necessary
• Price indications / bidding price limits during early low-liquidity phase
• LT capacity + ST energy product mix
• Simplified baselining methods with parallel testing of advanced approaches
• Centralised data platform for verification (in development)
• Lenient/simple penalties to reduce FSP risk in early stages
• Allow grid users with flexible connection agreements to participate

Medium-term target features (mature/harmonised markets)

• Limited set of stable, standardised local products at MS level
• Common flexibility register at MS level (aligned with FIS)
• Harmonised PQ across services at MS level; common steps to avoid duplication
• Automated market clearing without SO intervention for ST procurement
• Coordinated or common market scheme (sequential → common)
• Free ST bids compete with LT reserved flexibility
• Applicable baseline methods coordinated at MS level; EU-level baseline library
• Fully automated, streamlined verification via neutral data registry
• Standardised penalty mechanisms at MS level
• Independent aggregation models tested and implemented
• Advanced monitoring systems for gaming detection
• TOTEX-based regulatory model for SOs (essential prerequisite)
• FCAs linked to and priced via market mechanisms

Settlement and aggregation architecture

Capacity-limit products as baseline alternative

The EC report formally endorses capacity-limiting products (operating envelopes) as a structurally different approach to settlement: instead of measuring a flexibility volume, the product defines a power cap at the connection point. This avoids baseline calculation entirely. Particularly suited for LV constraints where individual metering is impractical.

Independent aggregation models — moved to EB GL

A significant regulatory architecture finding: provisions on independent aggregation models (perimeter correction, BRP financial compensation mechanisms) were removed from the current NC DR and will instead be handled through updates to the EB GL (Electricity Balancing Guideline). The current NC DR text “leaves room to have different aggregation models in different Member States.” This is directly relevant to Sweden’s BSP/BRP implementation — the regulatory home for cross-BRP aggregation compensation is the EB GL, not the NC DR.

CAPEX bias and TOTEX reform — EC endorsement

The study explicitly identifies DSO incentive misalignment as a structural prerequisite for LFMs:

The study’s point: regulatory frameworks for DSOs and TSOs across Europe remain largely CAPEX-biased, favouring grid expansion over flexibility, and most countries still lack schemes that adequately reward system operators for procuring flexibility — so incentives spanning both capital and operational expenditure are needed for a fair comparison between flexibility and grid investment.

This is the European Commission’s own commissioned report endorsing TOTEX reform as a structural prerequisite for functioning LFMs — not just a Swedish regulatory preference. Sweden’s Ei RP5 TOTEX initiative (2028–) is therefore aligned with EU-level consensus.

Policy recommendations (selected)

Relevance to wiki topics