Balancing markets

Balancing markets are a type of balancing mechanism that keeps the electricity grid stable by matching supply and demand in real time. They allow grid operators to quickly call on flexible resources – like batteries, virtual power plants, traditional power plants, combined heat and power,  gas or hydrogen power plants or adjustable loads – to correct imbalances and maintain frequency. As renewable energy grows, these markets become essential for preventing outages and ensuring a reliable power system.

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The need for balancing in a renewable grid

Western Europe’s shift to renewables is increasing volatility in electricity supply, while the electrification of transport and heating adds flexible but unpredictable demand. Unlike fossil fuel power plants, distributed energy resources like BEVs, heat pumps and rooftop solar systems require smart coordination. Balancing markets serve as real-time safety nets, correcting supply-demand mismatches within seconds or minutes when forecasts miss the mark.

In Europe, transmission system operators (TSOs) maintain grid frequency precisely around 50 Hz. Even tiny deviations (on the order of 0.2 Hz) can risk outages. To prevent that, TSOs procure balancing services that can quickly inject or absorb power as needed. These services are provided through different products, grouped by response speed:

• Frequency Containment Reserve (FCR): A primary reserve that reacts within ~10 seconds to stabilize frequency.
• Automatic Frequency Restoration Reserve (aFRR): A secondary reserve, activated automatically within ~30 seconds to restore frequency balance.
• Manual Frequency Restoration Reserve (mFRR): A tertiary reserve, activated within minutes (manually or semi-automatically) to replace the earlier reserves and resolve broader imbalances in the grid.

How balancing markets work in western Europe

Balancing markets in Western Europe operate as regulated balancing mechanisms typically overseen by DSOs in each country, often coordinated across the EU. Unlike the imbalance market – which settles deviations after they occur – balancing markets are used to procure flexibility in advance to keep the grid stable in real time. Providers of balancing capacity, such as generators, flexible loads or storage, commit to be on standby to adjust power output or consumption when the DSO signals. When an imbalance occurs (supply exceeding demand or vice versa), the DSO activates these reserves and the providers are paid for the energy they supply or absorb at the imbalance price.

Imbalance settlement and pricing signals

An imbalance settlement ensures each energy market participant keeps their portfolio balanced. Deviations from forecasts are settled at the balancing energy price, with penalties incentivizing accuracy. Balancing markets therefore serve as both a real-time stabilizer and a financial settlement system for imbalances.

Opening participation to smaller assets

Once limited to large generators and industrial users, balancing markets now allow participation from all resources – individually or through aggregation. This regulatory shift enables distributed energy resources like home batteries, battery electric vehicles (BEVs) and PV systems to contribute flexibility at scale.

Shift towards faster, real-time balancing

Western Europe is moving to shorter settlement and control periods – down to 15 or even 5 minutes – to better manage renewable fluctuations. Markets like the Netherlands already update prices and system balance data every few minutes, allowing rapid participant response.

Coordinating between TSOs and DSOs

With more flexibility coming from distribution networks, TSOs and DSOs must coordinate to prevent local congestion. Pilot projects are testing ways to use assets like EVs, heat pumps and batteries for national balancing without compromising local grid stability.

Flexibility from home energy assets: BEVs, PV, batteries and heat pumps

Heavy residential energy assets – BEVs, photovoltaic (PV) systems, batteries and heat pumps – can provide significant energy flexibility when intelligently managed.

Battery electric vehicles (BEVs)

BEVs function as large, controllable batteries. Smart charging can shift or reverse power flows via V2G, using idle plug-in time to support the grid. Aggregators can coordinate fleets for frequency regulation while ensuring owners’ charge requirements are met.

Solar PV systems

While PV output depends on sunlight, smart energy management systems enable curtailment to prevent grid congestion. Paired with batteries or EV charging, PV can store midday surplus for later use in the evening, avoiding feed-in surcharges and reducing network imbalances.

Home batteries

Residential batteries can charge or discharge within seconds, either discharging power into the grid when supply is low (upward regulation) or charging when there is excess supply (downward regulation). Individual residential batteries are typically too small to participate alone, but when aggregated into fleets they can qualify for balancing markets. In the UK, for example, the Short Term Operating Reserve requires at least 3 MW of aggregated capacity.

In Germany, recent regulatory changes make it easier for homeowners to feed electricity back into the grid, but these updates have not yet specified the minimum capacity needed to access balancing services. This approach allows homeowners and system operators to earn revenue while improving grid resilience and maximizing end users’ self-consumption.

Heat pumps and other appliances

Heat pumps have inherent thermal storage, allowing short-term load shifts without affecting comfort. Aggregators can preheat, precool or delay operation to stabilize the grid. Other smart HVAC devices like water heaters or air conditioners add to this flexibility.

Role of HEMS

Home energy management systems optimize these assets for the homeowner’s needs while responding to price or grid signals. Platforms like XENON ensure transparency so users know when their assets support grid stability and can  – turning consumers into prosumers and critical resources for integrating renewables.

The business of flexibility: Aggregators and Virtual Power Plants

Balancing markets create new revenue opportunities for companies by monetizing flexibility. Aggregators make this possible by pooling distributed assets – from home batteries and EVs to PV and heat pumps – into a virtual power plant (VPP) that meets market requirements and can respond to DSO signals. The flexibility layer of gridX’s energy management system, XENON Flex, integrates and controls DERs, aggregates and disaggregates their flexibility, and holistically optimizes these pooled assets to simultaneously ensure grid stability and end user comfort. . XENON Flex then interfaces with market partners to trade or dispatch the aggregated flexibility. By leveraging XENON Flex, energy providers are able to open up new future-proof revenue streams that make the most of flexibility, which is already being installed in homes, and provide more value to their customers.

Aggregators handle the complexity for smaller players – from forecasting and real-time control to working with licensed traders. For example, gridX identifies and unlocks flexibility, while a trading partner executes market bids; customers see only that their devices run as usual while generating savings or income. Business models vary: some share revenues with consumers, others help utilities cut imbalance costs or avoid grid upgrades. Value stacking is common – the same asset can serve multiple markets, such as a battery that maximizes solar self-consumption while also earning from balancing services.

Revenue potential is significant. In the Netherlands’ imbalance market, a home system can earn up to €6 per day, or ~€180 per month. gridX simulations show that with cross-market participation, optimized PV, storage, EV charging and heat pumps could generate €1,438 net annually while cutting energy costs by over €1,300. Participation demands strict compliance and reliability, which platforms like XENON Flex ensure by managing DSO communications, safe device control, performance verification and regulatory adherence. This enables partners to access flexibility markets without building their own trading infrastructure.

Expert insights: Monetizing flexibility with XENON Flex

Irene Guerra Gil, Energy Market Expert at gridX, sees the convergence of technology and markets as a turning point for distributed flexibility. She explains that allowing prosumers to actively participate in energy markets presents “a significant opportunity to unlock value – not just for end customers through cost savings, but also for businesses leveraging decentralized assets.”  Using a platform to manage the technical complexity and ensure compliance through standardized APIs with market operators allows businesses to quickly scale solutions and maximize revenue through advanced trading, in combination with other innovative features.

Tamika Baken, Product Manager Flexibility at gridX, says it’s about innovation meeting regulation: “By enabling home energy systems to participate in real-time markets, we turn a challenge into an opportunity. Small assets collectively can deliver the same stability services as a power plant – and they can get paid like one.” Partnerships are essential – manufacturers supply flexible-ready equipment, gridX optimizes it via HEMS software and licensed market players execute trades. XENON Flex’s ability to integrate with multiple DSOs and trading platforms ensures compliance and scalability, while its design prioritizes user trust through transparency and respect for preferences. For Irene Guerra Gil, the dual goal is clear: “Make homes smarter, more autonomous and better prepared for whatever challenges the grid throws their way” while delivering tangible financial benefits.

Balancing markets are no longer reserved for large utilities. With digital platforms like XENON Flex, aggregated flexibility is becoming a cornerstone of the energy transition – boosting stability, integrating renewables, rewarding consumers and reducing reliance on polluting peaker plants.