A Comprehensive Review and Analysis of Energy Market Mechanisms and Power System Flexibility

The goal of reducing carbon emissions CO$_2$ has encouraged the growth of generation from renewable sources, which must be integrated into the system in a reliable and sustainable manner [1]. To achieve this goal, power systems must have greater flexibility, since increased levels of variable generation require increased needs for flexibility on power systems, a term that refers to the system's ability to respond to unexpected changes in demand and supply [1], [2], [3],arising from the variability and intermittency that characterizes renewable generation sources.

The improvement of the flexibility of the power system is linked to market mechanisms that can encourage the participation of more flexible sources [3], [4], as well as the improvement of the existing ones, which can offer the required balance, while the penetration of renewables energy grows, regulators must examine rules like curtailment, energy imbalance, ramping and scheduling to balance the interest of consumers, industry and other stakeholders while ensuring a fair remunerations for the market participants and maintain the capacity adequacy to support the transition to low-carbon power system [5].

This study presents a literature review that initially addresses the definitions and classifications proposed to quantify the flexibility of a system. The review was carried out applying the PRISMA methodology, using the WOS and Scopus databases. A total of 102 articles were included in the analysis, focusing on studies linking flexibility with market design and high-impact contributions to flexibility research. The results reveal that flexibility has been extensively studied, with 50 literature reviews identified among the examined sample, demonstrating the maturity and scholarly attention this topic has received.

This review aims to provide an accessible entry point for readers looking to understand power system flexibility and its connection to market design, especially for those without extensive prior technical knowledge in this field. It presents various approaches to defining and measuring flexibility and highlights stakeholders' motivations in the valuation of flexibility. This provides a comprehensive starting point for those entering this evolving research area, which is essential for future energy system planning aimed at increasing the integration of renewable energy resources.

Our paper contributes to the relevant literature in the following ways: First, it reviews key documents that present different frameworks for understanding power system flexibility. Second, we compile and examine various market designs proposed to improve power systems' flexibility and discuss their challenges, considering different stakeholders. Finally, we highlight the various definitions of the value of flexibility and introduce a methodology that translates these findings into inputs for the energy planning process, supporting strategic decisions on optimal market design.

The integration of renewable energy sources into power systems has been a key strategy to achieve decarbonization goals [4], [6], [7]. Yet, their low cost and dependence on weather conditions that are uncertain and variable, has increased the challenges of integrating this type of resource into current market and system models [8]. This creates the need for sufficient resources to maintain system balance with adequate flexibility, while simultaneously raising the critical question of how to appropriately value and compensate this operational capability.

Many definitions of flexibility exist in the literature, depending on the time scale, or whether it refers to technical properties, systems, or market designs. A widely accepted definition is the following: Flexibility in power systems refers to the ability of system components to adjust their operating points in a timely and coordinated manner to accommodate both expected and unexpected changes in system operating conditions [9]. This property is essential necessary to obtain a large integration of renewable energy sources [10], [11], [12].

The main motivation of this review is to understand the state of the art in the study of power system flexibility over recent years, along with market mechanisms designed to promote the participation of flexible generators and the economic quantification of this property.

We followed the PRISMA guidelines [13] (see Figure 1). The main steps can be summarized as: Identification of Research, Study Selection, Study Quality Assessment, Data Extraction, and Data Synthesis, using the Scopus and WOS databases.

The next section provides details of the screening process conducted through the research data collection, starting from identification to final inclusion in the literature review.

This review addresses two fundamental questions in the context of modern power systems transformation. First, it seeks to identify and synthesize the principal studies that examine revisions and consolidations of flexibility concepts in power systems, particularly as they relate to the integration of variable renewable energy (VRE) sources.

Second, it aims to explore the body of research on the necessary adaptations and reforms to energy market structures, mechanisms, and frameworks to effectively address the challenges posed by large-scale renewable energy integration, with particular emphasis on methodologies for assessing, quantifying, and valuing flexibility services in these evolving market environments.

Eligibility criteria focused on two primary dimensions: publication quality and topical relevance. For publication quality, only peer-reviewed journal articles and reviews published in English between 2001 and 2025 with full-text accessibility were included, excluding conference proceedings, book chapters, and editorial materials.

The 2001–2025 timeframe was selected to capture the evolution of flexibility concepts and market design from early renewable integration initiatives through contemporary high-penetration scenarios. For topical relevance, studies were required to address either (1) flexibility in power systems—including conceptual frameworks, measurement approaches, or operational strategies in the context of renewable energy integration—or (2) energy market design, regulatory mechanisms, or flexibility valuation methodologies.

Studies focusing on tangential topics such as supply chain management, isolated material science applications, Power-to-X vehicle technologies without grid integration, circular economy applications without energy market connections, or COVID-19 impacts were systematically excluded.

The review focuses on Web of Science and Scopus, which offer comprehensive coverage of peer-reviewed literature, including major IEEE publications. While domain-specific repositories like IEEE Xplore contain additional conference proceedings and technical reports, the substantial overlap with Scopus (estimated at 70–90% for IEEE content) and our focus on high-quality, peer-reviewed research justified this scope. Future work could explore grey literature and emerging conference proceedings for complementary insights.

The search equation used in WOS and Scopus included the following terms, and the results were last updated on February 11, 2025, covering research published from 2001 to 2025.

Web of Science

ALL = ((variable generation OR renewable generation integration OR Uncertainty OR Renewable energy OR penetration OR intermittent renewable generation) AND (flexibility OR Power system flexibility OR Flexibility metrics OR flexib*) AND (Survey OR Review OR literature review OR systematic) AND (electricity markets OR ancillary services OR local flexibility market OR market design OR market clearing OR market mechanisms OR innova* OR market) )

Scopus

(TITLE-ABS-KEY (“variable generation” OR “renewable generation integration” OR uncertainty OR “Renewable energy” OR penetration OR “intermittent renewable generation”) AND TITLE-ABS-KEY (flexibility OR “Power system flexibility” OR “Flexibility metrics” OR flexib*) AND TITLE-ABS-KEY (survey OR review OR “literature review” OR systematic) AND TITLE-ABS-KEY (“electricity markets” OR “ancillary services” OR “local flexibility market” OR “market design” OR “market clearing” OR “market mechanisms” OR innova* OR market)).

The selection process comprised three mandatory phases—identification, screening, and inclusion—each with explicit, pre-determined criteria to ensure transparency and reproducibility. Database-specific filtering strategies were necessary due to inherent differences in categorization systems between WOS and Scopus.

Table 1 provides a comprehensive breakdown of the WOS screening process, detailing the number of records identified, screened, and included at each decision point, along with specific exclusion criteria and rationale. Table 2 presents the corresponding information for the Scopus database. Both tables document the systematic reduction of records from initial search results (n = 2,111 for WOS; n = 1,134 for Scopus) to final inclusion (n = 67 for WOS; n = 52 for Scopus), ensuring full methodological transparency.

For records retrieved from the Scopus database, the following systematic screening process is shown in Table 2.

The systematic search identified 2,111 records in Web of Science and 1,134 in Scopus. After screening and eligibility assessment ( Figure 1), 67 studies from Web of Science and 52 from Scopus were selected (subtotal: 119 articles). Duplicate removal eliminated 17 records, resulting in 102 unique articles for final inclusion. Among these, 50 were systematic reviews or state-of-the-art studies, and 52 were core research articles selected for detailed analysis. Full-text versions were obtained from publishers including IEEE, MDPI, and Elsevier for comprehensive review.

This review synthesizes research published between 2011 and 2025, with emphasis on recent developments. We prioritized high-impact publications and foundational works that continue to shape current research directions. Approximately 48% of cited references are from the most recent five years (2021–2025), ensuring coverage of both emerging trends and established knowledge.

Our search was limited to Web of Science and Scopus. While these databases index a substantial portion of domain-specific content, some specialized conference proceedings and technical reports available exclusively in repositories such as IEEE Xplore may have been omitted. Future research could expand coverage by including direct searches of domain-specific databases to identify additional specialized literature.

Based on the key co-occurrence analysis shown in Figure 2, four main thematic groups related to market design and flexibility in power systems were identified. These groups can be analyzed considering the four existing drivers of flexibility: storage, smart grid, demand response, and ancillary services.

Flexibility and Storage (Red Cluster): These two concepts are crucial for achieving the energy transition as they ensure sufficient storage resources and require the design of appropriate market mechanisms that incentivize improvements in the services offered within a high renewable energy system.

Demand Response and Electricity Markets (Green Cluster): The role of demand has proven to be a key aspect in the design of electricity markets, in particular, Distributed Energy Resources (DER) have grown in the field, reflecting the community's interest in the energy transition.

Flexibility and Smart Grid (Blue Cluster): To deal with the uncertainty and variability of the VRE is necessary to develop smart grid management technologies, and corresponding market designs that provide information and incentives for their participation.

Flexibility and Ancillary Services (Yellow Cluster): The innovation in ancillary services is crucial to increasing the flexibility of power systems and supporting their reliable operation.

The absence of a unified definition of the term flexibility and the varied use of terminology can lead to misunderstandings, making it difficult for stakeholders to effectively communicate each others [2], this confusion can hinder the transition from mature technology to investment decisions and deployment, affecting the efficiency of the power system operations, so for this reason the definition of flexibility has been a challenge [1], [14], [15].

Flexibility of power systems has become relevant due to the intention of integrating a large number of renewable sources to the system. This property can be classified as flexibility from generation, demand, grid [14], storage, among others, which depends on the technical properties of the assets. The design of energy markets is motivated to encourage the participation of more flexible sources as well as to design adequate mechanisms that efficiently remunerate all participants. They may include new players, rules, and market products.

The signs of inflexibility [16], include: Inability of the grid to maintain frequency, significant renewable energy curtailments, area balance violations, negative market prices and price volatility. The flexibility is not a new problem, system demand has varied, and generation outages have occurred for as long as power system have existed [17], so this classification can be divided in: Smart grid initiatives, energy storage systems, sectorial integration, new ancillary services, market design improvement, flexible conventional units, demand side flexibility utilization and grid interconnections.

The flexibility metric can identify the time intervals during which a system is most likely to face a shortage of flexible resources. It can measure the relative impact of changing operational policies and the addition of flexible resources. For example [18], proposes the Insufficient Ramping Resource Expectation, a metric designed to assess power system flexibility for use in long-term planning. This metric represents the expected number of observations when a power system cannot cope with the predicted or unpredicted changes in net load. Through literature, the next strategies for enhancing flexibility are: advanced energy storage technologies, demand response programs, grid expansion and interconnection, and sophisticated forecasting methods [19].

The term flexibility has been studied and classified from different perspectives according to [17], namely: Demand side flexibility options, Supply side flexibility options (generation-side flexibility), Network-side flexibility options, energy storage systems [15] and other sources of flexibility: energy system integration (PtX), Energy markets, regulatory policies.

The study of market's flexibility, to the best of our knowledge, began with the work of Ela [9], which is related to the proper market design to incentivize flexibility in both: investment and operation. The first attempt to quantify flexibility indices was made by Makarov [20] who proposed three indices: (1) The ramping limit defined as the maximum change a unit can effect on its operating point in a certain time, (2) power capacity that refers to minimum and maximum power outputs of any generation source and (3) energy capacity related with energy supply of a power source. Later publications introduced ramp-duration as another flexibility index, which denotes the time period that a unit can continue to change its output. Finally regarding demand-side flexibility a new metric called theta is proposed to measure the response time of Demand Response (DR) units [21].

Flexibility can be understood in relation to the elements that make up the system, as well as to its location within the electricity supply chain. This classification includes flexibility associated with generation, grid, storage, and demand [2], since its inception, the literature up to 2012 has analyzed power system flexibility and the consolidation of flexibility requirements in energy systems [18]. Subsequent contribution have addressed new market designs such as Flexible Ramp Products (FRP) [22], the importance of defining and quantifying flexibility from the network side [6], the development of a metric for measuring flexibility from demand side [23] and finally, a historical reviews of definitions of flexibility, sources, evaluation, and parameters [1].

The growing interest in quantifying power system flexibility, as well as in defining and developing metrics, is reflected in the number of literature reviews published on the subject. Previous reviews can be classified into different categories: demand response, storage, market design, and other holistic approaches emphasizing the importance of the subject and the contributions addressed in the present study (see Table 3).

Each document was assigned to the category that best represents its main contribution to power system flexibility research. Papers covering multiple themes were classified by their dominant research focus. The classification framework for energy systems review papers was created using the title, abstract, and keywords and the inclusion and exclusion criteria shown in Table 4.

Literature review publications related to flexibility could be grouped into the different sides of flexibility.

A random sample of 15 papers (approximately 30% of the total corpus) was independently coded by a second researcher familiar with power system flexibility literature. The initial inter-rater agreement was 80% (12 of 15 papers), indicating substantial consistency.

For the three papers with initial disagreement, both coders engaged in a structured discussion, reviewing the papers' objectives, methods, results, and conclusions to determine the predominant thematic focus. Consensus was reached for all three cases through this deliberative process, with final classifications based on the primary research contribution as evidenced by the distribution of content across sections and the stated research objectives.

The transformation of consumers into prosumers who can actively participate in energy markets through onsite production and flexible consumption, adjusting their demand according to market signals, has motivated the study of demand side flexibility [6], [33]. Their participation will play a significant role in integrating large shares of renewable energy, as demand management strategies allow consumers to support system operations while obtaining economic benefits for their flexibility potential [67].

Table 5 synthesizes the principal challenges, assumptions, barriers and mechanism proposed to leverage flexibility from the demand side flexibility.

The opportunities and challenges in demand response as a source of power system flexibility in energy-intensive industries are classified from the owners' perspective [29], focusing on the integration of these mechanisms into electricity markets—primarily in the USA and Germany. This analysis highlights critical aspects such as contingency reserve utilization, capacity contribution, market design, and flexibility [68]. Notably, demand response has significant potential as a vital component of modern electricity markets to enable system flexibility through programs that target various industries like the automotive sector, biodiesel production, polymer manufacturing, steel manufacturing, paper mills, the pharmaceutical industry, and cement production [69], [70] since the industrial flexibility not only could modify the demand profile, but also reduces the operational cost of the power system to avoid investing in fast-run power plants [26].

Additionally, the integration of distributed generators (DG) and demand-side management (DSM) programs raises the need for renewable generators to develop effective bidding strategies [32], [33], like ahead-markets scheduling that includes day-ahead and intra-day markets [68], and other market models that commercialize the flexibility that demand can provide, highlighting the new roles and functionalities that demand will have and the correct mechanisms to ensure market efficiency and a secure network operation [31], the optimal use of diverse and geographically distributed sources, considering the needs of the power system and the individual consumers [24] the role of the demand in real time markets [25], and the requirement of precise modeling techniques to capture the new technologies constraints and the dynamics of future power markets [28].

Furthermore, the role of the consumer must be empowered, making them the focus of the business model and considering their flexibility as essential to achieving system balance, where the DR programs have different timescales ranging from several years to real-time [27]. The residential sector has helped overcome many challenges related to high energy production costs during peak periods, as well as issues of reliability, security, and congestion management in both generation and distribution systems [30]. Incentives for customers to modify their demand could be implemented through a mechanism design that employs direct messaging and centralized decisions [31], which could enhance the welfare of all market participants, ensure truthful self-reporting of customer preferences, and enable the development of optimal pricing techniques while maintaining privacy.

The challenges in the planning and inclusion of storage technologies in the systems, and how this can enable flexible generation and stable electricity supply required by consumers, have been studied through different systematic literature reviews [36], [37}.

The economic valuation of energy storage is highly dependent on operation time, availability of flexibility options and sector coupling [4-70]. Energy storage systems represent a significant source of system flexibility through ancillary service provision [41], enabling increased renewable energy utilization and addressing future electricity supply-demand challenges [36]. However, despite their potential contribution to sustainable power networks, ESS deployment has been constrained by high technology costs, limited implementation experience, and regulatory uncertainties within conventional electricity markets [37]. Accelerating ESS adoption requires stable regulatory frameworks and market structures that incentivize technology development. Beyond addressing market barriers, technological advancement must focus on improving efficiency, reducing costs, and minimizing environmental impacts across all storage technologies, including mechanical systems [39]. See Table 6.

Energy storage systems offer critical advantages for power systems, notably enhanced supply security and operational flexibility. Realizing these benefits requires appropriate market design frameworks and strategic expansion planning models to guide investment decisions, particularly given accelerating renewable energy integration [38]. To facilitate ESS deployment, various market mechanisms have been implemented, including participation in ancillary services and capacity markets, as well as wholesale market access supported by policy incentives such as feed-in tariffs, capacity payments, and investment tax credits [40]. Determining optimal ESS specifications—including both power and energy capacity requirements—can be accomplished through multiple methodologies, such as analysis of historical wind generation profiles or probabilistic approaches based on wind power forecast error distributions [42].

The pioneering work of Lund et al. [45] establishes critical linkages between electricity market design and power system flexibility, particularly examining how market structures enable flexibility in renewable-intensive systems. An analysis of 400 flexibility-related references demonstrates that substantial flexibility can be achieved through strategic energy management, suggesting that power systems may accommodate high VRE penetration without necessarily requiring transformative infrastructure investments [45], [46]. However, as VRE deployment accelerates, net load patterns will evolve significantly. A key market consequence will be increased demand for balancing services and intraday trading, reflecting the inherent forecast uncertainty of renewable generation in day-ahead timeframes [47].

Building on these foundational insights, Table 7 synthesizes findings from major literature reviews on market design for flexibility, systematically organizing the specific problems addressed, mechanisms proposed, underlying assumptions, and implementation barriers identified across the literature.

Economically efficient flexibility trading among distribution system operators and market participants can be facilitated by Local Flexibility Markets (LFMs) [71] - electricity trading platforms operating in geographically limited areas such as neighborhoods, communities, and small cities. Within LFMs, residential prosumers, distributed energy resources, and industrial prosumers function as flexibility providers, coordinated by aggregators for market participation. On the demand side, DSOs procure flexibility for operational needs, including voltage control, congestion management, and loss reduction, while balance responsible parties acquire flexibility to optimize portfolios and minimize imbalance costs [48]. While comprehensive flexible market-price systems remain under development, novel business models for local energy trading are emerging through peer-to-peer (P2P) and transactive energy frameworks [52], which necessitate technological infrastructure including smart metering, blockchain-enabled smart contracts, intelligent storage systems, and well-designed market incentive mechanisms [49].

In addition to the LFMs, the design of Local Energy Markets (LEMs) has attracted significant research interest in recent years due to increasing distributed energy resource (DER) penetration [50]. Within this framework Gao et al. [54] further categorize bidding models into equilibrium models and agent-based models, providing insight into the underlying algorithmic structures. To transform passive consumers into active market participants, various incentive mechanisms must be implemented, including dynamic market pricing, reduced network fees, innovative pricing structures for members of energy communities or microgrids, direct peer-to-peer trading, and price negotiation between prosumers using game-theoretic strategies [63]. These mechanisms must accommodate diverse forms of aggregation and participation across day-ahead, intraday, balancing, and real-time markets.

The challenge of a market design that considers all the issues related to the VRE integration has been widely studied [46], [51], [72]. There is a consensus about the “right market design for the future”, where the market clearing process should manage the required level of flexibility among the generation resources by ensuring that adequate flexible capacity is available, and send appropriate price signals for resources to continue offering their flexibility [73], However, “it is unclear whether current market designs are incentivizing resources that have flexible capabilities to offer to the short-term energy and/or ancillary services market when active power flexibility is needed the most”, so the markets designs is still on debate, since it will need to ensure the flexible resources are incentivized to provide their flexibility when needed [51], [74].

The transition to a new market design will require economic principles, like those proposed by Newbery et al. [75] that suggest policies such as supporting more interconnection and better remuneration of flexibility services, and De Vries [76], who argues that market design requires intertemporal arbitrage, as in the presence of enough local flexibility. The mechanisms could be classified into procuring additional reserves, flexible ramp products, and flexible capacity products [77].

The existing and traditional market design elements in a centralized dispatch like: frequency scheduling and short settlement intervals, ancillary service markets, make-whole payments and day-ahead profit assurance payments, have incentivized the suppliers to offer flexibility to the market operator and allow it to commit and schedule the supplier’s output [78]. These recent market designs could be: flexibility from nontraditional resources, evolving regulating reserve markets, ancillary service markets for primary frequency control and flexible ramping products [79].

The common factors among the proposals for new market designs can be classified into system flexibility, ancillary services, capacity mechanisms, granular pricing, regulation, and others. (See Table 8).

According to Zhou et al. [80] the challenges of integrating large amounts of RES in electricity market design include: ensuring revenue sufficiency, providing flexibility and reliability, and market power monitoring and mitigation. This redesign of the markets are based on these principles: Integrity across time, space, and externalities, cost and risk minimization, allocation of risk to those who can best bear it, compensation of fixed costs with fixed income streams and variable costs with variable income streams, flexibility to respond to future events, co-optimization of multiple objectives might provide the capability of lower investment and operating system costs [62], [85].

Likewise, another element in the wholesale market design includes: temporal and spatial granularity of spot prices, cost or bid-based arrangements for dispatch and price formation, scarcity pricing, ancillary services, capacity mechanism, centralized auctions for long-term energy contracts, and the geographical integration of different market segments [72], [81].

The characteristics, benefits, and challenges of the market design models identified are explained in Table 9.

Flexible Ramp Products (FRPs) introduce two new market design variables to existing Unit Commitment (UC) and Economic Dispatch (ED) formulations: Flexible Ramp-Up (FRU) and Flexible Ramp-Down (FRD) capabilities. These products offer multiple operational benefits, including enhanced management of ramping capacity from controllable resources, reduced frequency of power balance violations, decreased deployment of regulation services, lower occurrence of penalty prices due to ramp scarcity, and improved operational reliability and flexibility [43]. Effective FRP integration requires understanding ramp requirement calculations and demand curve construction. While comprehensive validation through realistic case studies remains necessary, FRPs are expected to reduce reliance on demand offsets in real-time dispatch [44].

Although physical flexibility may be sufficient in many systems, contractual availability often constrains its utilization [74]. FRPs address this gap by increasing system flexibility through additional generator ramping capability, improved generation curve imbalance management, and opportunity cost payments compensating resources providing incremental ramp capacity [73]. The market-clearing process must manage required flexibility levels by ensuring adequate flexible capacity availability and transmitting appropriate price signals to incentivize continued flexibility provision [66].

Effective FRP market design requires careful modeling approaches, with stochastic models demonstrating superior performance compared to deterministic models in managing ramp constraints under uncertainty [92]. Successful implementation necessitates comprehensive market mechanisms incorporating: (1) fair payment systems, (2) transparent market processes, (3) technology-independent frameworks accommodating diverse resources, (4) appropriate incentives and assurances, and (5) performance-based evaluation principles ensuring participants are assessed on their ability to deliver flexible services effectively [92]. Table 10 synthesizes the problems addressed, key assumptions, methodologies employed, implementation barriers, and principal contributions of ramping flexibility products identified in the literature.

The implementation of these flexible products varies across different regions and shows more divergence than convergence, demonstrating that the optimal market design depends on renewable penetration levels, grid topology, existing market structures, and regional operational practices.

The CAISO has implemented a three-settlement system (day-ahead, 15-minute, real-time) with explicit flexible ramping products, reflecting California's high renewable penetration and operational complexity; by the other side, MISO has adopted a two-settlement system (day-ahead, real-time) with flexible ramping products, balancing flexibility needs with market simplicity, NYISO remains in the investigation phase, suggesting cautious evaluation of other markets' experiences before committing to a specific design and European and Australian markets are exploring various flexibility services, with different emphasis on frequency response, reserve services, and voltage control reflecting their distinct grid characteristics.

The evolution of the market designs approaches for managing ramping flexibility in power systems with high renewable penetration, shown through first the explicit flexible ramping products with separate pricing mechanisms (such as CAISO's FlexiRamp and MISO's flexible ramping proposals), to enhanced uncertainty modeling using advanced statistical techniques and integration of ramping products with capacity markets and ancillary services.

The integration of distributed renewable resources into traditional grid structure, while enabling active consumer participation and maintaining system reliability has motivated the design of different novel market structure, that can be categorized in: Local Electricity Markets, which show how to structure energy market organizations and the technical market mechanism and algorithmic solutions for local trading; Emerging Business Models that explain how to organize structures and actor relationship in decentralized systems and the viability of new business models, and finally the LFMs, that describe the characteristics and analyze the operational implementation of a flexibility products market, allowing the trading of flexibility supplied by both producing and consuming units at the distribution level [71], where the key design challenges of these markets are: TSO-DSO coordination, coexistence of different flexibility services, the prosumer [93].

This section synthesizes research across three complementary market categories: LEM, Emerging Business Models, and Local Markets for Electricity Trading (LFM). See Table 11.

The key value definitions in the literature are related to two terms: VRE Value and Value of Flexibility. These terms are analyzed in the next section.

Having a clear definition of “Value” is essential because it acts as the starting point for determining how to assign economic worth to an asset or service, such as flexibility. The literature review presents various definitions, so more analysis is needed to develop a definition accepted by both the academic and industrial sectors.

The definition of “Value of flexibility” has been subject to various operationalizations in the literature, with authors adopting different approaches based on their analysis of the market and system. These conceptual frameworks include: cost perspective, value perspective, immediacy value, ramping capability value, cost savings, and average realized power prices. See Figure 3.

Trying to find a definition is important to consider the consumers' viewpoint of a new energy market, who are primarily motivated by financial benefits—reduced electricity bills—and environmental concerns when considering participation in demand flexibility programs [95], and the use of a proper mathematical formulation that helps the planner simulate and model the power system, which could improve its security and reliability and make the power system more economical [96] taking into account metrics of flexibility and the analysis and framework used to quantify VRE integration costs, as explained by Hirth et al. [97].

One of the VRE market value definitions is the revenue that generators can earn on markets, without income from subsidies [98], alternatively, Hirth et al. [97] show that the integration of VRE costs can be estimated from a cost perspective, as the additional system costs caused by VRE integration; or from a value perspective, as the difference between wholesale prices and VRE market values, defining the value factor as the ratio between a technology's market value (unit revenues) and wholesale electricity prices. This ratio gives an insight into how much revenue a VRE technology can generate compared to the prevailing market prices for electricity, e.g., a value factor of 1 (or 100\%) indicates that the unit revenues received by VRE generators are equal to the average wholesale price. In contrast, a value factor less than 1 suggests that VRE unit revenues are falling below average wholesale prices.

Another approach to define value, is to measure of how flexible resources can respond to short-term price variations in day-ahead and intraday markets, named the immediacy value which increases as the delivery time approaches real-time, highlighting the urgency and associated risks in the intraday markets; and the ramping capability which relates how well a resource can react to short-term variations, particularly in 15-minute intervals compared to hourly intervals [99].

In contrast to the above, another definition of the value of flexibility [82] is related to the potential to realize significant cost savings associated with: avoidance of energy curtailment from low-carbon generation sources, efficient provision of operating reserve and response-related balancing services, potential savings in generation capacity, and avoidance of network reinforcement/addition. The savings are obtained from the reduction in system capacity requirement—low carbon generation, conventional generation, transmission, interconnection, distribution assets—and lower operating cost (due to energy curtailment avoidance, CO$_2$ cost savings, and reduced fuel usage).

Alternatively, another definition is proposed by [100], which assesses the value of flexibility through the average realized power prices of individual power plants and technologies. This realized power price is the average price per unit of energy that a given power station or technology achieves over a defined time period. The performance of a plant or technology refers to the percentage difference in the realized power price for a plant or technology compared to the average power price in the same area. The performance is used as a measure of how flexible a plant or technology is in adjusting generation to variations in the power price.

As explained, the variability of power prices increases with the penetration of ERV, which enables flexible technologies, such as storage and demand response, to operate effectively and profitably. In this scenario, the assessment of the incremental cost for transitioning into a flexible system must be taken very carefully, because if the models underestimate price variability, it could lead to inadequate investment in technologies, thereby affecting the flexibility of the power system [101]. Additionally, a highly flexible system requires significant infrastructure investment, which can substantially raise the cost of power supply [102].

Besides the need for a globally accepted definition of the value of flexibility, new modeling and decision-making tools are also needed that can capture the complex interdependencies of a RES-based system [103]. Since even with pricing schemes that internalize flexibility costs, it is not sufficient to make flexible units profitable, additional changes to market design are required [104], and in this way, encourage financing mechanisms for investment in renewable energy sources [105].

Flexibility value in power systems is inherently multi-dimensional, varying by stakeholder perspective, temporal scale, and decision context. Table 12 provides a comparative framework organizing six distinct flexibility value assessment approaches according to their definition, primary stakeholder, relevant time horizon, measured attribute, and applicable decision scenario.

The flexibility valuation methods span from decades-long planning horizons to minute-by-minute operations. Cost and value perspectives serve long-term decisions: planners assess total VRE integration costs for policy evaluation, while investors measure revenue potential for project feasibility. At operational scales, immediacy value quantifies real-time response premiums through intraday-day-ahead price spreads, while ramping capability captures sub-hourly adjustment value for frequency regulation. Cost savings measure avoided infrastructure and operational expenditures for adequacy planning, while average realized prices provide operational performance benchmarks for generators.

This taxonomy demonstrates that no single metric captures flexibility value comprehensively; rather, appropriate valuation requires matching the analytical approach to the stakeholder and decision context.

Real Options theory has emerged as a powerful framework for quantifying flexibility value in power systems by extending financial option pricing principles to physical assets and operational decisions [106].

The Real Options framework provides a unifying analytical lens for understanding flexibility across multiple dimensions of modern energy systems. Operational flexibility—embodied in dispatchable generation, energy storage, demand response programs, and advanced grid technologies—creates economic value precisely through its capacity to respond optimally to uncertain market conditions, variable renewable generation, and shifting demand patterns [106]. Similarly, strategic flexibility in investment decisions allows system planners to defer, expand, or abandon projects as uncertainties resolve over time, avoiding costly irreversible commitments.

This work addresses an important gap by showing how methods for valuing energy derivatives and assessing smart grid technology align, both based on optionality principles essential for decarbonizing and decentralizing energy systems.

The frameworks discussed above should be transformed into practical tools and market mechanisms through a planning process that includes, first, an asset classification step; second, a quantification process that may incorporate the flexibility metrics suggested in the literature; and third, an integration step that accounts for new flexibility products and market designs. The goal is to identify actions needed to ensure a safe and reliable energy supply as the integration of VRE sources grows.

This approach is proposed to provide a possible route for policymakers' analysis, investment decision information, and to offer a general view of the possibilities based on the reviewed literature, considering how different value definitions could influence decisions today.

Each part of the approach includes assumptions, methods, and outputs that help develop medium- and long-term plans, as well as questions that guide the application of these stages. The best market design depends on renewable penetration levels, grid topology, existing market structures, and regional operational practices. See Figure 4.

In each of the Planning Process proposed the next question should be solved:

• Classification Process: What types of flexibility exist in the energy system and how they can be categorized?

The Classification stage aims to systematically identify, categorize, and characterize all available flexibility resources within the energy system based on their technical and operational aspects attributes. The primary objective is to create a structured inventory of flexibility assets that serves as the basis for subsequent quantification and valuation, ensuring that all potential sources and its characteristics are properly identified.

• Quantification Process: How can we quantify the technical flexibility of different assets?

The Quantification stage transforms the qualitative asset portfolio from classification into quantitative flexibility indicators that enable objective comparison across different technology types and system contexts, presented through comprehensive datasets, performance indicators, and valuation metrics.

• Integration Process: How can quantified flexibility be effectively incorporated into energy markets and operational practices?

The Integration stage aims to design and choose the market mechanisms, regulatory frameworks, and operational procedures that enable effective participation of flexibility resources in energy markets and system operations, using the outputs data of the quantification process and the forecasted data of VRE generation, demand consumption forecast and technical and transmission data, to decide which elements of the three options for improve flexibility, such as new market products, new market participants and new market designs, could be considered for the planning process.

• Planning and Prospects Process: How should flexibility considerations be integrated into models for integrated resource planning and transmission expansion planning?

The Planning stage outputs describe policy analysis reports and investment decision frameworks that guide strategic pathways for energy system stakeholders. These results empower decision-makers to develop adaptive, evidence-based energy strategies that leverage flexibility to navigate the energy transition efficiently and equitably.

Implementing the market designs proposed in the literature—whether new market products, new participant categories, or redesigned energy market structure requires coordinated action among all electricity supply chain stakeholders. However, critical knowledge gaps still exist that fundamentally hinder both practical deployment and systematic comparison across studies. The next gaps are still a challenge due to specific barrier to turning theoretical market designs into operational:

• Current flexibility valuation methods assume deterministic or well-characterized stochastic processes, failing to capture the option value created by deep uncertainty in future VRE penetration. This gap creates a barrier of implementation since without real options frameworks that account for irreversible investments, system planners cannot justify flexibility investments to regulators, and investors face unquantifiable risk premiums that can undervalue flexibility relative to conventional generation, leading to suboptimal capacity mix. Critical research priorities include developing hybrid Real Options Analysis frameworks validated against actual market outcomes, creating accessible practitioner tools, and reconciling long-term strategic valuations with short-term operational assessments.

• While distributed energy resources can provide flexibility at both distribution and transmission levels, optimal allocation and pricing market mechanisms remain unresolved, with existing designs lacking operational protocols for coordinating procurement between TSOs and DSOs. This creates implementation barriers—TSOs and DSOs may compete for the same resources, creating conflicting dispatch signals and price distortions and DER aggregators face regulatory uncertainty about market access and exchange data protocols that can underutilize available flexibility. Critical research priorities include developing coordination protocols that prevent system-level conflicts, establishing standardized data exchange and settlement procedures, and piloting mechanisms in real-world networks with rigorous performance monitoring.

• Energy planning frameworks must support long-term capacity expansion decisions that align with actual market structures, incorporating flexibility as a core planning element with explicit links to market design to evaluate whether flexibility targets are achievable under realistic conditions. This requires standardized planning frameworks that accommodate different assumptions, technical characteristics, and policy objectives. Critical research priorities include developing integrated frameworks that endogenize market design impacts on flexibility provision, validating planning models against empirical data from mature flexibility markets, and creating decision-support tools that link long-term planning targets with operational market parameters to ensure adequate flexibility in increasingly complex power systems.

This review has summarized the evolving landscape of market designs for power system flexibility and the methods for measuring its economic value—a crucial necessity as VRE adoption accelerates worldwide. The literature reveals convergence toward several core design principles: innovative ancillary service products, capacity markets, enhanced temporal and spatial price granularity, improved forecasting systems, advanced dispatch models including co-optimization and stochastic frameworks.

However, translating these theoretical constructs into operational reality requires a systematic implementation pathway. A three-stage planning process is proposed to bridge this gap: (1) asset classification to identify flexibility sources across generation, storage, demand-side resources, and grid infrastructure; (2) quantification using standardized flexibility metrics that capture ramping capability, response time, and duration; and (3) integration through new market products and regulatory frameworks. This structured approach provides policymakers with actionable guidance for flexibility planning, offers investors clarity on value drivers for flexible assets, and enables system operators to maintain reliability as energy systems transition toward decarbonization.

The concept of flexibility lacks a single, unified definition due to its multi-dimensional nature and its service to various stakeholders across different time scales. Various approaches—such as cost analysis for planning, market value for investments, premiums for immediacy in balancing, cost savings for infrastructure, and realized prices for benchmarking—are valid within specific contexts. However, this fragmentation complicates system-wide optimization. Although real options theory offers a promising framework for valuing flexibility under uncertainty, it encompasses diverse methodologies that require a deep understanding of the underlying assets and rely on strong assumptions about future behavior.