As the U.S. energy landscape evolves, distributed battery energy storage systems (BESS) are gaining traction in local flexibility markets. These markets, operated by distribution system operators (DSOs), provide new ways for small-scale energy storage assets to generate revenue while enhancing grid stability. As utilities shift from traditional infrastructure upgrades to flexible energy solutions, distributed BESS offers a promising path forward in managing demand and integrating renewable energy sources.

What are local flexibility markets?

Local flexibility markets allow DSOs to manage grid constraints and stabilize the power network by contracting distributed resources, such as residential and community-scale batteries. Instead of expanding infrastructure, DSOs rely on these markets to address congestion, balance loads, and respond to fluctuating demand during peak periods. Distributed BESS can reserve capacity or provide real-time dispatch services to help reduce stress on the grid and maintain reliability.

Why distributed BESS is a good fit for local markets

Distributed energy matches local demand

Distributed BESS systems are well-suited for localized services because they align with the needs of smaller grids and urban areas. Markets operated by DSOs, such as those in California and New York, often require geographically distributed energy resources that can react quickly to local demands. These batteries are typically deployed behind-the-meter at homes, businesses, or community hubs, making them ideal for participating in demand response programs and peak load reduction initiatives.

Aggregators unlock market participation

Through virtual power plants (VPPs), aggregators can pool smaller batteries into a single entity capable of meeting the minimum capacity requirements for flexibility services. This aggregation allows distributed storage owners to participate in wholesale and local markets, enabling them to earn revenue through peak shaving, load shifting, and grid support services. Some programs even offer capacity payments, providing additional income just for making the battery available for dispatch during critical periods.

Growing demand response incentives

Many DSOs across the U.S. offer demand response programs that pay distributed BESS operators to reduce electricity consumption or discharge during high-demand periods. These programs are particularly beneficial in regions with dynamic pricing models, where operators can maximize earnings by participating during peak events. By shifting load or discharging energy at optimal times, distributed BESS can relieve pressure on the grid and earn financial incentives simultaneously.

Challenges and outlook

Despite the growing potential, there are several challenges to widespread participation in flexibility markets:

• Fragmented market structures: Each DSO has unique rules and procurement processes, making it difficult to standardize participation across regions.
  
• Operational complexity: Distributed BESS operators must carefully balance participation in multiple programs to optimize revenue, which can be operationally demanding.
  
• Limited availability of contracts: Some local markets offer only small contract sizes or dispatch infrequently, which limits revenue potential

However, policy changes and market growth are expected to address these challenges. Federal incentives, such as the Inflation Reduction Act (IRA), have accelerated the adoption of distributed energy resources, and regulatory bodies are working to create more standardized frameworks for local flexibility markets. As DSOs increasingly recognize the value of distributed energy, more opportunities will emerge for BESS owners to participate and earn meaningful returns.

Local flexibility markets provide exciting new revenue opportunities for distributed BESS owners in the U.S. As DSOs shift from traditional infrastructure solutions to flexible, decentralized energy strategies, small-scale storage systems are becoming essential components of modern grid operations. By participating in demand response programs, aggregation schemes, and local balancing services, distributed BESS owners can unlock new income streams while supporting the reliability and sustainability of the nation’s power grid.