Virtual Trading Parties and the mutualisation problem

Before P415, a customer's flexibility could be offered into the Balancing Mechanism and Capacity Market by an independent aggregator, but not into the wholesale market. If you wanted to trade flexibility on a power exchange, you needed your Supplier to do it. P415 changed this by creating the Virtual Trading Party (VTP) role, allowing aggregators to allocate dispatched flexibility volumes directly to their own Energy Accounts.

The modification was proposed by Enel X and implemented in November 2024. By December, over a dozen VTPs had qualified and registered. The mechanism works: a VTP instructs a customer's asset (an Ohme charger, a battery, an industrial load) to reduce consumption, and the avoided volume is settled against the VTP's account rather than the Supplier's.

The critical design choice in P415 was how to compensate the host Supplier for the commercial impact of losing volume from their meter. Ofgem was presented with two options. The Proposed Solution mutualised the compensation costs across all suppliers. The Alternative Solution made VTPs pay suppliers directly. Ofgem chose mutualisation. That choice is now the contested ground.

Mutualised compensation means the cost of compensating suppliers for VTP-adjusted volumes is spread across all market participants. The P415 impact assessment showed this was justified: the growth in independent flexibility providers and the reduction in peak prices from demand avoided would more than offset the mutualised costs.

The problem is that P415 appears to be used for purposes not originally envisaged. The mechanism was designed for demand-side flexibility, specifically for aggregators dispatching customer assets to reduce consumption at peak times. But the VTP role is defined broadly enough that generators can qualify. If a generator uses the VTP mechanism to shift volumes between accounts, the mutualisation fund pays the compensation, but there is no corresponding system benefit from avoided peak demand.

This is the classic problem with socialised cost recovery. When the cost of an action is borne by everyone and the benefit accrues to the party taking the action, rational participants will exploit the mechanism. The mutualisation fund becomes, in effect, an open subsidy funded by all suppliers and passed through to consumers.

Three modifications were raised in rapid succession in early March 2026, each taking a different approach to the problem.

P509 (Voltalis) proposes a monitoring and safety-net approach. It would introduce a regular quantification process for demand response benefits, using existing market data, and create a surveillance mechanism to identify when DR activations create more costs than benefits. The logic is that if you can measure the net benefit at the individual participant level, you can use existing performance assurance tools (from P504) to investigate parties whose activity is net-negative. P509 does not change the compensation mechanism itself. It adds oversight.

P510 (Flexitricity) proposes replacing mutualised compensation with direct bilateral compensation. Under P510, a VTP that reduces a customer's demand pays the host Supplier directly for the commercial impact. Conversely, if a VTP increases demand (demand turn-up), the Supplier pays the VTP. This is bidirectional and settled through BSCCo using processes established under P444. P510 removes the mutualisation fund entirely.

P511 (not yet in the change register) proposes removing generators above a certain threshold from the VTP mechanism altogether, directly addressing the unintended use case without changing the compensation structure for genuine demand-side participants.

P509's weakness is that monitoring is not the same as fixing. A complicated counterfactual applied as a sanction could be easily challenged by anyone motivated to exploit the mechanism. Measuring whether a specific VTP activation was net-beneficial requires constructing a hypothetical market outcome without that activation, which is precisely the kind of administered calculation that market mechanisms exist to avoid. P509 would work better as a market-wide monitoring tool feeding into P504's performance assurance framework than as a per-participant enforcement mechanism.

P510's weakness is that direct compensation requires an administered reference price to calculate what the Supplier lost. That reference price creates its own incentive distortions. It could lead flexibility providers to prefer importing power from the grid over using self-generated solar, because the reference price does not distinguish between the source of the avoided consumption. It changes incentives based on bulk wholesale price movements or seasonal price changes rather than the current supply-demand curve. Direct compensation is cleaner in principle but fragile in implementation, because the reference price becomes a policy lever that can be gamed.

P511 is the simplest intervention: if generators are exploiting the mechanism, exclude generators. The difficulty is drawing the line. A battery behind a solar farm is both generation and flexibility. A data centre with on-site generation and controllable load is both consumer and generator. Threshold-based eligibility rules create boundary effects that sophisticated participants will structure around.

P510 is the one that changes the architecture. If Ofgem approves direct compensation, it replaces the foundational design choice in P415. The assessment consultation opens in June 2026, with a final modification report expected by October 2026. The reference price methodology will be the contested ground.

P509 and P511 are patches. P509 adds monitoring without changing the mechanism. P511 excludes a category of participant without addressing why the mechanism is exploitable. Both may be implemented faster (P511 has requested Urgent status) but neither resolves the structural question of whether mutualisation is the right cost allocation method for VTP compensation.

The underlying tension is between growing the independent flexibility market (which requires low barriers to entry and socialised costs during the growth phase) and preventing exploitation (which requires either direct cost allocation or eligibility restrictions). P415's impact assessment assumed the former would dominate. The market's response suggests the latter is arriving faster than expected.

Dena Barasi (E.ON) has compared P415's mutualisation to embedded benefits, arguing that restricting mutualisation to some participants and not others (as P511 proposes) is itself discriminatory. Her position is that only removing mutualisation entirely (P510 or equivalent) addresses the structural problem. This framing, that mutualisation is inherently a subsidy rather than a transitional growth mechanism, may shape Ofgem's approach to the urgency decisions.