During the last decade, Baltic electricity markets for wholesale trading in the day-ahead and intraday timeframe have been well-integrated with the Nordic power market. However, integration of balancing markets has been started only recently with the launch of the common Baltic balancing market in 2018 in line with the EU-wide trends on establishing regional balancing areas. As the 2025 deadline for synchronisation with the Continental Europe grid approaches, the Baltic transmission system operators have recognised the need to involve more local balancing resources. While currently the remaining Baltic imbalance is covered by regulation within the Integrated/Unified Power System (IPS/UPS) of Russia et al., the demand for balancing reserves will only continue to increase. Additionally, demand for balancing energy is expected to rise due to the growing share of intermittent generation sources. Abovementioned considerations require for increased flexibility of the Latvian power system. This Doctoral Thesis is focussed on improvements of power system flexibility through employment of demand-side resources and optimisation of the overall balancing process. An optimised activation strategy of reserves is proposed which can be part of the Baltic TSOs’ workflow where traditionally only human-based dispatching has been employed. Furthermore, assessment of the operating, planning and economic benefits obtainable from demand response (DR) in the Latvian power system is provided through detailed modelling of a DR-enabled technology for the Latvian case study. Finally, a robust tool for an economic assessment of DR from the end-user point-of-view has been developed. This can be useful for establishing a business case for DR and attracting new market participants to the Baltic balancing market, thus increasing market liquidity and improving the overall system flexibility. Hence, the Doctoral Thesis provides an array of tools and methods on establishing the value of demand response in the Latvian power system. Along with the optimised balancing process, this can aid in improving the flexibility of the Latvian and Baltic power systems.