A Refined Bid Stack Model for the Multi-Technology Merit Order of Electricity Markets

Abstract

In this paper, we present an analytical bid stack model for the electricity market which is extended to the case of an arbitrary number N of technology classes embedded in the production stack (esp. for N > 2). As bid stack model, the proposed framework represents a structural model that considers a range of heat rates per technology class rather than a single heat rate. We give an explicit formula for the electricity spot price as a function of random variables like residual load, available production capacity, as well as marginal production costs per technology class including the full technology switch dynamics. Additionally, deviations from the marginal cost price level in the form of a scarcity function are included. Assuming normal or log-normal marginal cost price dynamics, closed form expressions for expectation values of the electricity spot price and for European option premiums written on the electricity spot are derived.