An incentive profit-sharing mechanism for welfare transfer in balancing market integration

Abstract

Due to the rising share of variable renewable energy, balancing market integration (BMI) has been advocated as a promising solution to achieve flexible resource sharing among different regions and enhance the flexibility of the overall power system. However, BMI can result in welfare transfers among regions, which may correspondingly give rise to resistance to integration. Therefore, an incentive mechanism to facilitate flexible resource sharing under BMI is designed in this paper. We first analyse the sources of the benefits of BMI and compare the influence of different market regulation approaches on the welfare transfer effect via a graphical method. Then, based on the Coase theorem, we design an incentive profit-sharing mechanism that is able to optimize the allocation of flexible resources and eliminate welfare transfers among regions to some extent to reduce possible resistance to integration. Case studies based on the three-region system and a realistic northwest power grid in China show that the balancing cost of multi-region systems can be respectively reduced up to 31% and 25%, and the utilization of flexible units can be increased by over 30% by BMI. Finally, corresponding policy implications for BMI are put forward; the proposed mechanism also provides a useful reference and insight for dealing with welfare transfers in interregional trading.