Abstract
We present an integrated market model which considers the dependencies between the wholesale market and the highly regulated balancing power markets. This fosters the understanding of the mechanisms of these markets and, thus, allows the evaluation of the designs of these markets and their interplay. In contrast to existing literature, in our model the prices on the different markets are interdependent and endogenously determined, which also applies to the switch from inframarginal suppliers to extramarginal suppliers. Linked to this, the implementation of a specific assignment of the suppliers to the different markets is according to their production costs and their ability to provide balancing power. We prove the existence of a market equilibrium, analyze its outcome and contrast this with German market data. Based on this model, we assess design changes, partly stipulated by recent European regulation. This includes uniform pricing as a common settlement rule (effect: no truthful bidding in general), standardized prequalification criteria (promising measure for cost reduction), market flexibilization via “free energy bids” (no increased competition) and the alternative score “mixed-price rule” (no effect on the equilibrium).
Highlights
To ensure a proper working of the electricity system, ancillary services are used
We present an integrated market model which considers the dependencies between the wholesale market and the highly regulated balancing power markets
We prove the existence of a market equilibrium, analyze its outcome and contrast this with German market data
Summary
To ensure a proper working of the electricity system, ancillary services are used. The most important short-term service is balancing power ( abbreviated as BP, see Appendix1): it balances demand and supply deviations in real-time. In Europe, the “Electricity Balancing Guideline” states the framework conditions for a pan-European BP market with a harmonized structure (European Commission 2017a) This includes a harmonized settlement rule (uniform pricing) to incentivize truthful bidding and increase efficiency, and market flexibilization (“free energy bids”) to ease the integration of volatile renewable energy sources. Chao and Wilson (2002) show that a scoring rule consisting only of the capacity bid suffices the efficiency condition if incentive compatibility is imposed The latter yields that suppliers energy bids reveal their variable cost, and energy bids are paid the wholesale market price. They argue that a switch from pay-as-bid to uniform pricing ensures efficient activation We relate to these contributions and present an equilibrium model for the wholesale and BP markets, considering different scoring and settlement rules..
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