Abstract
Scarcity pricing is a mechanism for improving the valuation of reserve capacity in real-time electricity markets. The goal of scarcity pricing is to mitigate the missing money problem and enhance investment in flexible resources. The implementation of scarcity pricing is underway in a number of U.S. markets, including Texas and PJM. The implementation is also currently under consideration in Belgium. As the mechanism was originally conceived in the context of a U.S.-style two-settlement system, its implementation in a European setting poses a number of interesting market design dilemmas which can affect the back-propagation of scarcity prices to forward day-ahead markets for energy and reserve capacity. We propose a modeling framework for analyzing these market design choices based on stochastic equilibrium, and use this modeling framework in order to represent and analyze a wide range of market design proposals. We report results on a case study of the Belgian electricity market.
Highlights
Scarcity pricing is the principle of pricing electricity at a value above the marginal cost of the marginal unit during conditions of high system stress, according to the incremental value that flexible capacity offers to the system in terms of keeping loss of load probability in check
The notation here is as follows: VOLL corresponds to the value of lost load, λ is a proxy of the marginal cost of the marginal unit, R is the amount of remaining reserve capacity, and LOLP is the loss of load probability
Getting real-time reserve prices right is a fundamental aspect of sound market design in an environment of large-scale renewable energy integration, where flexible resources are needed for supporting system security
Summary
Scarcity pricing is the principle of pricing electricity at a value above the marginal cost of the marginal unit during conditions of high system stress, according to the incremental value that flexible capacity offers to the system in terms of keeping loss of load probability in check. Through economic arbitrage between generation and reserve capacities in real time and day ahead, scarcity pricing creates the potential of giving rise to a long-term investment signal for building flexible capacity or mobilizing demand response that can deliver security to the system. Numerical analyses of the Belgian market (Papavasiliou and Smeers, 2017; Papavasiliou et al, 2018) have demonstrated the potential of scarcity pricing to restore the financial viability of flexible technologies in Belgium, and to create a strong investment signal for mobilizing demand response. In response to these encouraging indicators about the potential of scarcity pricing to attract flexibility in the Belgian market, the present paper discusses concrete market design measures that would enable scarcity pricing to function effectively in the context of the Belgian market design. On the basis of our analysis, our concrete recommendation to the Belgian regulator is to proceed with the introduction of a real-time market for reserve capacity in Belgium
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