Market Design Options for Scarcity Pricing in European Balancing Markets

Anthony Papavasiliou,Gilles Bertrand

doi:10.1109/tpwrs.2021.3058414

Anthony Papavasiliou, Gilles Bertrand

Open Access

https://doi.org/10.1109/tpwrs.2021.3058414

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Abstract

The European balancing market is undergoing radical transformation through numerous market design initiatives. These initiatives aim at improving geographical coordination among European transmission system operators, and better positioning the European system for integrating renewable resources through short-term operational efficiency and long-term investment in flexible resources. However, the European design is characterized by a missing market for real-time reserve capacity, that has been inherited from a failure to recognize the central role of real-time operations as the spot market of the electric power industry. This missing market undermines the valuation of reserve capacity, and the back-propagation of price signals to forward reserve markets that can support investment in reserves. The goal of the present paper is to develop a methodology that exposes the implications of this missing market. The methodology relies on analytical insights that can be derived under an assumption of price-taking behavior. These insights are validated by a simulation model which represents the European balancing market as a Markov Decision Process. The simulation model is used for validating the analytical insights and testing the ability of various balancing market design options to back-propagate the real-time value of reserve to forward reserve markets.

Highlights

We propose an analytical framework for analyzing European balancing markets which we supplement by an Markov Decision Process (MDP)-based market simulator
It is impossible to enforce ai = 0, since agents are in control of their private assets, and since the net demand forecast of a portfolio is private information that the TSO cannot audit [1]. 3) Three-Stage MDPs: In order to model the backpropagation of the value of reserve to forward reserve capacity auctions, we introduce a uniform-price auction for reserve capacity
We present a methodology for analyzing the European balancing market based on an analytical derivation of optimal bidding under perfect competition assumptions, accompanied by an MDP-based simulation

Summary

Introduction

T HE European balancing market has been undergoing significant transformation in recent years, due to various coordinated balancing initiatives. These initiatives include integrated market clearing platforms for replacement reserve (abbreviated RR, “TERRE” initiative), manual frequency restoration reserve (abbreviated mFRR, “MARI” initiative), automatic frequency restoration reserve (abbreviated aFRR, “PICASSO” initiative), imbalance netting (“IGCC” initiative) and the sharing of frequency containment reserve (abbreviated FCR). Manuscript received July 20, 2020; revised January 5, 2021; accepted February 6, 2021. Date of publication February 10, 2021; date of current version August 19, 2021.

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