Scarcity pricing and the missing European market for real-time reserve capacity

Abstract

Scarcity pricing is a valuable step towards the evolution of electricity markets that rely increasingly on reserves for enabling the large-scale penetration of renewable resources. A real-time market for reserve capacity is essential in the implementation of scarcity pricing, in order to enable the back-propagation of the value of reserve capacity to forward markets for energy and reserve. Such a market for real-time reserve capacity does not exist currently in Europe. Consequently, the existing design of the European balancing market creates challenges for the valuation of reserves. We argue that the implementation of a real-time market for reserve capacity can be aligned with European legislation, and we describe how scarcity pricing based on operating reserve demand curves can be integrated in such a design. We discuss the ongoing scarcity pricing debate in Belgium, and highlight various implementation challenges.