The economic impacts of integrating European balancing markets: The case of the newly installed aFRR energy market-coupling platform PICASSO

Abstract

The coupling of European balancing markets is one of the latest steps towards integrating Europe’s internal electricity market. From mid-2022 onwards, besides imbalance netting, the activation of the automated frequency restoration reserves (aFRR) has also been increasingly integrated between European transmission system operators (TSOs) in the so-called PICASSO framework. The possible benefits of this balancing market integration include cost savings and a reduced use of activation energy.The goal of this paper is to quantify the effects of the joint activation of balancing power in European markets in terms of welfare gains and increases in consumer rents due to lower prices. The paper also aims to demonstrate the reduced use of activation energy under the latest market-coordination framework. For this purpose, the coupling of aFRR markets is modelled by formulating and solving the optimisation problems for economic activation using linear programming. A PICASSO market structure with imbalance netting and cross-border activation of reserves is compared to the non-collaborative reference arrangement and to the existing IGCC set-up with imbalance netting only. A case study of the Belgian, Dutch and German electricity systems is modelled over a full year using historic data from 2021. The study indicates overall welfare gains of €400 million per year, the same order of magnitude as the increase in economic welfare of earlier balancing platforms such as TERRE. In addition, the cross-border effects on activation volumes and prices and their distributional effects are discussed. The results suggest that within the three countries, the primary beneficiaries of PICASSO are balancing service providers in the Netherlands and Belgium, and consumers in Germany.