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Remuneration of Flexibility using Operating Reserve Demand Curves: A Case Study of Belgium

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  • Anthony Papavasiliou
  • Yves Smeers

Abstract

Flexibility is becoming an increasingly important attribute of conventional generators due to the challenges imposed by the unpredictable, highly variable and non-controllable nature of renewable supply. Paradoxically, flexible units are currently being mothballed or retired in Europe due to financial losses. We investigate an energy-only market design, referred to as operating reserve demand curves, that rewards flexibility by adjusting the real-time energy price to a level that reflects the value of capacity under conditions of scarcity. We test the performance of the mechanism by developing a model of the Belgian electricity market, which is validated against the historical outcomes of the market over a study period of 21 months. We verify that (i) based on the observed market outcomes of our study period, none of the existing combined cycle gas turbines of the Belgian market can cover their investment costs, and (ii) the introduction of price adders that reflect the true value of scarce flexible capacity restores economic viability for most combined cycle gas turbines in the Belgian market.

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  • Anthony Papavasiliou & Yves Smeers, 2017. "Remuneration of Flexibility using Operating Reserve Demand Curves: A Case Study of Belgium," The Energy Journal, International Association for Energy Economics, vol. 0(Number 6).
    • Handle: RePEc:aen:journl:ej38-6-papavasiliou
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    References listed on IDEAS

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    2. Le Cadre, Hélène & Mezghani, Ilyès & Papavasiliou, Anthony, 2019. "A game-theoretic analysis of transmission-distribution system operator coordination," European Journal of Operational Research, Elsevier, vol. 274(1), pages 317-339.
    3. Daraeepour, Ali & Patino-Echeverri, Dalia & Conejo, Antonio J., 2019. "Economic and environmental implications of different approaches to hedge against wind production uncertainty in two-settlement electricity markets: A PJM case study," Energy Economics, Elsevier, vol. 80(C), pages 336-354.
    4. Chyong, C. & Pollitt, M. & Cruise, R., 2019. "Can wholesale electricity prices support “subsidy-free” generation investment in Europe?," Cambridge Working Papers in Economics 1955, Faculty of Economics, University of Cambridge.
    5. Bajo-Buenestado, Raúl, 2021. "Operating reserve demand curve, scarcity pricing and intermittent generation: Lessons from the Texas ERCOT experience," Energy Policy, Elsevier, vol. 149(C).
    6. David P. Brown & Andrew Eckert & Douglas Silveira, 2023. "Strategic interaction between wholesale and ancillary service markets," Competition and Regulation in Network Industries, , vol. 24(4), pages 174-198, December.
    7. Cartuyvels, Jacques & Papavasiliou, Anthony, 2022. "Calibration of Operating Reserve Demand Curves using Monte Carlo Simulations," LIDAM Discussion Papers CORE 2022009, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    8. Tsaousoglou, Georgios & Petsinis, Konstantinos & Makris, Prodromos & Skoteinos, Iraklis & Efthymiopoulos, Nikolaos & Varvarigos, Emmanouel, 2021. "A shortage pricing mechanism for capacity remuneration with simulation for the Greek electricity balancing market," Utilities Policy, Elsevier, vol. 71(C).
    9. Stover, Oliver & Karve, Pranav & Mahadevan, Sankaran, 2023. "Reliability and risk metrics to assess operational adequacy and flexibility of power grids," Reliability Engineering and System Safety, Elsevier, vol. 231(C).
    10. Lasantha Meegahapola & Pierluigi Mancarella & Damian Flynn & Rodrigo Moreno, 2021. "Power system stability in the transition to a low carbon grid: A techno‐economic perspective on challenges and opportunities," Wiley Interdisciplinary Reviews: Energy and Environment, Wiley Blackwell, vol. 10(5), September.
    11. Maria Kannavou & Marilena Zampara & Pantelis Capros, 2019. "Modelling the EU Internal Electricity Market: The PRIMES-IEM Model," Energies, MDPI, vol. 12(15), pages 1-28, July.
    12. Mou, Yuting & Papavasiliou, Anthony & Hartz, Katharina & Dusolt, Alexander & Redl, Christian, 2023. "An analysis of shortage pricing and capacity remuneration mechanisms on the pan-European common energy market," Energy Policy, Elsevier, vol. 183(C).
    13. Neuhoff, Karsten & Richstein, Jörn C. & Kröger, Mats, 2023. "Reacting to changing paradigms: How and why to reform electricity markets," Energy Policy, Elsevier, vol. 180(C).
    14. Karsten Neuhoff & Jörn C. Richstein & Mats Kröger, 2023. "Reacting to Changing Paradigms: How and Why to Reform Electricity Markets," DIW Berlin: Politikberatung kompakt, DIW Berlin, German Institute for Economic Research, volume 127, number pbk189, September.

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