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Pricing of reserves: Valuing system reserve capacity against spot prices in electricity markets

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  • Just, Sebastian
  • Weber, Christoph

Abstract

This paper models the interdependencies between markets for secondary reserve capacity and spot electricity to derive the pricing of reserves under equilibrium conditions. Starting with the indifference condition between offering in both markets, the reservation price is derived from the opportunity cost consideration and the unit commitment conditions in a fundamental interrelated market framework. The reserve market examined compares widely to the German market for secondary reserves, but the general approach may also be used to investigate other reserve markets. The approach explores and formalizes the influence of reserve capacity on the spot market supply function. A numerical solution procedure is provided to this non-trivial case of market interaction. The model is used to estimate the expected reservation price development over the last years in Germany.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Economics.

Volume (Year): 30 (2008)
Issue (Month): 6 (November)
Pages: 3198-3221

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Handle: RePEc:eee:eneeco:v:30:y:2008:i:6:p:3198-3221

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Web page: http://www.elsevier.com/locate/eneco

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Keywords: Electricity markets Ancillary service Secondary reserve Spinning reserve Opportunity costs Equilibrium model;

References

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  1. Federico, Giulio & Rahman, David, 2003. "Bidding in an Electricity Pay-as-Bid Auction," Journal of Regulatory Economics, Springer, vol. 24(2), pages 175-211, September.
  2. Natalia Fabra & Nils-Henrik von der Fehr & David Harbord, 2002. "Designing Electricity Auctions," Microeconomics, EconWPA 0211017, EconWPA, revised 31 Aug 2003.
  3. Hirst, Eric, 2000. "Maximizing Generator Profits across Energy and Ancillary-Services Markets," The Electricity Journal, Elsevier, Elsevier, vol. 13(5), pages 61-69, June.
  4. Chao, Hung-Po & Wilson, Robert, 2002. "Multi-dimensional Procurement Auctions for Power Reserves: Robust Incentive-Compatible Scoring and Settlement Rules," Journal of Regulatory Economics, Springer, vol. 22(2), pages 161-83, September.
  5. Kamat, Rajnish & Oren, Shmuel S, 2002. "Rational Buyer Meets Rational Seller: Reserves Market Equilibria under Alternative Auction Designs," Journal of Regulatory Economics, Springer, vol. 21(3), pages 247-88, May.
  6. Swider, Derk J. & Weber, Christoph, 2007. "Bidding under price uncertainty in multi-unit pay-as-bid procurement auctions for power systems reserve," European Journal of Operational Research, Elsevier, Elsevier, vol. 181(3), pages 1297-1308, September.
  7. Spinler, Stefan & Huchzermeier, Arnd, 2006. "The valuation of options on capacity with cost and demand uncertainty," European Journal of Operational Research, Elsevier, Elsevier, vol. 171(3), pages 915-934, June.
  8. Creti, Anna & Fabra, Natalia, 2007. "Supply security and short-run capacity markets for electricity," Energy Economics, Elsevier, Elsevier, vol. 29(2), pages 259-276, March.
  9. Raineri, R. & Rios, S. & Schiele, D., 2006. "Technical and economic aspects of ancillary services markets in the electric power industry: an international comparison," Energy Policy, Elsevier, vol. 34(13), pages 1540-1555, September.
  10. Kirsch, Laurence D. & Singh, Harry, 1995. "Pricing ancillary electric power services," The Electricity Journal, Elsevier, Elsevier, vol. 8(8), pages 28-36, October.
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Citations

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Cited by:
  1. Sven Heim & Georg Götz, 2013. "Do pay-as-bid auctions favor collusion? - Evidence from Germany’s market for reserve power," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 201324, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  2. Nicolosi, Marco, 2010. "Wind power integration and power system flexibility-An empirical analysis of extreme events in Germany under the new negative price regime," Energy Policy, Elsevier, vol. 38(11), pages 7257-7268, November.
  3. Sebastian Just & Christoph Weber, 2012. "Strategic Behavior in the German Balancing Energy Mechanism: Incentives, Evidence, Costs and Solutions," EWL Working Papers 1204, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Oct 2012.
  4. Richter, Jan, 2011. "A Unique Competitive Equilibrium on Interdependent Spot Electricity and Reserve Capacity Markets," EWI Working Papers, Energiewirtschaftliches Institut an der Universitaet zu Koeln 2011-9, Energiewirtschaftliches Institut an der Universitaet zu Koeln.
  5. Loisel, Rodica & Mercier, Arnaud & Gatzen, Christoph & Elms, Nick & Petric, Hrvoje, 2010. "Valuation framework for large scale electricity storage in a case with wind curtailment," Energy Policy, Elsevier, vol. 38(11), pages 7323-7337, November.
  6. Weber, Christoph, 2010. "Adequate intraday market design to enable the integration of wind energy into the European power systems," Energy Policy, Elsevier, vol. 38(7), pages 3155-3163, July.
  7. Sebastian Just, 2011. "Appropriate contract durations in the German markets for on-line reserve capacity," Journal of Regulatory Economics, Springer, vol. 39(2), pages 194-220, April.

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