An Institutional Frame to Compare Alternative Market Designs in EU Electricity Balancing
AbstractThe so-called “electricity wholesale market” is, in fact, a sequence of several markets. The chain is closed with a provision for “balancing,” in which energy from all wholesale markets is balanced under the authority of the Transmission Grid Manager (TSO in Europe, ISO in the United States). In selecting the market design, engineers in the European Union have traditionally preferred the technical role of balancing mechanisms as “security mechanisms.” They favour using penalties to restrict the use of balancing energy by market actors. While our paper in no way disputes the importance of grid security, nor the competency of engineers to elaborate the technical rules, we wish to attract attention to the real economic consequences of alternative balancing designs. We propose a numerical simulation in the framework of a two-stage equilibrium model. This simulation allows us to compare the economic properties of designs currently existing within the European Union and to measure their fallout. It reveals that balancing designs, which are typically presented as simple variants on technical security, are in actuality alternative institutional frameworks having at least four potential economic consequences: a distortion of the forward price; an asymmetric shift in the participants’ profits; an increase in the System Operator’s revenues; and inefficiencies.
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Bibliographic InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0724.
Date of creation: May 2007
Date of revision:
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Web page: http://www.econ.cam.ac.uk/index.htm
Electricity Forward Market; Balancing Mechanism; Risk Aversion; Penalty; Institutional Frame; Market Design.;
Other versions of this item:
- Jean Michel Glachant & Marcelo Saguan, 2007. "An Institutional Frame to Compare Alternative Market Designs in e U Electricity Balancing," Working Papers 0701, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
- L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
- L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-05-19 (All new papers)
- NEP-EEC-2007-05-19 (European Economics)
- NEP-ENE-2007-05-19 (Energy Economics)
- NEP-MIC-2007-05-19 (Microeconomics)
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