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Electricity balancing as a market equilibrium: Estimating supply and demand of imbalance energy

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  • Eicke, Anselm
  • Ruhnau, Oliver
  • Hirth, Lion

Abstract

Stable power systems require equalizing demand and supply of electricity at short time scales. Such electricity balancing is often understood as a sequential process: exogenous shocks, such as weather events or technical outages, cause system imbalances that system operators close by activating balancing reserves. By contrast, we study electricity balancing as a market where the equilibrium price (imbalance charge) and quantity (system imbalance) are determined endogenously by supply and demand. System operators supply imbalance energy by activating reserves. Market parties that, deliberately or not, deviate from schedules create demand for imbalance energy. When deliberately taking open positions, firms respond to price signals from electricity markets and imbalance charges. Based on this market framework, we estimate the demand curve of imbalance energy, and hence the price responsiveness of market parties to deviate from schedules. To overcome the classical endogeneity problem of price and quantity in the market equilibrium, we deploy instruments that we derive from a novel theoretical framework. Using data from Germany, we find that firms reduce the physical system imbalance by about 2.8 MW for each increase in the imbalance charge by EUR 1 per MWh. This price response is remarkable because such behavior is prohibited. It is, however, beneficial: on average, such strategic deviations reduced the German system imbalance by 20%.

Suggested Citation

  • Eicke, Anselm & Ruhnau, Oliver & Hirth, Lion, 2020. "Electricity balancing as a market equilibrium: Estimating supply and demand of imbalance energy," EconStor Preprints 223062, ZBW - Leibniz Information Centre for Economics.
  • Handle: RePEc:zbw:esprep:223062
    Note: Please cite as: Eicke, Anselm, Oliver Ruhnau & Lion Hirth (2021): “Electricity balancing as a market equilibrium: An instrument-based estimation of supply and demand for imbalance energy”, Energy Economics, https://doi.org/10.1016/j.eneco.2021.105455
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    References listed on IDEAS

    as
    1. Lijesen, Mark G., 2007. "The real-time price elasticity of electricity," Energy Economics, Elsevier, vol. 29(2), pages 249-258, March.
    2. Francesco Lisi and Enrico Edoli, 2018. "Analyzing and Forecasting Zonal Imbalance Signs in the Italian Electricity Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 5).
    3. Koch, Christopher & Hirth, Lion, 2019. "Short-term electricity trading for system balancing: An empirical analysis of the role of intraday trading in balancing Germany's electricity system," Renewable and Sustainable Energy Reviews, Elsevier, vol. 113(C), pages 1-1.
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    Cited by:

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    More about this item

    Keywords

    Electricity balancing; Intraday electricity market; Imbalance energy; Arbitrage trading;
    All these keywords.

    JEL classification:

    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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