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Effect of market design on strategic bidding behavior: Model-based analysis of European electricity balancing markets

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  • Poplavskaya, Ksenia
  • Lago, Jesus
  • de Vries, Laurens

Abstract

Market-based procurement of balancing services in Europe is prone to strategic bidding due to the relatively small market size and a limited number of providers. In the European Union, balancing markets are undergoing substantial regulatory changes driven the efforts to harmonize the market design and better align it with the goals of the energy transition. It is proposed to decouple the balancing energy (real-time) market from the (forward) balancing capacity market and the price of balancing energy will be based on the marginal bid. In this paper, the potential effects of these changes on market participants’ strategies are analyzed using an agent-based model. This model compares the effects of a standalone balancing energy market with different pricing rules on economic efficiency with agents that apply naïve, rule-based and reinforcement-learning strategies. The results indicate that the introduction of a standalone balancing energy market reduces the cost of balancing, even in a concentrated market with strategic bidders. Marginal pricing consistently leads to lower weighted average prices than pay-as-bid pricing, regardless of the level of competition. Nevertheless, in an oligopoly with actors bidding strategically, prices can deviate from the competitive benchmark by a factor of 4–5. This implies that the introduction of a standalone balancing energy market does not entirely solve the issue of strategic bidding, but helps dampen the prices, as compared to the balancing market prior to the design change.

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  • Poplavskaya, Ksenia & Lago, Jesus & de Vries, Laurens, 2020. "Effect of market design on strategic bidding behavior: Model-based analysis of European electricity balancing markets," Applied Energy, Elsevier, vol. 270(C).
    • Handle: RePEc:eee:appene:v:270:y:2020:i:c:s0306261920306425
    DOI: 10.1016/j.apenergy.2020.115130
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    10. Fang, Xin & Cui, Hantao & Du, Ershun & Li, Fangxing & Kang, Chongqing, 2021. "Characteristics of locational uncertainty marginal price for correlated uncertainties of variable renewable generation and demands," Applied Energy, Elsevier, vol. 282(PA).
    11. Cartuyvels, Jacques & Bertrand, Gilles & Papavasiliou, Anthony, 2023. "Market Equilibria in Cross-Border Balancing Platforms," LIDAM Discussion Papers CORE 2023009, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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    14. Zhongfu Tan & Jiacheng Yang & Fanqi Li & Haochen Zhao & Xudong Li, 2022. "Cooperative Operation Model of Wind Turbine and Carbon Capture Power Plant Considering Benefit Distribution," Sustainability, MDPI, vol. 14(18), pages 1-21, September.
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