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Harmonization of the European balancing power auction: A game-theoretical and empirical investigation

Author

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  • Ocker, Fabian
  • Ehrhart, Karl-Martin
  • Belica, Matej

Abstract

The shift towards renewable energies is accompanied by great volatility on the supply side, demanding European-wide instead of national balancing services. For the integrated European procurement of balancing reserves, the European Commission proposes a multi-attributive auction mechanism which is very similar to the current German auction. The key difference, however, is a switch from pay-as-bid to uniform pricing. We develop a game-theoretical model of the current German and the future European balancing market design. Both market designs have desirable economic properties in their one-shot version, i.e., an efficient auction outcome and competitive prices. We show that a switch to uniform pricing does not induce bidders to report their true costs in their bids, but leads to underbidding. We contrast the equilibrium outcomes with German market data and find a substantial discrepancy, i.e., non-competitive prices. We provide a game-theoretical grounded explanation that is based on the regular repetition of the auction combined with the invariant supplier side.

Suggested Citation

  • Ocker, Fabian & Ehrhart, Karl-Martin & Belica, Matej, 2018. "Harmonization of the European balancing power auction: A game-theoretical and empirical investigation," Energy Economics, Elsevier, vol. 73(C), pages 194-211.
    • Handle: RePEc:eee:eneeco:v:73:y:2018:i:c:p:194-211
    DOI: 10.1016/j.eneco.2018.05.003
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    Citations

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    Cited by:

    1. Papavasiliou, Anthony & Cartuyvels, Jacques & Bertrand, Gilles & Marien, Alain, 2023. "Implementation of scarcity pricing without co-optimization in European energy-only balancing markets," Utilities Policy, Elsevier, vol. 81(C).
    2. Furtwängler, Christian & Weber, Christoph, 2019. "Spot and reserve market equilibria and the influence of new reserve market participants," Energy Economics, Elsevier, vol. 81(C), pages 408-421.
    3. Merten, Michael & Olk, Christopher & Schoeneberger, Ilka & Sauer, Dirk Uwe, 2020. "Bidding strategy for battery storage systems in the secondary control reserve market," Applied Energy, Elsevier, vol. 268(C).
    4. Nitsch, Felix & Deissenroth-Uhrig, Marc & Schimeczek, Christoph & Bertsch, Valentin, 2021. "Economic evaluation of battery storage systems bidding on day-ahead and automatic frequency restoration reserves markets," Applied Energy, Elsevier, vol. 298(C).
    5. Poplavskaya, Ksenia & de Vries, Laurens, 2019. "Distributed energy resources and the organized balancing market: A symbiosis yet? Case of three European balancing markets," Energy Policy, Elsevier, vol. 126(C), pages 264-276.
    6. Fabian Ocker & Karl‐Martin Ehrhart & Marion Ott, 2018. "Bidding strategies in Austrian and German balancing power auctions," Wiley Interdisciplinary Reviews: Energy and Environment, Wiley Blackwell, vol. 7(6), November.
    7. Schillinger, Moritz, 2019. "Balancing Market Design and Opportunity Cost - The Swiss Case," Working papers 2019/14, Faculty of Business and Economics - University of Basel.
    8. 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).
    9. Emil Kraft & Dogan Keles & Wolf Fichtner, 2020. "Modeling of frequency containment reserve prices with econometrics and artificial intelligence," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(8), pages 1179-1197, December.
    10. Karl-Martin Ehrhart & Fabian Ocker, 2021. "Design and regulation of balancing power auctions: an integrated market model approach," Journal of Regulatory Economics, Springer, vol. 60(1), pages 55-73, August.
    11. Felix Röben & Hans Schäfers & Anna Meißner & Jerom de Haan, 2021. "Smart Balancing of Electrical Power in Germany: Fuzzy Logic Model to Simulate Market Response," Energies, MDPI, vol. 14(8), pages 1-25, April.
    12. Prakash, Abhijith & Bruce, Anna & MacGill, Iain, 2022. "Insights on designing effective and efficient frequency control arrangements from the Australian National Electricity Market," Renewable and Sustainable Energy Reviews, Elsevier, vol. 161(C).
    13. Lopez, A. & Ogayar, B. & Hernández, J.C. & Sutil, F.S., 2020. "Survey and assessment of technical and economic features for the provision of frequency control services by household-prosumers," Energy Policy, Elsevier, vol. 146(C).
    14. Eicke, Anselm & Ruhnau, Oliver & Hirth, Lion, 2021. "Electricity balancing as a market equilibrium: An instrument-based estimation of supply and demand for imbalance energy," Energy Economics, Elsevier, vol. 102(C).
    15. Schillinger, Moritz & Weigt, Hannes, 2019. "Bidding into balancing markets in a hydro-dominated electricity system," Working papers 2019/13, Faculty of Business and Economics - University of Basel.

    More about this item

    Keywords

    Balancing power; Bidding behavior; Market design; Repeated auctions; Reserve power;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • D2 - Microeconomics - - Production and Organizations
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy

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