Efficiency and market power analysis of alternative reserve market design proposals: a case study of Greece

The Greek day-ahead electricity market is currently organized as a sequential clearing of energy followed by a clearing of reserves through a unit-based integrated scheduling process. Inspired by the design of Central and Western Europe, a recent proposal by the Hellenic Transmission System Operator favors transition to a portfolio-based pay-as-bid pricing design where the clearing of the day-ahead reserve market is moved before the clearing of the day-ahead energy market. We discuss the motivations for the proposed redesign and follow a three-pronged approach for analyzing the proposal. Firstly, using a production simulation model of the Greek system, we benchmark the efficiency of the proposal against an idealized design where energy and reserves are co-optimized at the stage of day-ahead market clearing. Secondly, we propose a dominant firm model for analyzing market power in energy and reserves markets and derive analytical insights that can contribute to the ongoing policy debate. Finally, we discuss the current state of affairs in the Greek day-ahead market for reserves. The analysis uncovers significant potential efficiency losses (in the range of 6.6-6.9%, barring intraday and real-time corrections within portfolios) resulting from sequential clearing relative to an idealized co-optimization benchmark as well as concerns about enabling the exercise of market power in the energy and reserves market under either sequential or co-optimized clearing when market concentration is an issue.