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Implementation of scarcity pricing without co-optimization in European energy-only balancing markets

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  • Papavasiliou, Anthony
  • Cartuyvels, Jacques
  • Bertrand, Gilles
  • Marien, Alain

Abstract

The implementation of scarcity pricing is underway in the Belgian balancing market. The market design proposed in this paper aims at transposing the first principles of scarcity pricing theory to the boundary conditions of European balancing markets. One relevant boundary condition is the absence of real-time co-optimization of energy and reserves in Europe. As international experience demonstrates, the fact that energy and reserves are not co-optimized in balancing markets does not preclude the implementation of scarcity pricing. The mechanism can be implemented implicitly, and a concrete path has been proposed in the context of the Belgian balancing market. The Belgian design proposal, which is based on the implicit trading of reserve in real time, has raised questions related to financial implications for market stakeholders, the pricing of multiple reserve products, cross-border interactions, the financing of the mechanism, compatibility with EU law, and the coexistence of the proposed mechanism with capacity markets. We attempt to address these questions in the present work by drawing comparisons between the explicit co-optimization of energy and reserves and the implicit trading of reserve capacity.

Suggested Citation

  • 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).
    • Handle: RePEc:eee:juipol:v:81:y:2023:i:c:s0957178722001527
    DOI: 10.1016/j.jup.2022.101488
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    References listed on IDEAS

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    1. Peter Cramton & Steven Stoft, 2006. "The Convergence of Market Designs for Adequate Generating Capacity," Papers of Peter Cramton 06mdfra, University of Maryland, Department of Economics - Peter Cramton, revised 2006.
    2. Cramton, Peter & Stoft, Steven, 2005. "A Capacity Market that Makes Sense," The Electricity Journal, Elsevier, vol. 18(7), pages 43-54.
    3. Fabra, Natalia, 2018. "A primer on capacity mechanisms," Energy Economics, Elsevier, vol. 75(C), pages 323-335.
    4. Cartuyvels, Jacques & Papavasiliou, Anthony, 2022. "Calibration of Operating Reserve Demand Curves Using a System Operation Simulator," LIDAM Reprints CORE 3208, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. 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.
    6. Zarnikau, J. & Zhu, S. & Woo, C.K. & Tsai, C.H., 2020. "Texas's operating reserve demand curve's generation investment incentive," Energy Policy, Elsevier, vol. 137(C).
    7. William W. Hogan, 2013. "Electricity Scarcity Pricing Through Operating Reserves," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 2).
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    Cited by:

    1. David P. Brown & Andrew Eckert & Douglas Silveira, 2023. "Strategic interaction between wholesale and ancillary service markets," Competition and Regulation in Network Industries, , vol. 24(4), pages 174-198, December.
    2. 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).
    3. Mou, Yuting & Papavasiliou, Anthony & Hartz, Katharina & Dusolt, Alexander & Redl, Christian, 2023. "An analysis of shortage pricing and capacity remuneration mechanisms on the pan-European common energy market," Energy Policy, Elsevier, vol. 183(C).

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