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Appropriate Contract Durations in the German Markets for On-line Reserve Capacity

Author

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  • Sebastian Just

    () (Chair for Management Sciences and Energy Economics, University of Duisburg-Essen)

Abstract

This paper explores the economic implications of different contract durations in markets for on-line (primary and secondary) reserve capacity in Germany with the crucial feature of separate markets for spot energy and reserve capacity provision. The analysis is based on an equilibrium model developed by Just and Weber (2008) for reserve markets. It reveals the implicit trade-off for the bidders and interdependencies between the reserve and the spot markets. The results clearly show that shorter periods (with resulting lower variations in overall electricity demand) lead to more efficient dispatch and market results. Not only prices in the reserve capacity markets are expected to be lower, but also spot market prices. As these benefits can be partially reaped by owners of large generation portfolios also under longer contract durations, it discriminates smaller generation companies and can potentially deter market participation. Further, the paper discusses security concerns against shorter contract durations. It is shown that the opportunity costs character of the reserve market implies sufficient incentives for supplying online reserve capacity. The concerns do not appear to be predominant and it should be possible to manage them appropriately.

Suggested Citation

  • Sebastian Just, 2010. "Appropriate Contract Durations in the German Markets for On-line Reserve Capacity," EWL Working Papers 1002, University of Duisburg-Essen, Chair for Management Science and Energy Economics, revised Aug 2010.
  • Handle: RePEc:dui:wpaper:1002
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    File URL: http://www.wiwi.uni-due.de/fileadmin/fileupload/BWL-ENERGIE/Arbeitspapiere/RePEc/pdf/wp1002_Just_ContractDurations_2010_08_16.pdf
    File Function: First version, 2010
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    References listed on IDEAS

    as
    1. Stirling, Andrew, 1994. "Diversity and ignorance in electricity supply investment : Addressing the solution rather than the problem," Energy Policy, Elsevier, vol. 22(3), pages 195-216, March.
    2. Fabien A. Roques & William J. Nuttall & David M. Newbery & Richard de Neufville & Stephen Connors, 2006. "Nuclear Power: A Hedge against Uncertain Gas and Carbon Prices?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 1-24.
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    Cited by:

    1. Hirth, Lion & Ziegenhagen, Inka, 2015. "Balancing power and variable renewables: Three links," Renewable and Sustainable Energy Reviews, Elsevier, vol. 50(C), pages 1035-1051.
    2. Chaves-Ávila, José Pablo & van der Veen, Reinier A.C. & Hakvoort, Rudi A., 2014. "The interplay between imbalance pricing mechanisms and network congestions – Analysis of the German electricity market," Utilities Policy, Elsevier, vol. 28(C), pages 52-61.

    More about this item

    Keywords

    electricity markets; contract duration; power systems reserve; ancillary service; primary reserve; secondary reserve; spinning reserve; opportunity costs; equilibrium model;

    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • D41 - Microeconomics - - Market Structure, Pricing, and Design - - - Perfect Competition
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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