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An Institutional Frame to Compare Alternative Market Designs in e U Electricity Balancing

  • Jean Michel Glachant
  • Marcelo Saguan

The so-called “electricity wholesale market” is, in fact, a sequence of several markets. The chain is closed with a provision for “balancing,” in which energy from all wholesale markets is balanced under the authority of the Transmission Grid Manager (TSO in Europe, ISO in the United States). In selecting the market design, engineers in the European Union have traditionally preferred the technical role of balancing mechanisms as “security mechanisms.” They favour using penalties to restrict the use of balancing energy by market actors. While our paper in no way disputes the importance of grid security, nor the competency of engineers to elaborate the technical rules, we wish to attract attention to the real economic consequences of alternative balancing designs. We propose a numerical simulation in the framework of a two-stage equilibrium model. This simulation allows us to compare the economic properties of designs currently existing within the European Union and to measure their fallout. It reveals that balancing designs, which are typically presented as simple variants on technical security, are in actuality alternative institutional frameworks having at least four potential economic consequences: a distortion of the forward price; an asymmetric shift in the participants’ profits; an increase in the System Operator’s revenues; and inefficiencies.

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Paper provided by Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research in its series Working Papers with number 0701.

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Date of creation: Jan 2007
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Handle: RePEc:mee:wpaper:0701
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  1. Joskow, P. & Tirole, J., 2004. "Reliability and Competitive Electricity Markets," Cambridge Working Papers in Economics 0450, Faculty of Economics, University of Cambridge.
  2. SMEERS, Yves, 2005. "How well can one measure market power in restructured electricity systems ?," CORE Discussion Papers 2005050, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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