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

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  • Jean Michel Glachant
  • Marcelo Saguan

Abstract

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.

Suggested Citation

  • Jean Michel Glachant & Marcelo Saguan, 2007. "An Institutional Frame to Compare Alternative Market Designs in e U Electricity Balancing," Working Papers 0701, Massachusetts Institute of Technology, Center for Energy and Environmental Policy Research.
  • Handle: RePEc:mee:wpaper:0701
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    References listed on IDEAS

    as
    1. Paul Joskow & Jean Tirole, 2007. "Reliability and competitive electricity markets," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 60-84, March.
    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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    Cited by:

    1. Rious, Vincent & Glachant, Jean-Michel & Perez, Yannick & Dessante, Philippe, 2008. "The diversity of design of TSOs," Energy Policy, Elsevier, vol. 36(9), pages 3323-3332, September.
    2. Eva Niesten & Albert Jolink, 2014. "Absence of a market in the Dutch balancing mechanism: European rules versus specific investments," European Journal of Law and Economics, Springer, vol. 38(1), pages 71-90, August.
    3. Roques, Fabien A., 2008. "Market design for generation adequacy: Healing causes rather than symptoms," Utilities Policy, Elsevier, vol. 16(3), pages 171-183, September.
    4. Vandezande, Leen & Meeus, Leonardo & Belmans, Ronnie & Saguan, Marcelo & Glachant, Jean-Michel, 2010. "Well-functioning balancing markets: A prerequisite for wind power integration," Energy Policy, Elsevier, vol. 38(7), pages 3146-3154, July.
    5. Gro Klaeboe & Anders Lund Eriksrud & Stein-Erik Fleten, 2013. "Benchmarking time series based forecasting models for electricity balancing market prices," Working Papers 2013-006, The George Washington University, Department of Economics, Research Program on Forecasting.

    More about this item

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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