Analysis of Integrated Balancing Markets in Northern Europe under Different Market Design Options

Abstract

In an electric power system, the instantaneous balance between demand and supply must always be maintained. Due to the inherent stochasticity of certain types of generation sources and demand, as well as contingencies in the power system, imbalances occur. Hence, corrective actions are required to continuously keep the system in a balanced state. For this, the system needs reserve generation capacity with a set of desired technical characteristics such as fast ramp up speed and short startup time. By making use of market mechanisms, the System Operator ensures the availability of enough reserve capacity ahead of time and activates the resources in response to system imbalances in real-time in a setting called balancing market. An integrated European electricity market is expected to increase the efficiency, overall welfare, competition, and security of supply. With this understanding, the day-ahead market in Europe has undergone integration efforts with the long-term goal of establishing a single European electricity market. Integration of the balancing market is also expected to bring a socio-economic benefit. This is due to the sharing of balancing resources and the reduction of required balancing actions by netting of imbalances in adjacent areas. However, prior to the realization of a fully integrated balancing market, balancing market variables such as gate closure times, remuneration mechanisms, and the contract periods have to be harmonized first. This PhD work assumes that these variables are in place in the mathematical formulations and the associated results. The main objective of this thesis is the modeling of integrated reserve procurement and balancing energy markets in a setting similar to the current sequential market clearance order in Europe. The models are used to analyze the impact of balancing market integration in the current European electricity market settings and allow the comparison of different market designs. To assess the impact of balancing market integration, optimization models addressing cross-border reserve procurement and balancing energy market integration are developed. The first one is composed of three interdependent blocks: Reserve bidding price determination, reserve procurement, and day-ahead market clearance. The other one is a formulation for balancing energy market. In addition, a methodology for optimal cross-border transmission capacity allocation is developed. The balancing market integration is implemented in both NTC based and flow-based market coupling settings. The following are some of the main results obtained in this PhD work: Unit based upward and downward bidding prices for reserve provision are a function of the difference between the spot price forecasts and a unit’s marginal cost. • The total reserve procurement cost decreases with increased share of reserved Net Transfer Capacity (NTC), as a result of the possibility of procuring cheaper cross-border reserves. The day-ahead cost generally increases with increase in reserved capacity. However, for small shares of reserved transmission capacity, procuring reserves from another system reduces the need to keep reserves in the expensive system, increasing the flexibility and reducing the day-ahead cost. • Given the possibility of cross-border reserve procurement, more upward reserve is procured from Norway, Sweden, and the Netherlands. On the other hand, Germany imports some of its FRR requirement. • Using an NTC based methodology to optimally allocate transmission capacity for FRR exchange for a planning period of 24 hours, a reduction of EUR 26 million (≈ 8 %) in FRR procurement and EUR 53 million in total costs is obtained compared to the base case of no reservation. This result asserts that optimal reservation of NTC for FRR exchange can reduce both FRR procurement costs and day-ahead costs simultaneously. • For the model with NTC based optimal transmission capacity reservation, where a reservation period of 24 hours has been normally used, sensitivity analyses using a 12 hours reservation period showed very significant cost reductions. This emphasises the importance of short reservation periods for reserve procurement. • The implicit market clearance option, where the reserve requirement is implicitly considered as a constraint in the day-ahead market clearance, is generally a more efficient market clearance option than the sequential market clearance with optimal transmission capacity reservation. The flexibility due to short planning period and efficiency of the market design option contribute to the significant total cost reduction offered by the implicit market clearance option. The flow-based market coupling with implicit market clearance results in total cost savings of EUR 413 million compared to the case with no transmission capacity reservation. On the other hand, flow-based sequential market clearance with optimal transmission reservation gives a saving of EUR 19 million. • The possibility of cross-border balancing energy exchange gives cost reduction benefits in comparison to local balancing. The decrease in balancing costs is due to the netting of imbalances and the use of cheaper balancing energy from neighbouring zones. Due to the general improvement in market efficiency, considering the IEEE 30-bus test system, the integrated flow-based balancing energy market clearing results in 20 % lower balancing cost compared to the NTC based approach.