CROSS BORDER BALANCING MECHANISM IN A HARMONIZED EUROPEAN
ELECTRICITY MARKET
Frieder Borggrefe, Institute of Energy Economics at the University of Cologne, +49 221 470 2443, frieder.borggrefe@uni-koeln.de
Karsten Neuhoff, EPRG at the University of Cambridge, +44 1223 33 5292, karsten.neuhoff@econ.cam.ac.uk
Overview
Based on an analytic model this paper investigates the potential of harmonizing the European balancing markets under
transmission constraints. In the coming years increasing capacities of wind (IEA 2008) and other renewable energy will raise
the demand for balancing power in European countries. (Schulz 2005) At the same time an increasing share of renewables will
lead to a decrease of available conventional generation, which is needed to provide spinning reserve to meet demand. Trading
balancing power between countries can be beneficial for the balancing market but will also influence dispatch efficiency in the
day ahead markets. The analytic model investigates different market designs for cross border trade of balancing power and
determines the welfare optimal dispatch under transmission constraints. A two stage market model for day-ahead spot and realtime balancing power is applied using stochastic optimisation. The model determines the optimal reservation of interconnector
capacities for balancing power as function of the overall wind forecasts. Based on the model the current market clearing and
other design options are evaluated. From this analysis, suggestions for market improvements in the European power markets
are derived.
Methods
The EU strives for a fully competitive internal energy market. To archieve this aim several measures have been taken. As a first
step in 2002 the Member States aggreed to incease the minimum interconnector levels between Member States to 10%. In
2006, however, there was still the call for a further development of the grid as well as effective leislative and regulatory
frameworks. (EU 2006)
Interconnector capacities within the EU are still frequently constrained. Efficient trading at the interconnectors is a decisive
tool which can create efficient interactions among the markets. These markets underwent significant changes in recent years.
The liberalisation of trading between EU States was based on a seperated market design. This means physical transmission
rights are auctioned and traded sperately from the energy markets (Ehrenmann, 2008). Among the European countries, in recent
years, more approaches towards an integrated market design were implemented (e.g. Northpool, Germany and Dannmark and
the penterlaterale energy treaty between Germany, Benelux and France). An integrated market design can be defined as a
system where “a centralised system operator collects location-specific energy bids and then clears the market for the entire
region according to a well-defined protocol.” The question arises as to which market mechanisms should be implemented in
such an integrated market design?
Various articles address market design of cross border trade and effects of volatile wind feed-in on the grid and markets.
Ehrenmann and Smeers (2004) analyzed the European approaches to congestion management and trading of interconnector
capacities. This work shows drawbacks of ETSO’s proposed coordinated auctions and propose a (decentralized) market
coupling to pave the path for a consistent market system. Muesgens et al. (2006) investigate the effects of wind power on
reserve and balancing market for the year 2003. They show that volatility of wind power will induce additional costs for
electricity generation, mainly due to increased start-up and part-load costs. Bouffard and Galiana (2008) investigate alternative
short-term power system operations planning methods capable of better coping with the nature of wind generation while
maintaining or even improving the current reliability and economic performance of the system.
In Europe, available transmission capacities are determined by the UCTE and are primarily used for day ahead spot trading.
This article investigates whether, under an integrated market design system, part of the transmission capacities could be used to
provide balancing energy. The model used here distinguishes the (planned) electricity flows resulting from the dispatch in the
day ahead market and stylised flows for positive and negative balancing markets, allowing us to detmine the resulting real time
flows along the interconnector lines. Two scenarios need to be assessed. First, positive or balancing power is provided against
the prevailing energy flow. This reduces (or inverses) the actual flow at the transmission line and therefore sufficient capacities
are available. Second, balancing power is provided in the direction of the energy flow contracted at the spot market. This can
only occure if a share of the transmission line is reserved for balancing power. The provision of negative balancing power can
be treated accordingly.
At the point in time when the decision to reserve transmission lines has to be made, the demand for regulating energy on the
transmission lines is still unknown and depends highly on wind forecasts and wind uncertainty. The model is therefore a two
stage stochastic simulation and encounters both dispatch decision in the spot and balancing market. The share of capacity
reserve at the transmission lines depends on several parameters:
-
Wind uncertainty
Forecasted wind supply
Correlation of wind between the countries
Transmission capacities
Cost structure of the generation plants in both countries
The aim of the model is, firstly, to determine to what extent interconnector transmission capacities have to be reserved.
Secondly ,it depicts which plants offer regulating energy and, thirdly, it determines the change of transmission at the
interconnectors based on regulating energy. The analysis investigates four market designs for a harmonized balancing market
between the countries.
Results
Based on scenarios we investigate the impact of correlation of wind levels between countries. This becomes important because
the level of wind feed-in in each country affects demand for regulating energy, as well as the market prices and the direction of
the electricity flows at the interconectors. Three scenarios can be distinguished: Wind feed-in in both countries is uncorrelated,
and wind feed-in is positive and respectively negatively correlated. Based on this modelling approach, implications for a future
design of the European electricity market are investigated. The fundamental questions here are:
-
How should a harmonized European balancing market be implemented to incorporate wind uncertainty?
What are the benefits (and drawbacks) of trading balancing power at the interconnections?
Can the current market design in the EU deal with a increasing share of intermittent generation?
We show that the impact of the market design on spot market prices are small. A well designed market can, however,
significally reduce costs for balancing services. A large share of positive minute reserve is traded against the electricity flow
into regions with high wind forecasts, thus transmission lines allow for trading of reserve capacities against the flow. Countries
with high wind forecasts, that export electricity, tend to export negative minute reserve, but import large share of positive
minute reserve along the interconnector lines.
Apart from a more efficient use of the interconnectors, results show that in certain hours it is optimal to reserve interconnector
capacities in the day ahead market for the real time balancing markets. The welfare gains in the regulating markets outweigh
the welfare losses in the spot market. The model shows under what conditions such reserve is economically efficient and how a
coordination could take place.
Conclusions
Based on the results from the mathematical approach and from scenario based market simulation, current implementations of
the cross border trade in the European electricity markets are analysed. The article provides suggestions for an improvement of
the market design towards a harmonized European electricity markets for spot and balancing energy. The proposed market
scheme extends all current implemented European trading schemes as well as the standard market design currently
implemented in major US electricity regions (such as PJM, NY-ISO and New England). With increasing wind capacities in the
grid the need for such a market scheme will gain importance.
References
Bouffard, F., and F. D. Galiana. “Stochastic security for operations planning with significant wind power generation.” IEEE
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Ehrenmann, A., and Y. Smeers. “Inefficiencies in European congestion management proposals.” Utilities policy 13, no. 2
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Ehrenmann, A., and K. Neuhoff. “A Comparison of Electricity Market Designs in Networks.” Cambridge Working Papers in
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European Commission: “Green Paper: A European strategy for sustainable, competitive and secure energy" European
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Intelligent Well Technology: Status and Opportunities for Developing Marginal Reserves
SPE
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