An institutional frame to compare alternative market designs in EU electricity balancing
Name
2007-001.pdf
Size
384.46 KB
Format
Adobe PDF
Checksum (MD5)
bc5b7df3847ce5c9f3000c65a6a5c3f5
Author(s)
Glachant, Jean-Michel
Saguan, Marcelo
Date Issued
2007
Publisher
MIT Center for Energy and Environmental Policy Research
Series/Report no.
MIT-CEEPR (Series) ; 07-001WP.
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.
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