Table of Contents

Contents i
List of Figures vi
List of Tables viii
Acknowledgments x
1 Introduction 1
1.1 Background ………………………….. 1
1.1.1 Electricity liberalization process in Europe ………. 2
1.1.2 European short-term electricity markets ………… 2
1.1.3 European electricity market integration ………… 5
1.1.4 Increase of wind power in Europe …………… 6
1.2 Research topic: electricity market designs under high wind power
penetration ………………………….. 7
1.2.1 Support schemes for wind power ……………. 8
1.2.2 Wind power and intraday markets …………… 9
1.2.3 Wind power and balancing arrangements ……….. 9
1.2.3.1 Wind power as a Balance Responsible Party . . . . 10
1.2.3.2 Wind power as a Balancing Service Provider . . . . 10
1.2.4 Wind power and congestion management mechanisms . . . . 10
1.2.5 European priority dispatch for renewable sources . . . . . . . 11
1.2.6 Cross-border balancing arrangements for wind power integration 11
1.3 Research scope . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.4 Research relevance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.5 Research questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.6 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.7 Thesis outline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2 The role of European intraday markets to manage energy imbalances 19
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2.2 Description of existing European market designs . . . . . . . . . . . 20
2.2.1 Cross-border intraday markets . . . . . . . . . . . . . . . . . 21
2.2.2 Challenges of European intraday market integration . . . . . 22
2.3 The Spanish intraday market . . . . . . . . . . . . . . . . . . . . . . 25
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2.3.1 Overview of the Spanish electricity market . . . . . . . . . . 26
2.3.2 Incentives to trade in the Spanish intraday market . . . . . . 27
2.3.3 Analysis of the Spanish intraday market outcomes . . . . . . 31
2.3.4 Behavior of intraday market participants . . . . . . . . . . . 34
2.3.5 Reducing renewable energy imbalances in the intraday market 41
2.4 Continuous trading: the German intraday market . . . . . . . . . . . 46
2.4.1 Insights from the German intraday market data . . . . . . . . 46
2.4.1.1 Price behavior . . . . . . . . . . . . . . . . . . . . . 48
2.4.1.2 Relation between bid prices and bidding hours . . . 49
2.4.1.3 Challenges in a continuous trading intraday electricity market: compute accurate liquidity measures and
bidding strategies . . . . . . . . . . . . . . . . . . . 51
2.4.2 Changes in German RES-E support schemes . . . . . . . . . 52
2.4.3 German RES-E balancing . . . . . . . . . . . . . . . . . . . . 53
2.5 Convergence bidding for European intraday markets . . . . . . . . . 54
2.5.1 Convergence bidding: theory and implementation in the USA
markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
2.5.1.1 Definition . . . . . . . . . . . . . . . . . . . . . . . 56
2.5.1.2 USA experiences with convergence bidding . . . . . 58
2.5.1.3 Possible risks of convergence bidding identified in the
USA markets . . . . . . . . . . . . . . . . . . . . . . 58
2.5.2 European market design . . . . . . . . . . . . . . . . . . . . . 59
2.5.2.1 Current organization of the European intraday markets . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
2.5.2.2 Liquidity providers in the European intraday markets 60
2.5.3 Attractiveness of convergence bidding in the German and Spanish intraday markets . . . . . . . . . . . . . . . . . . . . . . . 61
2.5.3.1 Market efficiency and risk premium . . . . . . . . . 61
2.5.3.2 Application to the Spanish market . . . . . . . . . . 63
2.5.3.3 Application to the German market . . . . . . . . . . 66
2.5.4 Potential benefits and implementation concerns of convergence
bidding in Europe . . . . . . . . . . . . . . . . . . . . . . . . 67
2.6 Conclusions on European intraday markets . . . . . . . . . . . . . . 68
3 Impact of electricity cross-border intraday trading on wind balancing 71
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
3.2 Dutch and German electricity markets . . . . . . . . . . . . . . . . . 72
3.2.1 Dutch day-ahead and intraday markets . . . . . . . . . . . . 72
3.2.2 The German intraday market . . . . . . . . . . . . . . . . . . 73
3.2.3 Allocation of transmission capacity between Germany and the
Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
3.3 Dutch balancing rules . . . . . . . . . . . . . . . . . . . . . . . . . . 75
3.3.1 Bidding strategies for a Dutch WPP . . . . . . . . . . . . . . 76
3.3.1.1 Mathematical formulation . . . . . . . . . . . . . . 76
3.4 Case study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
3.4.1 Data description . . . . . . . . . . . . . . . . . . . . . . . . . 80
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3.5 Uncertainty modeling . . . . . . . . . . . . . . . . . . . . . . . . . . 83
3.6 Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
3.7 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
4 Participation of wind power in balancing mechanisms 91
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
4.2 Procurement designs for frequency reserves . . . . . . . . . . . . . . 92
4.2.1 Capacity and energy markets for FRR and RR . . . . . . . . 93
4.2.2 Procurement Scheme and Pricing of FRR and RR . . . . . . 93
4.2.3 Timing of the capacity and energy markets . . . . . . . . . . 94
4.2.4 Settlement Time Unit . . . . . . . . . . . . . . . . . . . . . . 96
4.2.5 Imbalance pricing . . . . . . . . . . . . . . . . . . . . . . . . 96
4.2.6 Publication time of imbalance prices . . . . . . . . . . . . . . 97
4.3 Procurement designs of balancing services for congestion management 97
4.4 Participation of wind power in the provision of balancing services . . 99
4.4.1 Support schemes . . . . . . . . . . . . . . . . . . . . . . . . . 100
4.4.2 Participation of wind power in capacity and energy balancing
markets for FRR and RR . . . . . . . . . . . . . . . . . . . . 100
4.4.2.1 Wind power participation in the balancing capacity
markets . . . . . . . . . . . . . . . . . . . . . . . . . 100
4.4.2.2 Wind power participation in the balancing energy
markets . . . . . . . . . . . . . . . . . . . . . . . . . 101
4.4.3 Active versus passive participation in the provision of balancing services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
4.4.4 Danish experience with participation of wind power in the
balancing market . . . . . . . . . . . . . . . . . . . . . . . . . 103
4.4.5 Possible risks for the provision of balancing services by wind
power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
4.5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
5 The interplay between imbalance pricing and internal congestions 107
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
5.2 German balancing mechanisms . . . . . . . . . . . . . . . . . . . . . 108
5.2.1 Procurement of balancing services . . . . . . . . . . . . . . . 108
5.2.2 The German imbalance pricing mechanism . . . . . . . . . . 110
5.3 German congestion management . . . . . . . . . . . . . . . . . . . . 112
5.3.1 Evidence of internal congestions in Germany . . . . . . . . . 112
5.4 Imbalance settlement with internal congestions . . . . . . . . . . . . 114
5.4.1 Conditions for misleading imbalance prices under internal congestions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
5.4.2 Evidence of adverse price signals in the German market due
to the imbalance pricing mechanism . . . . . . . . . . . . . . 116
5.5 Alternative designs for imbalance pricing mechanism . . . . . . . . . 119
5.5.1 Nodal single pricing . . . . . . . . . . . . . . . . . . . . . . . 119
5.5.2 Zonal single pricing . . . . . . . . . . . . . . . . . . . . . . . 120
5.5.3 Dual pricing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
5.5.4 Mix of single and dual pricing based on regulation states . . . 120
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5.6 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
6 Alternatives for the European priority dispatch rule for RES-E 123
6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
6.2 Priority dispatch for renewable sources . . . . . . . . . . . . . . . . . 124
6.3 Support schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
6.4 Existence of negative prices . . . . . . . . . . . . . . . . . . . . . . . 126
6.4.1 Negative prices in Europe . . . . . . . . . . . . . . . . . . . . 127
6.5 Intermittent RES-E curtailment and compensation schemes . . . . . 129
6.5.1 Wind power curtailment compensation schemes in Europe . . 130
6.5.2 Considerations for intermittent RES-E curtailment compensation for intermittent RES-E in the Spanish case . . . . . . . 132
6.6 Evaluation of alternatives of the priority dispatch for Spanish 2020
scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
6.7 Results and discussions . . . . . . . . . . . . . . . . . . . . . . . . . 135
6.8 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137
7 Impact of European balancing rules on wind power bidding strategies 139
7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
7.2 Regulatory context . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
7.2.1 Balance responsibility . . . . . . . . . . . . . . . . . . . . . . 140
7.2.2 Imbalance settlement . . . . . . . . . . . . . . . . . . . . . . . 142
7.2.2.1 Imbalance pricing in Denmark . . . . . . . . . . . . 143
7.2.2.2 Imbalance pricing in Germany . . . . . . . . . . . . 143
7.3 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
7.3.1 Mathematical formulation . . . . . . . . . . . . . . . . . . . . 146
7.3.1.1 Belgium . . . . . . . . . . . . . . . . . . . . . . . . 147
7.3.1.2 Denmark . . . . . . . . . . . . . . . . . . . . . . . . 149
7.3.1.3 Germany . . . . . . . . . . . . . . . . . . . . . . . . 150
7.3.1.4 The Netherlands . . . . . . . . . . . . . . . . . . . . 150
7.3.2 Data description . . . . . . . . . . . . . . . . . . . . . . . . . 151
7.4 Results and Discussion . . . . . . . . . . . . . . . . . . . . . . . . . . 152
7.5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
8 Effects of lack of harmonization of European balancing rules 159
8.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
8.2 Short-term cross-border electricity trade . . . . . . . . . . . . . . . 160
8.2.1 Benefits from short-term cross-border electricity trade . . . . 161
8.2.1.1 Intraday cross-border electricity trade . . . . . . . 161
8.2.1.2 Imbalances netting between countries . . . . . . . . 163
8.2.1.3 Cross-border exchange of balancing services . . . . . 164
8.2.2 Inefficiencies of short-term electricity trade due to differences
in balancing rules . . . . . . . . . . . . . . . . . . . . . . . . 165
8.2.2.1 Procurement time of balancing services . . . . . . . 166
8.2.2.2 Balancing timing . . . . . . . . . . . . . . . . . . . . 167
8.2.2.3 Inclusion of internal congestion costs in the imbalance prices . . . . . . . . . . . . . . . . . . . . . . . 168
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8.2.2.4 Pricing mechanisms . . . . . . . . . . . . . . . . . . 168
8.3 EU short-term market designs under high penetration of intermittent
RES-E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
8.4 Simulation of arbitrage opportunities due to imbalance pricing differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
8.4.1 Use of an agent-based model for electricity balancing . . . . . 172
8.4.2 Model objective . . . . . . . . . . . . . . . . . . . . . . . . . . 173
8.4.3 Model structure . . . . . . . . . . . . . . . . . . . . . . . . . 173
8.4.4 Model Results . . . . . . . . . . . . . . . . . . . . . . . . . . 177
8.5 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
9 Conclusions and recommendations 181
9.1 Conclusions and answers to research questions . . . . . . . . . . . . . 181
9.2 Recommendations for policy makers . . . . . . . . . . . . . . . . . . 187
9.3 Future Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
Appendices 191
A. Acronyms 193
B. Nomenclature 195
C. Definitions 197
D. Imbalance pricing mechanisms in European countries 201
Summary 209
List of Publications 215
Curriculum Vitae 217
Bibliography 219
NGInfra PhD Thesis Series on Infrastructures 237

Abstract

The EU has ambitious policies for decarbonization of the electricity sector. Due to recent technological developments, wind power already represents a significant share of the generation mix in some European countries. As a result, short-term electricity markets and balancing arrangements must be redesigned to accommodate the increasing variability and unpredictability of generation in an economically efficient way, without endangering system security. Currently, Europe is characterized by heterogeneity of national market designs for short-term electricity markets. This thesis analyzes the efficiency of short-term markets in Europe, in a national context and in the context of cross-border trade. It highlights the effects of interactions between the various short-term markets and balancing arrangements and shows how current market designs and regulations cause distorted price signals. This thesis argues the case for harmonization of national market designs to improve the economic efficiency of cross-border trade in short-term markets. The current initiatives towards the establishment of an Internal Energy Market in Europe are insufficient to ensure economic efficiency and system security of the European electricity system of the future, in which intermittent renewables will play a dominant role.

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