Lecture 4 – Electricity Markets: Balancing and Reserve Markets

Question 1

What are ancillary services required for?

Answer 1

▪ Frequency stability
▪ Voltage stability (reactive Power)
▪ Black start capability
▪ System operation

Question 2

What are the trading phases for balancing power?

Answer 2

• Prequalification and framework contract (Months ahead)
• Request for quotes for primary and secondary control reserves (6 - 1 Month(s) ahead)
• Request for quotes for minute reserves (Day ahead)
• Dispatch after merit order (Units dispatched after energy price – so-called “merit order”)
• After Dispatch: Remuneration (Payment by power price [€/MW] and if employed, energy price [€/MWh])

Points 2 and 3 come under balancing RFQ which stands for request for quotation

Question 3

What are the properties of primary frequency control for frequency sustainment?

Answer 3

− Primary frequency control (30 s – 15 min.)
▪ All units over 100 MW obligatory.
▪ Lowest bid +/- 1 MW
▪ Invitation for bids one month in advance. Remuneration only for demand rate (MW)
▪ Rate of change +/- 2% capacity rating per minute

Question 4

What are the properties of secondary frequency control for frequency sustainment?

Answer 4

− Secondary frequency control (30 s – 60 min, power after 15 min)
▪ Pooling possible. Minimum bid size 5 MW, increment 1 MW
▪ Running of individual items up to 4 h after disturbance
▪ No symmetrical bids necessary
▪ Controllable capacity +/- 30 MW
▪ Invitation for bids one month in advance.

Question 5

What are the properties of minutes reserve control for frequency sustainment?

Answer 5

− Minutes reserve (as from 15 min – 4 h),
▪ Can be delivered as spot market / intraday regular delivery
▪ Minimum bid size 15 MW, increments 1 MW
▪ Free reserve capacities from +/- 15 MW can be offered
▪ Invitation for bids in day-ahead modus

Question 6

What is generation adequacy?

Answer 6

▪ The way in which the power system can match the evolution in electricity demand is expressed as system or generation adequacy
▪ Generation adequacy measures the ability of a power system to cope with its load in all the steady states it may operate under standard conditions

Question 7

What are the components of generation adequacy?

Answer 7

• The ability of the generation assets to cover the peak load, taking into account uncertainties in the generation availability and load level
• The ability of the transmission system to perform, with the flexibility provided by interconnection and import and export flows

Question 8

What is the missing money problem?

Answer 8

• The “Missing Money Problem” addresses the problem of insufficient cost coverage for base load power generation, especially coal or gas-fired power plants.
• It occurs especially in energy-only markets (EOMs) due to subsidization of renewable energies with zero marginal costs, which result in extremely low price levels.
• Power plant operators can no longer cover the fixed costs, which may lead to a capacity shortage.

Question 9

How does the payment in Energy-only market work?

Answer 9

▪ Based on marginal costs
▪ Plants are getting paid for delivered energy only, not for availability of capacity

Question 10

What are the problems with EOM?

Answer 10

• Lower load factor due to renewable energy sources
• Conventional power plants have difficulties to cover their fixed costs
• Shift of merit order curve
• Low incentive to invest in (flexible) capacity
• Operation of conventional power plant becomes inefficient

Question 11

What is strategic reserve?

Answer 11

Several power plants that do not regularly participate in the electricity market and kept exclusively for situations where the market is not able to cover the demand. Mainly conventional gas- or oil-fired power plants with low fixed costs

Question 12

What is capacity market?

Answer 12

-Two separate markets: producing energy, and keeping generation capacity available to produce electricity when required
- Derivatives of generation capacity are traded between power generators and Load Serving Entities (LSE) or large consumers to ensure generation adequacy in times of shortages
- By providing payments to encourage investment in new capacity or for existing capacity to remain open, sufficient reliable capacity is available

Question 13

How do the strategic reserve and capacity market differ in compliance mechanism (1 is strategic reserve and 2 is capacity market)?

Answer 13

1. Plants are exclusively dispatched by TSO
   2.
   • Capacity is contracted by central authority
   • Financial penalties if capacity cannot be provided

Question 14

How do the strategic reserve and capacity market differ in dispatch mechanism (1 is strategic reserve and 2 is capacity market)?

Answer 14

1. When market price is close to the so-called ‘‘value of loss load (VOLL)” – a high price which has to be determined in advance
2. In case of electricity shortage. When market price exceeds a predefined value, the “strike price

Question 15

How do the strategic reserve and capacity market differ in market participation (1 is strategic reserve and 2 is capacity market)?

Answer 15

1. • No
   • Earnings from the strategic reserve market
   2.
   • Yes
   • Earnings from spot, futures, reserve and capacity market

Question 16

How do the strategic reserve and capacity market differ in capacity planning (1 is strategic reserve and 2 is capacity market)?

Answer 16

1.
• Central regulator determines the size of the strategic reserve
• ~5% of peak load
2. Central instance estimates the residual future load (load minus capacity credit of renewables), purchases a certain level of capacity and determines price

Question 17

How do the strategic reserve and capacity market differ in price settlement (1 is strategic reserve and 2 is capacity market)?

Answer 17

1. Market settles the price via uniform price auctions or via bilateral contracts
2. Descending Clock/Dutch auction – auctioneer announces first price, calls for supply bids and lowers the price until the necessary capacity is found or until floor price is reached

Question 18

How do the strategic reserve and capacity market differ in power plants (1 is strategic reserve and 2 is capacity market)?

Answer 18

1. • Existing power plants
   • Mainly old gas- or oil-fired peak load power plants
2. • Existing and new power plants
   • Flexible power plants (gas)
   • RES can participate in combination with storage

Question 19

Advantages of capacity market?

Answer 19

• Decline of investment related risks (price volatility)
• Incentive for investment due to additional revenue
• Dispatch is more efficient
• Addresses missing money problem
• Protects consumers from high price peaks and price volatility

Question 20

Disadvantages of capacity market?

Answer 20

• New market structure needs to be implemented (demanding, risky)
• The appropriate parametrization to avoid overcapacities (and related costs) is challenging
• The adequate integration of renewable energy sources (RES) technologies is difficult

Question 21

How is the development of flexible capacities in central capital market?

Answer 21

Higher volume of power plant capacity compared to the EOM
Overcapacities of thermal power plants
Nearly constant investments during the whole period until 2050 without generating higher total system costs
The capacity payments are compensated by avoided price peaks (cost savings)

Question 22

How is the adequacy ratio in central capital market?

Answer 22

The adequacy ratio is continuously over 1.1, which means overcapacity

Question 23

Advantages of strategic reserve?

Answer 23

Easy to implement
Adapts to changing market conditions
Marginal impact on existing markets

Question 24

Disadvantages of strategic reserve?

Answer 24

Inefficient dispatch under normal market conditions
- Capacity in the strategic reserve is withheld from the regular electricity market
Difficult determination of the optimal volume of the strategic reserve
- Available future capacity is subject to uncertainty
Difficult determination of the price at which the strategic reserve bids into the market
- Lower price can reduce scarcity rents and lead to fewer investments
No reduction of investment related risks (price volatility)
No reduction of the missing money problem
- Inadequate cost coverage for base-load power plants

Question 25

How is the development of flexible capacities in case of strategic reserve?

Answer 25

The overall capacity of thermal power plants is larger than in a scenario without a strategic reserve
Primarily built power plants: gas-fired peak load power plants (‘peakers)
The total capacity of the strategic reserve is never fully dispatched

Question 26

How is the adequacy ratio in case of strategic reserve?

Answer 26

Increased generation adequacy
Prevented brownouts that may occur (in simulations based on the EOM)

Question 27

What is (Net) consumer surplus?

Answer 27

− Economic measure of consumer benefit
− A consumer surplus occurs when the consumer is willing to pay more for a given product than the current market price

Question 28

What is producer surplus?

Answer 28

− Economic measure of producer benefit
− Difference between the amount received and minimum amount willing to accept