Bidding Into Balancing Markets in a Hydrodominated Electricity System

Abstract

In an electricity system, demand and supply have to be balanced in real time. Since most energy is traded before real time already in forward, day-ahead and intraday markets imbalances can occur. To ensure the balance between demand and supply even if power plants deviate from their schedules, the system operator procures balancing capacity and energy in balancing markets. The market outcomes may significantly differ from one country to the other depending on the underlying generation technologies and market design. In this paper, we have a look at the balancing market prices of a hydro-dominated electricity system using Switzerland as a case study. By using a short-term hydropower operation model and a set of Swiss hydropower plants, we are able to identify a competitive benchmark for Swiss balancing market prices defined by the opportunity costs of hydropower for providing balancing capacity. Our results show that Swiss balancing market prices are influenced by several drivers but do not hint at any market imperfections.

Balancing-market design and opportunity cost: The Swiss case

“…(Swissgrid, 2018a To analyze the impact of the adaptations in the Swiss SRL market design on the opportunity cost for hydropower for providing SRL, I use a hydropower operation model. The basic model and opportunity cost logic that are applied in this paper are described in Schillinger and Weigt (2019). In the simple, linear and deterministic model adopted for this analysis, I do not consider trading options beyond the day-ahead market, uncertainty, or head effects.…”

“…The plant operator's objective is to maximize his/her revenue in the day-ahead market taking generation and storage constraints into account. While in Schillinger and Weigt (2019) the model has a weekly time horizon, here I implement a yearly time horizon. The storage at the beginning and end of the year is given exogenously and water values (i.e., the future value of water) do not have to be taken into account explicitly.…”

“…While in average only a small fraction of the actual balancing capacity is called up in case of a system imbalance (approx. 6%), I assume as in Schillinger and Weigt (2019) that the plant operator runs a zero risk strategy by ensuring that at all time enough water is reserved in the reservoir to be fully called up. To derive the opportunity cost for providing SRL in a specific week or day, I first run a model where the plant or cascade is optimized on the day-ahead market only.…”

“…Second, I run a model in which capacity is bid into the balancing market for one week or day of the year and adopt the corresponding yearly generation schedule for the day-ahead market. By comparing the yearly revenue with and without balancing market participation in a specific week or day, I am able to calculate the opportunity costs of that week or day by the yearly revenue difference (Schillinger and Weigt, 2019). Additional details on the model as well as all model equations can be found in Schillinger and Weigt (2019).…”

“…With the adaptation, Switzerland addresses some of the key issues facing balancing market design: internalization, price mechanism, market incentives, and how to benefit from the synergies between products and the development of additional flexibility (Swissgrid, 2018a). In a previous paper (Schillinger and Weigt, 2019), we analyzed the past balancing market design 1 in Switzerland and showed that Swiss balancing market prices are defined by the opportunity cost of hydropower. In this paper, I dig deeper into how changes in the Swiss balancing market design influence the opportunity cost of hydropower for providing balancing services.…”