An Institutional Frame to Compare Alternative Market Designs in EU Electricity Balancing

Jean-Michel Glachant () and Marcello Saguan

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

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.

Keywords: Electricity Forward Market; Balancing Mechanism; Risk Aversion; Penalty; Institutional Frame; Market Design. (search for similar items in EconPapers)
JEL-codes: D23 D8 L51 L94 (search for similar items in EconPapers)
Pages: 29
Date: 2007-05
New Economics Papers: this item is included in nep-eec, nep-ene and nep-mic
Note: Ec
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.electricitypolicy.org.uk/pubs/wp/eprg0711.pdf
Our link check indicates that this URL is bad, the error code is: 500 Can't connect to www.electricitypolicy.org.uk:80 (nodename nor servname provided, or not known)

Related works:
Working Paper: An Institutional Frame to Compare Alternative Market Designs in e U Electricity Balancing (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0724

Access Statistics for this paper

More papers in Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
Bibliographic data for series maintained by Jake Dyer ().