European short-term electricity market designs under high penetration of wind power

Abstract

The European Union (EU) has adopted ambitious targets for decarbonization of the electricity sector. Renewable energy sources for electricity (RES-E), especially wind and solar power, will play an important role in achieving the new policy targets. In a RES-E dominated electricity system of the future, variability and unpredictability of intermittent RES-E will be prominent features that require constant attention over a range of time frames, from day-ahead to real-time. The electricity market mechanisms also need to be adapted to systems with higher variability and limited predictability of generation. This thesis provides an analysis of current and future challenges for the adaptation of short-term European electricity market mechanisms to accommodate a higher penetration of intermittent RESE-E. This thesis make of different quantitative methods such as optimization techniques, data analysis, agent-based modeling, among other to evaluate existing and proposed market designs in order to make policy recommendations. In this context, the Internal Energy Market in Europe should ideally be fostered by a harmonized set of market rules for all the countries that are part of it. In this respect, European institutions may be more ambitious in defining such a single set of rules in the Network Codes instead of proposing minimum requirements that give significant freedom for different national designs. With this latter approach, and because of cross-border electricity trade, there is a real and imminent risk that the current situation of heterogeneity in market designs persists, with a negative impact on both economic efficiency and system security. One stressed argument in this thesis is the intricate interaction between the various short-term market mechanisms, which influences their efficiency. For example, congestion management and balancing mechanisms are strongly interrelated. Network congestions limit the possibility to use balancing resources from any part of the grid; therefore, the cost of balancing services depends on the grid location. As European electricity prices are usually set at the national level, adverse price signals can emerge in the absence of locational price signals. Therefore, with the current changes to- wards more intermittent RES-E in the European generation mix, locational price signals become more relevant. In order to achieve a robust design and well-functioning of the short-term market mechanisms, these mechanisms should be based on competitive market forces, with as little administrative interference and distorted price signals as possible. This thesis provides various examples of current regulations in European countries that generate distortions in the short-term market mechanisms. For example, differences in the allocation of financial responsibility to wind power producers with respect to energy imbalances give different incentives to these market parties to deviate in their bids from the energy forecasts. In addition, the elimination of price caps and floors in systems with high intermittency is required to better manage the intermittency in current and future electricity systems. Furthermore, market regulations such as the priority dispatch rule for renewable sources give rise to operational decisions that are not economically efficient, at least in the short-term. A weak point of the European balancing mechanisms encountered in the development this thesis is a lack of transparency at different levels, mainly in the disclosure of balancing costs and the timely publication of balancing data. This limits the possibility for investment in flexibility and for market parties to react to the costs associated with imbalances. Furthermore, the publication of relevant data would allow a detailed analysis of the systems performance, and actions taken by relevant market parties such as the System Operators. A relevant finding of this thesis is that, depending on the market design, RES-E generators will not necessarily bid the expected energy output in the markets. This is challenging for balancing decisions taken by the system operators close to real time. Furthermore, if additional market distortions exist, market parties (including intermittent RES-E producers) can react to the price signals, with negative effects for the system. This is shown in this thesis with bidding strategies’ modeling in Northern European countries and also supported by data from bids in the Spanish and German markets.