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Proposal for the Implementation of ScarcityPricing in the Belgian Electricity Market

Anthony PapavasiliouUCLouvain

Joint with Yves Smeers (UCLouvain),Gauthier de Maere d’Aertrycke (ENGIE)

National Technical University of Athens, GreeceJune 20, 2019

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Outline

1 Motivation of Scarcity Pricing

2 How Scarcity Pricing Works

3 Scarcity Pricing Developments in the US and Europe

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Outline

1 Motivation of Scarcity Pricing

2 How Scarcity Pricing Works

3 Scarcity Pricing Developments in the US and Europe

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A Paradox of Highly Renewable SystemsGas and oil units are (i) the most flexible, and (ii) the leastprofitable

Inv. cost Marg. cost Min load Energy market Profit(e/MWh) (e/MWh) cost (e/MWh) profit (e/MWh) (e/MWh)

Biomass 27.9 5.6 0 35.6 7.7Nuclear 31.8 7.0 0 34.2 2.4

Gas 5.1 50.2 20 0.1 -5Oil 1.7 156.0 20 0 -1.7

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Motivation for Scarcity Pricing

Scarcity pricing: a real-time demand for reserve capacity,determined by loss of load probability

introduces a non-volatile real-time price for reserve capacityaffects the real-time price of energy

Definition of flexibility for this talk:Secondary reserve: reaction in a few seconds, fullresponse in 7.5 minutesTertiary reserve: available within 15 minutes

such as can be provided bycombined cycle gas turbinesdemand response

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Outline

1 Motivation of Scarcity Pricing

2 How Scarcity Pricing Works

3 Scarcity Pricing Developments in the US and Europe

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Operating Reserve Demand Curve (ORDC)

Reserve is procured by the system operator fromgenerators in order to ensure reliability, which is a publicgoodDemand for reserve can be driven by its value for dealingwith uncertainty, based on engineering principles:

Above a max threshold (Qmax), extra reserve offers noadditional protection⇒ (P, Q) = (0, Qmax)Below a min threshold (Qmin), operator is willing to curtaildemand involuntarily⇒ (P, Q) = (VOLL, Qmin), whereVOLL is value of lost loadAt Qmin < Qi < Qmax , extra reserve increases probabilityof preventing load curtailment⇒ (P, Q) = (LOLP · VOLL,Qi), where LOLP is loss of load probability

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Loss of Load Probability

Uncertainty ∆ in real time due toforecast errorsunscheduled outages of generators

LOLP(x) = P[∆ ≥ x ] is the probability that real-timeuncertainty exceeds reserve capacity x

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Scarcity Pricing Adder Formula

In its simplest form, the scarcity pricing adder is computed as

(VOLL− M̂C(∑

g

pg)) · LOLP(R),

where M̂C(∑

g pg) is the incremental cost for meeting anadditional increment in demand, R is the available reserve

More frequent, lower amplitude price spikesPrice spikes can occur even if regulator mitigates bids ofsuppliers in order to mitigate market powerCan co-exist with capacity mechanisms, perceived asno-regret measure for improving the energy-only market

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Example

The generator used in our example can provide secondaryreserveThe day-ahead energy price is λDA = 20 $/MWhThe day-ahead secondary reserve price is λR,DA = 65$/MWhThe real-time secondary reserve price is λ̃R,RT = 1229.2$/MWh; note that this is entirely due to the contribution ofthe adderThe real-time energy price is λRT = 1539.2 $/MWh; notethat this is equal to the imbalance price plus λ̃R,RT

The capacity of the generator is P+ = 125 MW

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Example: Settlement without Adder

Settlement Formula Price Quantity Cashtype [$/MWh] [MW] flow [$/h]

DA energy λDA · pDA λDA = 20 pDA = 0 0DA reserve λ̃R,DA · rDA λ̃R,DA = 65 rDA = 25 1,625RT energy λRT · (pRT − pDA) λRT = 300 pRT − pDA = 125 37,500

Total 39,125

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Example: Settlement with Adder

Settlement Formula Price Quantity Cashtype [$/MWh] [MW] flow [$/h]

DA energy λDA · pDA λDA = 20 pDA = 0 0DA reserve λ̃R,DA · rDA λ̃R,DA = 65 rDA = 25 1,625RT energy λRT · (pRT − pDA) λRT = 1, 529.2 pRT − pDA = 191,150

125RT reserve λ̃R,RT · (rRT − rDA) λ̃R,RT = 1, 229.2 rRT − rDA = -30,730

-25Total 162,045

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Illustration from Texas: July 30, 2015

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Illustration from Texas: July 30, 2015

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Outline

1 Motivation of Scarcity Pricing

2 How Scarcity Pricing Works

3 Scarcity Pricing Developments in the US and Europe

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Scarcity Pricing Developments in PJM

Synchronized Reserves are a 10-minute, online, reserveproductAverage requirement is about 1640 MW2018 Market Revenues ∼44 million

Price performance is poor$24 million settled through clearing price$20 million settled through uplift payments

Revenues paid through the market clearing price onlycover about 78% of the total cost to procure reserves

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Scarcity Pricing Developments in PJM

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Scarcity Pricing Developments in PJM

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Scarcity Pricing Developments in ISO-NE

Three (mostly) new types of co-optimized ancillaryservices

1 Replacement-energy reserves2 Load-balance reserves3 Generation contingency reserves

ISO-NE discussing with stakeholders about adoptingsix-day ahead multi-settlement marketDiscussion paper: http://www.iso-ne.com/committees/key-projects/energy-security-improvements/

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Balkanization of European Electricity Market

Source: Eurelectric

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Scarcity Pricing Developments in Europe

Diverse approaches towards remuneration of (flexible)capacity in EuropeSome of these measures draw scrutiny as possiblyconstituting anti-competitive state aidEuropean Commission not in favor of balkanization ofmember-state market rulesTwo legal documents of the European Commissionindicate favorable view towards ORDC:

Electricity balancing guidelineClean energy package

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European Commission Electricity Balancing Guideline,Article 44(3)

Each TSO may develop a proposal for an additional settlementmechanism separate from the imbalance settlement, to settlethe procurement costs of balancing capacity pursuant toChapter 5 of this Title, administrative costs and other costsrelated to balancing. The additional settlement mechanismshall apply to balance responsible parties. This should bepreferably achieved with the introduction of a shortage pricingfunction. If TSOs choose another mechanism, they shouldjustify this in the proposal. Such a proposal shall be subject toapproval by the relevant regulatory authority.

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Clean Energy Package, Article 20(3)

Member States with identified resource adequacy concernsshall develop and publish an implementation plan with atimeline for adopting measures to eliminate any identifiedregulatory distortions or market failures as a part of the Stateaid process. When addressing resource adequacy concerns,the Member States shall in particular take into account theprinciples set out in Article 3 and shall consider:

. . .

introducing a shortage pricing function for balancingenergy as referred to in Article 44(3) of Regulation2017/2195;. . .

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The CREG Scarcity Pricing Studies

First study (2015): How would electricity prices change ifwe introduce ORDC (Hogan, 2005) in the Belgian market?Second study (2016): How does scarcity pricing dependon

Strategic reserveValue of lost loadRestoration of nuclear capacityDay-ahead (instead of month-ahead) clearing

This talk: Third study (2017): Can we take a US-inspireddesign and plug it into the existing European market?ELIA ex-post simulation (2018): ELIA (Belgian TSO)releases report on the simulation of scarcity prices in theBelgian market for 2017ELIA parallel run (2019): By October 2019, ELIA will beposting adders publicly

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Scarcity Pricing Developments in Belgium

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Thank You for Your Attention

For more information:anthony.papavasiliou@uclouvain.be

http://uclengiechair.be/

https://perso.uclouvain.be/anthony.papavasiliou/public_html/

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References

1 A. Papavasiliou, Y. Smeers. “Remuneration of Flexibilityunder Conditions of Scarcity: A Case Study of Belgium”,the Energy Journal, vol. 38, no. 6, pp. 105-135, 2017.

2 A. Papavasiliou, Y. Smeers, G. Bertrand. “An ExtendedAnalysis on the Remuneration of Capacity under ScarcityConditions”, Economics of Energy and EnvironmentalPolicy, vol. 7, no. 2, 2018.

3 A. Papavasiliou, Y. Smeers, G. de Maere d’Aertrycke,“Study on the general design of a mechanism for theremuneration of reserves in scarcity situations”, June 6,2019.

4 ELIA, “Study report on Scarcity Pricing in the context of the2018 discretionary incentives”, December 20, 2018.

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