Inefficiencies Caused by Non-harmonized Capacity Mechanisms in an Interconnected Electricity Market

The European Internal Energy Market consists of many interconnected market zones. Unless transmission capacities are constrained, these market zones share capacity assets and injected energy to the benefit of the system. Market and price coupling allows making use of resources more efficiently. These efficiency gains are grounded on the harmonization of system operation and market rules. However, various capacity mechanisms (CMs) are put in place on national level that undermine the process of harmonization and complicate efficient market coupling. This paper addresses the inefficiencies caused by non-harmonized CMs. We propose a novel model formulation including generators, a market operator, an interconnection operator and an aggregated set of consumers. The model combines market clearings with investment decision in generation and transmission. The formulation allows for multiple market zones with different CMs. The model is set up as non-cooperative game whose properties are analyzed through the computation of a Nash Equilibrium. The model quantifies average cost, energy not served, and reserve margins per zone and system. The changing net exchange between markets and installed capacities are evaluated. A case study with three zones highlight the inefficiencies of wrongly estimating the contribution from neighboring market zones. These can be reduced by a shared assessment of capacity demands in coupled CMs and cross-border participation. A sensitivity analysis distinguishes explicit and implicit cross-border contributions. The results suggest that a common approach to CMs yields beneficial outcomes from a regional perspective. However, wrong estimation (under or over) of cross-border participation leads to different economic inefficiencies.

Publication year:2018

BOF-keylabel:yes

IOF-keylabel:yes

BOF-publication weight:2

CSS-citation score:1

Authors from:Government, Higher Education

Accessibility:Open