Offshore Wind Power in Electricity Markets: Regulatory and Market Design Implications under Flow-Based Market Coupling

An important element of the ongoing transition towards a sustainable energy system is the increasing share of wind power in the electricity mix globally. Wind power is highly variable by nature leading to geographical and temporal mismatches between supply and demand. Therefore, there is an increasing opportunity for cross-border trade of electricity from low-cost regions to high-cost regions to unlock economic welfare gains. 

The dissertation analyzes the integration of wind power plants into highly interconnected electricity markets. We focus on three challenges. Firstly, trade is limited by the commercial transmission capacity, i.e., the fraction of the transmission capacity that is made available to the market. The methodology for the calculation and allocation of transmission capacity has been subject of policy debates in Europe without a consensus on the way forward. Secondly, with many offshore energy hubs being developed, well interconnected with each other and with the mainland, it is unclear to which wholesale electricity prices these energy hubs should be exposed. This poses important questions regarding the offshore market design that should be considered by policy makers. Thirdly, unlike non-intermittent generation technologies, it is challenging to monitor whether the wind power sold in electricity markets equals the wind power output that is technically possible. Therefore, strategic operations of wind power plants should be studied carefully aiming for an optimal integration of wind power in electricity markets.

The first main objective of this dissertation is to provide a fundamental understanding of the functioning of flow-based market coupling in Europe, i.e., the target methodology to provide commercial transmission capacities to (cross-border) wholesale electricity markets, to pinpoint pitfalls and solutions. To this end, we develop both an optimisation model and a data-driven regression model.

We show that flow-based market coupling allows for a better representation of grid constraints in the market than before its introduction. Specifically, it increased cross-border exchanges and price convergence in Central Western Europe despite highly changing market conditions. However, some gains disappeared due to lower commercial transmission capacities. Specifically, the performance of flow-based market coupling is subject to parameters at the discretion of TSOs. Therefore, regulatory oversight is important to stimulate welfare-optimal commercial transmission capacities. Incentive regulation, if well designed, allows to consider the multiple objectives of TSOs and can overcome the issue of information asymmetry between TSO and regulator. 

The second main objective of this dissertation is to analyse the implications of (an) offshore bidding zone(s) when flow-based market coupling is the active methodology to calculate and allocate transmission capacity. To do this, we extend our optimisation models in two steps: (i) by including (offshore) HVDC transmission lines, and (ii) by including investments. 

Given that the implementation of full nodal pricing, i.e., having nodal pricing in place both onshore and offshore, faces political hurdles in Europe, onshore zonal combined with offshore nodal pricing or different offshore zonal configurations can serve as valuable alternatives. They increase economic welfare and decrease offshore electricity prices. Offshore loads like, e.g., electrolysers can serve as catalysts to decrease the remaining welfare gap with full nodal pricing. This is because decreased offshore electricity prices benefit the business case of offshore electrolysers. 

The third main objective of this dissertation is to gain insights into the options for wind power plants to operate strategically. Specifically, we investigate two options that relate to the bidding behavior of wind farms in the wholesale electricity market: when (i) sharing private forecast information and (ii) inducing wake effects. For the first strategic option, we find that when sharing individual wind power forecasts between wind power plants, both profits and economic welfare can either increase or decrease depending on the determinants of bidding profiles like, e.g., risk aversion. For the second strategic option, we reveal that there exists a potential to increase economic welfare and profits for closely located offshore wind farms facing different electricity prices. In such a case, the upstream wind farm is de-rated to increase the available energy at a downstream location while the downstream farm remunerates the upstream farm.