Strategic behavior in the German balancing energy mechanism: incentives, evidence, costs and solutions
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This paper investigates the incentives market participants have in the German electricity balancing mechanism. Strategic over and undersupply positions are the result of existing stochastic arbitrage opportunities between the spot market and the balancing mechanism. Clear indications for strategic behavior can be observed in aggregate market data. These structural imbalances increase the need for reserve capacity, raise system security concerns, and therefore place significant costs on consumers. The underlying problem is the disconnect between spot market, reserve capacity market and balancing mechanism. Alternative market design options discussed in this paper suggest better alignment between these markets/mechanisms.
KeywordsElectricity market design Balancing mechanism Reserve capacity Strategic behavior
JEL ClassificationL94 Q41 Q47
The authors would like to thank the editor and the anonymous referees for helpful comments on earlier drafts of the paper.
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