As part of the redesign of the Nordic balancing market, Nordic transmission system operators are studying the impact of a potential introduction of a scarcity pricing mechanism.  In that spirit, N-SIDE was given by Svenska Kraftnät, the Swedish TSO, the opportunity to propose a design for the implementation of a scarcity pricing mechanism in Sweden and analyze the impact of its introduction in Sweden relying on active cooperation with Nordic system operators.

European balancing electricity markets in transition

The European balancing market is currently undergoing an important transition. Indeed, the phasing out of nuclear and coal plants, and their replacement with faster-moving and more variable renewable resources, is increasing the need for balancing resources. Moreover, the European Balancing Guideline and the Clean Energy Package are placing requirements on 15-minute settlements for balancing, which are pushing currently stressed balancing systems to their limits. Furthermore, a critical evolution that is taking place at the European scale is the launch of the PICASSO and MARI platforms for the activation of automatic and manual frequency restoration reserves respectively. This evolution challenges the existing philosophy by which European balancing markets have been put in place. 

Scarcity pricing in a nutshell

Scarcity pricing concerns the operation of uplifting real-time energy prices above the marginal cost of the marginal unit for time periods during which the system is under stress, meaning that a shortage in generation capacity is occurring. This mechanism is highly developed in the USA where it relies on simultaneously auctioning energy and balancing capacity in real-time. 

However, among the numerous market design differences between the EU and US, such a co-optimization between energy and balancing capacity is not foreseen in the balancing design being implemented currently in Europe. Therefore, N-SIDE studied alternative designs that are more aligned with the European electricity market design and regulations to integrate scarcity prices in the Swedish balancing market. An innovative part of the project compared to available scarcity pricing literature was to leverage the knowledge present at N-SIDE in order to investigate scarcity pricing designs that take into account (1) the absence of actual co-optimization of energy and balancing capacity in real-time and (2) the fact that the Nordic balancing markets operate in a zonal design with multiple bidding zones.  During this project, a concrete proposal for the introduction of scarcity pricing was developed, first theoretically, and then its impact was analyzed quantitatively on the Swedish system thanks to simulations. 

N-SIDE was thrilled to participate in the interesting exchanges taking place during the project about scarcity pricing and more broadly Nordic balancing systems. Moreover, N-SIDE had the chance to valorize a growing expertise on co-optimization mechanisms during this project. 

Access the public report of this project:

Phase 1 | Report on Design Principles

Phase 2 | Simulations for Sweden

Co-Author 

Anthony Papavasiliou is an assistant professor at the National Technical University of Athens and formerly an associate professor at UCLouvain in Belgium, where he held the ENGIE chair. Anthony is a recipient of an ERC Starting Grant (2019), the Francqui Foundation research professorship (2018), and the Bodossaki Foundation Distinguished Young Scientist award (2021). Anthony has advised numerous regulatory authorities, transmission system operators, consulting firms, utilities, and other organizations, on various topics related to electricity market design and the application of analytics in power system operations and planning.