Dealing with renewables integration in the European balancing phase: A comparative study of the Belgian and French imbalance markets

Dealing with renewables integration in the European balancing phase: A comparative study of the French and Belgian imbalance markets. Since the back end of the twentieth century, significant progress have been realized to integrate the sequence of power markets, especially the Day-ahead segment, into the European internal energy market. Last part of the sequence corresponding to the balancing phase that encompasses reserve markets and imbalance market, remains poorly integrate [1]. At the moment those markets can take very heterogeneous forms across member states, sometimes reflecting the legacy of pre-liberalization context. However there is an harmonization push at the European level through publications of guidelines and network codes [2]. In parallel European countries are experiencing the rapid deployment of wind and solar technologies into power system, and such trend will accelerate in the next decades [3]. It creates new challenges for the short-term balancing of grids. Due to their intrinsic characteristics, in particular the uncertainty they hold on their own [4], renewables affect the needs for short-term flexibility. This paper investigates the relevance of the promoted imbalance market design at European level, which favors reactive balancing philosophy. It analyzes the potential superiority of single imbalance pricing based on marginal pricing, that is commonly associated with reactive balancing activation of reserves, over dual-pricing traditionally relying on weighted average pricing. Assessing the suitability of imbalance pricing methods is of particular interest, given the fact that short-term market designs can facilitate the integration of renewables into power system by mitigating their potential negative effects in terms of reserves needs [5], [6]. To the authors' knowledge, we are the first to conduct a systematic comparative study assessing respective performance of proactive and reactive balancing approaches, through real-world observations data. Our empirical work is based on the comparison of imbalance markets in Belgium and France trough an econometric study. The former relies on reactive philosophy and can be considered as the standard design that will be set-up at European level. The latter based on dual pricing, at the contrary represents the opposite imbalance market design that might disappear in coming years. This comparative work aims at assessing the relevancy of incentives send to Balancing Responsible Parties (BRPs) under both imbalance settlement schemes. We use 2021 data describing power mix plus Day-Ahead and Imbalance prices for France and Belgium at half-hour and quarter-hour granularity respectively. Analogous to models used in a similar context by Deman and Boucher [7] and by the literature on short-term electricity prices forecasting [8] an ARMAX-GARCH model is set-up. A particular attention is given to the way that both market designs handle the integration of renewables. Therefore, regressions try to evaluate and compare the effects of renewables integration on 1) system imbalance (by examining energy reserve activation by direction) and 2) on financial incentives send to BRPs (according to the direction of their own imbalance). Results suggest the superiority of reactive approach based on marginal pricing compared to weighted-average pricing, in line with theoretical prediction. We find a larger financial incentives in Belgium. BRPs penalties and rewards are between two and three times larger in the imbalance price settlement based on marginal pricing. Those larger financial incentives find their translation in terms of physical imbalances. In fact, imbalances are lower in the reactive system. However, some similar patterns relative to renewables penetration remain in both system. We observe increasing (resp. decreasing) volumes of downward (resp. upward) energy activation with higher level of renewables in the system. The magnitude of those effects tend to be lower in Belgium even though the country experiments higher level of renewables penetration compared to France. Our findings support the harmonization towards reactive approach promoted at European level. Relative to renewables effects on balancing activity, we find similar results than previous observations from Deman and Boucher [7] but with a generalization to the Belgian context. Those persistent results about renewables effects, whatever the imbalance market design considered, support the needs for further research. It leaves room to discussion and potential additional studies linking imbalance markets with other short-term markets like Intraday and Reserves. Therefore, the last part of this work discusses open issues arising from our results and gives some insights about potential explanations that remain open to debate. Bibliography: [1] M. Håberg and G. Doorman, "Classification of balancing markets based on different activation philosophies: Proactive and reactive designs," in 2016 13th International Conference on the European Energy Market (EEM), Jun. 2016, pp. 1–5. doi: 10.1109/EEM.2016.7521272. [2] European Commission, Balancing Electricity Guidelines. 2017. [3] European Commission, "REPowerEU." Accessed: Jan. 15, 2024. [Online]. Available: https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal/repowereu-affordable-secure-and-sustainable-energy-europe_en [4] L. Hirth, "The market value of variable renewables," Energy Econ., vol. 38, pp. 218–236, Jul. 2013, doi: 10.1016/j.eneco.2013.02.004. [5] L. Hirth and I. Ziegenhagen, "Balancing power and variable renewables: Three links," Renew. Sustain. Energy Rev., vol. 50, pp. 1035–1051, Oct. 2015, doi: 10.1016/J.RSER.2015.04.180. [6] F. Ocker and K. M. Ehrhart, "The ‘German Paradox' in the balancing power markets," Renew. Sustain. Energy Rev., vol. 67, pp. 892–898, Jan. 2017, doi: 10.1016/J.RSER.2016.09.040. [7] L. Deman and Q. Boucher, "Impact of renewable energy generation on power reserve energy demand," Energy Econ., vol. 128, p. 107173, Dec. 2023, doi: 10.1016/j.eneco.2023.107173. [8] E. Hickey, D. G. Loomis, and H. Mohammadi, "Forecasting hourly electricity prices using ARMAX–GARCH models: An application to MISO hubs," Energy