Electricity balancing as a market equilibrium: Estimating supply and demand of imbalance energy

Stable power systems require equalizing demand and supply of electricity at short time scales. Such electricity balancing is often understood as a sequential process: exogenous shocks, such as weather events or technical outages, cause system imbalances that system operators close by activating balancing reserves. By contrast, we study electricity balancing as a market where the equilibrium price (imbalance charge) and quantity (system imbalance) are determined endogenously by supply and demand. System operators supply imbalance energy by activating reserves. Market parties that, deliberately or not, deviate from schedules create demand for imbalance energy. When deliberately taking open positions, firms respond to price signals from electricity markets and imbalance charges. Based on this market framework, we estimate the demand curve of imbalance energy, and hence the price responsiveness of market parties to deviate from schedules. To overcome the classical endogeneity problem of price and quantity in the market equilibrium, we deploy instruments that we derive from a novel theoretical framework. Using data from Germany, we find that firms reduce the physical system imbalance by about 2.8 MW for each increase in the imbalance charge by EUR 1 per MWh. This price response is remarkable because such behavior is prohibited. It is, however, beneficial: on average, such strategic deviations reduced the German system imbalance by 20%.