Analysis of the impact of imbalance settlement design on market behaviour in electricity balancing markets

Abstract

The imbalance settlement design is the part of an electricity balancing market design that stimulates so-called Balance Responsible Parties (BRPs) to balance their electricity production and consumption portfolio and to stick to their energy schedules by penalizing any deviations from these schedules with an imbalance price. There are numerous imbalance settlement design options, each of which gives different incentives to BRPs. The aim of this work is to analyze the impact of the imbalance settlement design on BRP behaviour, and thereby on balancing market performance. For this purpose an agent based model has been built, in which the BRPs are the agents that decide autonomously in each round on their balancing strategy based on results in past rounds. Six alternative imbalance settlement designs are analyzed. We conclude from the analysis results that it is generally a better strategy for BRPs to opt for a long position rather than a short position, and to opt for a small imbalance rather than a large one. Furthermore, different imbalance settlement designs will lead to different but still similar results, because of the balancing market equilibrium that emerges as a result of the dynamic feedback loop between BRP behaviour and balancing market outcomes. An exception is formed by two-price settlement, which leads to much higher imbalance costs. Finally, it was found that the imbalance costs for large BRPs are relatively higher, and that the choice of imbalance settlement design has a greater impact on the behaviour of small BRPs.