Spot and reserve market equilibria and the influence of new reserve market participants

Highlights: • We investigate the interplay of flexibility and heat provision from Combined Heat and Power (CHP) plants • We derive opportunity costs of reserve power provision by calculating a cost-optimal endogenous market outcome • We analyze the price effects of reserve flexibility from CHP entering both spot electricity and reserve markets • We provide model sensitivities concerning heat assumptions and a short-term outlook to the year 2020 • We analyze the price effects of different tendering regimes with a case study of the German 2016 market -- Abstract: There is a broad consensus that the energy transition planned in Europe demands a sufficient number of flexibility providers. This contribution proposes to analyse effects of reserve flexibility from CHP, encompassing both the price effects on spot and secondary reserve markets in an endogenous market equilibrium model. Through the analysis of contrasting cases it highlights how the specific nature of CHP plants, and in particular their heat restrictions, lower the cost at which they contribute to the reserve and spot markets due to implied must-run conditions. A somewhat stylized fundamental market model based on input data for Germany in 2016 is used to analyse the price effects of reserve flexibility from Combined Heat and Power (CHP) entering both markets. Additionally, the impact of changes in the reserve market auction design in Germany is investigated. From June 2018 on, secondary reserve in Germany is auctioned in four-hour tenders, instead of the previous weekly peak/off-peak auction design. We therefore compare the results under such an alternative auction regime with the same demand. Our approach leads to spot prices at a similar mean level compared to historical data, with Mean Absolute Error (MAE) values in a range from 6.0 to 6.6 €/MWh for all cases. The reserve price levels in this approach also compare to mean historical price levels, yielding MAE values in the range of 2.6–7.1 €/MW/h for positive, and 0.8–2.2 €/MW/h for negative reserves. The price lowering effect of flexibility provision from CHP is clearly identifiable, underscoring the importance of explicit modelling of heat demand restrictions. A change of the reserve tender regime towards 4-hour tenders further lowers positive reserve prices in all cases. Finally, a short-term future scenario of the German power sector is investigated, in order to estimate the development of reserve markets with current market developments, finding that in the short-term future, price-lowering effects from CHP are likely to be overcompensated by higher spot price volatility due to rising fuel and emission prices.