Short-term electricity trading for system balancing: An empirical analysis of the role of intraday trading in balancing Germany's electricity system

Highlights: • Since 2011 wind and solar energy nearly doubled; balancing energy decreased by 50%. • One reason for this is the expansion of short-term electricity trading. • It is now common to trade electricity around the clock, and on a 15-min basis. • In general, the paper finds support for efficient short-term electricity markets. • Good market design allows integrating large volumes of renewable energy at low cost. -- Abstract: Previous studies have noted that, unexpectedly, Germany's dramatic expansion of wind and solar energy coincided with a reduction of short-term balancing reserves. This observation has been dubbed the "German Balancing Paradox". This paper provides further and updated evidence: since 2011, wind and solar energy have nearly doubled while both reserve requirements and reserve use have declined by 50%. The paper quantitatively explores one reason for reduced balancing needs: increased and improved short-term wholesale electricity trading on the intraday market. Trading is now commonly done around the clock and based on quarter-hour, rather than full-hour, contracts. The shift to quarter-hourly products alone explains a decrease in balancing energy by 17%. There is also strong evidence that market parties respond efficiently to imbalance charges, suggesting that incentive-based approaches to electricity balancing work.