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Remuneration of Flexibility using Operating Reserve Demand Curves: A Case Study of Belgium

Abstract:
Flexibility is becoming an increasingly important attribute of conventional generators due to the challenges imposed by the unpredictable, highly variable and non-controllable nature of renewable supply. Paradoxically, flexible units are currently being mothballed or retired in Europe due to financial losses. We investigate an energy-only market design, referred to as operating reserve demand curves, that rewards flexibility by adjusting the real-time energy price to a level that reflects the value of capacity under conditions of scarcity. We test the performance of the mechanism by developing a model of the Belgian electricity market, which is validated against the historical outcomes of the market over a study period of 21 months. We verify that (i) based on the observed market outcomes of our study period, none of the existing combined cycle gas turbines of the Belgian market can cover their investment costs, and (ii) the introduction of price adders that reflect the true value of scarce flexible capacity restores economic viability for most combined cycle gas turbines in the Belgian market.

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Keywords: Flexibility, Energy-only markets, Renewable integration, Operating reserves, Capacity remuneration

DOI: 10.5547/01956574.38.6.apap

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Published in Volume 38, Number 6 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.