1. Imbalance costs of wind power – how to improve the market integration of wind power Hannele Holttinen Senior Research Scientist, Team leader

2. VTT TECHNICAL RESEARCH CENTRE OF FINLAND 2 Contents Introduction Bidding in the electricity markets, paying balance settlement costs – case Nordpool System net imbalances, balancing market and imbalance pricing Balance settlement rules – one/two price system Comparison on different balance settlement rules Imbalance payments depending on the wind penetration Producers with single or distributed wind power Balancing costs of wind power to power system versus imbalance payments by the producers Conclusions

3. VTT TECHNICAL RESEARCH CENTRE OF FINLAND 3 Wind power bidding to the electricity market Day-ahead market: 12-36 hours ahead bid at one go, as 24 hourly bids for the next day The predicted production amounts are bid to the market

4. VTT TECHNICAL RESEARCH CENTRE OF FINLAND 4 Prediction errors cause imbalances Every hour there is either a need to buy up-regulation or a need to sell excess production at down-regulation price Down-reg. Up-reg.

5. VTT TECHNICAL RESEARCH CENTRE OF FINLAND 5 Each hour there is a cost for either up or down regulation - Example of hourly prices Price difference to spot price has been on average 3 to 9 €/MWh in 2004-2008 (Finland price area of Nordic market)

6. VTT TECHNICAL RESEARCH CENTRE OF FINLAND 6 Imbalances of wind power combined with other imbalances give the system need of balancing System operators use up- or down-regulation (from balancing market) to balance the total aggregate of imbalances from loads and generators – system net imbalance and price of available regulation determines the price for each hour Hourly price for imbalances from the balancing market are used for balance settlement  transparency System net imbalance Producer_1 imbalance Producer_2 imbalance Producer_3 imbalance … Producer_7 imbalance Producer_8 imbalance Producer_9 imbalance …

7. VTT TECHNICAL RESEARCH CENTRE OF FINLAND 7 One and two price system for balance settlement Both systems treat the producers that contribute to system net imbalance the same (blue bars) How to treat the producers that do not contribute to the system net imbalance (white bars) two price system – gives them the spot price one price system – gives them the balancing market price, extra benefit as if they had actually bid to balancing market System net imbalance Producer_1 imbalance Producer_2 imbalance Producer_3 imbalance … Producer_7 imbalance Producer_8 imbalance Producer_9 imbalance …

8. VTT TECHNICAL RESEARCH CENTRE OF FINLAND 8 System operator view Two price system – gives income from balance settlement One price system – gives only enough to cover the imbalance cost incurred, the extra money from the ”blue” producers are circulated to the ”white” producers System net imbalance Producer_1 imbalance Producer_2 imbalance Producer_3 imbalance … Producer_7 imbalance Producer_8 imbalance Producer_9 imbalance …

9. VTT TECHNICAL RESEARCH CENTRE OF FINLAND 9 Imbalance pricing – system operator point of view System operators need income for keeping system balance Regulation used from the balancing market Maintaining instantaneous and disturbance reserves Making the balance settlement process System operators can cover fixed costs from the tariff for all consumers (and producers), for example to cover the reserve costs Also imbalance prices can contain a fixed price component: Fixed price €/MWh for all imbalances: for example 0.07 €/MWh in Finland (extra penalties are included in some systems)

10. VTT TECHNICAL RESEARCH CENTRE OF FINLAND 10 Imbalance pricing: wind power point of view Prediction errors large day-ahead (12-36 hours ahead): One wind farm: ave 10-16 % of capacity (45-60 % of energy) Distributed wind: average 6 % of capacity (28 % of energy) (experience Denmark/Germany) For 1-6 hours ahead, the prediction accuracy improves Errors reduced by trading after spot market (intra-day markets) Imbalance prices also used as an incentive for the market actors to keep their balance For wind power producers there is not much they can do but use state-of-the-art forecasting For wind power producers it is beneficial if fixed costs are allocated to all consumers (or all imbalances)

11. VTT TECHNICAL RESEARCH CENTRE OF FINLAND 11 Imbalance payments for wind power, one/two price system One price system starts to incur more costs first when penetration level increases and wind power starts to impact the system imbalances – wind and system imbalances to the same side more of the time

12. VTT TECHNICAL RESEARCH CENTRE OF FINLAND 12 Producer with concentrated/distributed wind power One price system: at low penetration level not so much difference whether a small or large producer

13. VTT TECHNICAL RESEARCH CENTRE OF FINLAND 13 Comparison of imbalance payments and costs for the system More wind power will increase the up/down regulation needed, there will be additional cost from the balancing market (here: system cost) Both costs calculated with average up/down regulation prices, 2004

14. VTT TECHNICAL RESEARCH CENTRE OF FINLAND 14 Conclusions – how to improve market integration of wind One price system gives clear benefits at low penetration levels, and for small producers with concentrated wind power Balance settlement rules have a large impact for wind power One-price system reflects the increase in system costs Imbalance payments increase with higher penetration levels, (for both one and two price systems) transparency –when costs directly from balancing market Allocating system operator fixed costs in the tariff for all consumers As wind power producers have more imbalances than other producers or loads, it is beneficial for wind power that costs are allocated to all consumers and not in the payments of imbalances One price system means less income for the system operators At higher penetration levels, largest errors from day-ahead forecasts should be corrected before the hour of delivery updated information from the prediction, intra-day markets

15. VTT TECHNICAL RESEARCH CENTRE OF FINLAND 15 VTT creates business from technology