aFRR on a sunny day

Here is a short post on automatic Frequency Restoration Reserves, or aFRR. On Sunday 2 July 2023, electricity production from renewables and especially solar was very high, provoking rock-bottom prices in the wholesale electricity markets, as we can observe on the graph below.

At any moment, power reserves have to be present, including the secondary reserves or aFRR. It proves insightful to examine the pricing dynamics of these reserves during periods of exceptionally low day-ahead and intraday prices. .Let's focus on the downward aFRR in Germany.

First, the capacity (ability to provide the reserves) is procured on 6 blocks of 4 hours each. The graph below shows the capacity price (€/MW per hour) for the 6 downward blocks on 2 July 2023. It is clear that the blocks during sunny hours exhibit much higher prices.

Second, for each 15 minutes, there is an auction for the activation price. A supply curve is then created for each 15-minute block. In the graph below, we compare the supply curve of one block at the peak of solar generation and one during the night. We observe that activation prices are more negative for the one in the afternoon, which will lead to more expensive activation of aFRR.

Certainly, it's crucial to recognize that these observations pertain to a specific day, and making broad generalizations always carries risks. However, there is a certain logic to the notion that power reserves might trend toward higher costs when the wholesale market experiences exceptionally low prices. This is because flexibility providers, encompassing traditional assets, must recover the expenses associated with remaining operational, even when not generating profits in the wholesale market, or even potentially facing losses during periods of negative prices.

As renewables are expected to grow substantially, day-ahead and intraday prices would tend to decrease (see here), and such a decrease would be partly compensated by an increase in the cost of power reserves. Of course, a quantitative estimation of this effect is not an easy task!

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