NL Dual Imbalance Pricing Record Highlights Behaviour Change in Reserve Markets

NL: I have been getting some questions lately about the occurence of dual pricing in the Netherlands lately. People have asked if the frequency has increased, where the TSO expected to actually see a lower number of dual prices due to the reduction of the full activation time of aFRR reserves. It looks like our assumption of more frequent shifts of direction in balancing markets has compensated that effect.

Also noticed a discussion between our friends Robert Kleiburg and Jan Willem Zwang contemplating if the continuous run of 9 settlement periods with dual pricing was a record or not. The last question is an easy one, it is not. Before rule changes in 2007, dual pricing was present in around 16% of the cases and longer runs were seen, especially during periods where the 'incentive component' was triggered, causing at least a whole month of duel prices (not regulation state 2).

However it is the longest run since 2015. In that year a number of 8 period-long runs was observed but since September 2015, we have not seen runs longer than 7 settlement periods. This 9 period-long run of dual prices under regulation state 2 is remarkable.

Some Trends Around Dual Pricing

We have seen the spreads between shortage and surplus prices increase during the gas crisis. What is remarkable is that the spread during periods of dual pricing has increased dramatically versus the period before the crisis. In short, it has become more risky to have an imbalance position, during dual price periods.

Another trend we see is that dual pricing seems to occur a lot during volatile periods, such as the windy winter months. This is logical, dual prices are driven by a change of direction in the balancing volume within a period and in winter, there is more wind, so more wind based volatility, but there is also more flexible power online in the form of gas and coal assets, because the demand for power is higher.

As a result of the higher spreads, which are not just a result of the energy crisis we saw last year, but also of changed bidding behaviour in reserve markets, it has become riskier to 'help' balance the system, using the data as published by TenneT on its Balance Delta 2017 page.

Lower Voluntary Balancing Activity

With faster responding aFRR reserves, for example we have seen a dramatic decline in the 'voluntary' balancing activities performed by the greenhouse sector. The self balancing capacity of the market has declined.

With increased renewable generation, we see that the amount of flexible generation can at times also be at scary low levels. If you can't run your power plant at a baseload level and make money, you may as well shut it down, especially if you are not prequalified for the aFRR capacity auctions.

This results in a need for speed at the TSO, to balance the grid. We therefore see quite often that the whole balancing stack gets activated and prices go extreme with relatively moderate balancing needs. As the maximum bids in the balancing stack have become more extreme, activating the whole stack at once results in those more extreme prices.

Looking Forward

So what is ahead of us? There is a promise from the TSO to the ACM (Autoriteit Consument en Markt), to not have more than 10% of dual pricing in the balancing market on average. This holds for most months, only 10 months since 2016 have seen a higher than 10% dual price situation, if we assume the average is calculated on an annual basis, that is well within the promised numbers.

So what is needed, is a more profound insight in where the balancing market may be going. There are quite some indicators that can help you out there.

For one, you can check the sensitivity of day-ahead market results, it will help you identify the orders that were in the market but were not matched. These will still be hanging above the market as the fundamentals only change marginally overnight.

Then there are things like generation forecasts, margin forecasts and forecast sensitivities for renewable forecasts to keep an eye on. The ratio between forecast deviation risk and available flexibility in the market is key to understand.

The during the day, following the trends on the intraday market, offers for reserve capacity are key.

And then finally, we have to realise that we are not alone. The Netherlands is a small country, having an idea what is happening around us, especially in Belgium and Germany will inform us well. Looking ahead at balancing risks and forecasts for the German and Belgian Markets will set the scene for how the Dutch market behaves as well.

Even if you do everything right, you will still be exposed to a degree of dual pricing methods. There are a few ways to mitigate the impact of dual prices. You can work through a BRP aggregator, such as my old colleagues of PVNED , or trade your imbalance out in the ex-post auction as organised by Etpa - A new way of power trading .

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