Agent-based analysis of the impact of the imbalance pricing mechanism on market behavior in electricity balancing markets Reinier A.C. van der Veen a, ⁎, Alireza Abbasy b , Rudi A. Hakvoort b a Delft University of Technology, Faculty of Technology, Policy and Management, Section Energy & Industry, Jaffalaan 5, 2628 BX, Delft, The Netherlands b Delft University of Technology, Faculty of Technology, Policy and Management, Section Energy & Industry, Jaffalaan 5, 2628 BX, Delft, The Netherlands abstract article info Article history: Received 27 July 2011 Received in revised form 28 March 2012 Accepted 1 April 2012 Available online 16 April 2012 JEL classifications: C63 L19 Keywords: Electricity markets Balancing market Settlement Agent-based modeling Imbalance pricing mechanism The imbalance pricing mechanism is an important design variable within European-type electricity balancing markets that determines the incentives given to so-called Balance Responsible Parties (BRPs) to balance their electricity production and consumption portfolio. To analyze the impact of alternative imbalance pricing mechanisms on balancing market performance, an agent-based model has been built, in which the BRPs are the agents that decide autonomously in each round on their balancing strategy based on results in past rounds. Six alternative mechanisms are analyzed. It is concluded that aiming for a small long position is gen- erally the preferable BRP strategy. Different imbalance pricing mechanisms lead to comparable system imbal- ances, but single pricing results in the lowest imbalance costs for the BRPs and for the market as a whole. © 2012 Elsevier B.V. All rights reserved. 1. Introduction Balance management is the power system operation service that encompasses the continuous balancing of power supply and demand, or production and consumption. In this work, we focus on the institu- tional arrangement establishing market-based balance management in unbundled, European-type electricity markets, which we call the ‘balancing market’. European-type markets have a voluntary power exchange and freedom of dispatch, instead of the centralized power pool and unit commitment commonly found in U.S.-type markets (cf. Rebours et al., 2007; Shuttleworth, 2002). We define the ‘balancing market’ to be the institutional arrangement that establishes market-based balance management in a deregulated electricity market, and that consists of three main pillars: balance plan- ning, balancing service provision, and imbalance settlement. These terms are frequently used in Europe (cf. ETSO, 2003), whereas U.S. mar- kets more often apply the terms of scheduling, ancillary services (for frequency regulation), and balancing settlement (cf. PJM, 2008). Balancing service provision concerns the provision of balancing ser- vices by market participants, and the activation of such services by the System Operator (SO) for the real-time restoration of the system bal- ance. 1 Balance planning involves the submission of energy schedules by so-called Balance Responsible Parties (BRPs) to the SO, and imbalance settlement involves the financial settlement of schedule deviations with an imbalance price 2 between the BRPs and the SO. The Balance Re- sponsible Party is a market party that has taken up the responsibility for balancing a portfolio of generation and/or consumption connections. In the imbalance settlement process, which takes place after real- time, both the schedule deviations of BRPs and the imbalance prices are determined. The schedule deviation, or imbalance volume, of a BRP is the difference between the planned net electrical energy exchange with the power grid over its entire energy portfolio (as specified in the energy schedule) and the actual net electrical energy exchange, which is mea- sured in real-time. The main time unit used within the balancing market is the Program Time Unit (PTU). For each PTU, BRPs specify planned energy exchange, for each PTU the schedule deviations are determined, and for each PTU imbalance prices are determined. Two imbalance prices are Energy Economics 34 (2012) 874–881 ⁎ Corresponding author. Tel.: + 31 15 2785749; fax: + 31 15 2783422. E-mail address: r.a.c.vanderveen@tudelft.nl (R.A.C. van der Veen). 1 In European-type markets, the System Operator is not the market operator of a common power pool, but it still operates the market(s) for balancing services, i.e. it is the single buyer in those markets. 2 Imbalance prices are charged in European-type markets, whereas U.S.-type mar- kets with a centralized pool apply real-time prices that differ per node based on local congestion costs and grid losses (cf. PJM, 2008). The part of these real-time prices that reflect the costs of system balancing can be considered the equivalent of the imbalance prices in European-type markets. 0140-9883/$ – see front matter © 2012 Elsevier B.V. All rights reserved. doi:10.1016/j.eneco.2012.04.001 Contents lists available at SciVerse ScienceDirect Energy Economics journal homepage: www.elsevier.com/locate/eneco