Limiting imbalance settlement costs from variable renewable energy sources in the Nordics: Internal balancing vs. balancing market participation

Abstract

Due to the market gate closures in the Nordic energy markets, producers with variable renewable energy (VRE) assets, e.g., PV and wind power plants, must forecast their production prior to delivery, leaving room for significant forecast errors. These forecast errors can lead to imbalances between the contractual market agreements and physical delivery, which have to be financially accounted for through the imbalance settlement. The increasing shares of VREs in the Nordic energy mix and the increasing variability in the price of regulating the imbalances, can lead to potential large revenue losses for the producers.

This study investigates how different producer balancing strategies can limit the uncertainty and potential revenue losses in the imbalance settlement. The study focuses on available balancing measures the producers are able to use in the period starting from the last energy market gate closure, i.e., the manual Frequency Restoration Reserve (mFRR, tertiary reserves) balancing market, and throughout the subsequent settlement period. During this settlement period, producers have the option within the Nordic imbalance settlement framework to prevent VRE imbalances by performing internal balancing, i.e., ramping up or down their dispatchable assets which are located in the same bidding area as the VRE assets. However, this study shows both theoretically and quantitatively that such internal balancing is not economically beneficial compared to offering this regulating energy to the mFRR market.