Getting prices right in structural electricity market models
File(s)
Accepted version
Author(s)
Ward, Kate
Green, Richard J
Staffell, Iain
Type
Journal Article
Abstract
Electricity market models are widely employed to study the role, impacts and economic viability of new technologies. Sources of arbitrage, such as storage and transmission, are increasingly seen as essential for integrating higher shares of variable renewables. Understanding their operation and business case requires models which accurately represent time-series of wholesale electricity prices.
We show that the prevailing assumption of generators bidding short-run marginal cost, such as in the merit order stack, substantially underestimates the spread and volatility of hourly wholesale prices. To compound this, the lack of transparent outputs from previous electricity
market modelling studies makes it impossible to scrutinise the prevailing methods or provide a detailed inter-comparison.
We demonstrate a simple modification to the short-run marginal cost approach that delivers improved variability in modelled prices: allowing generators to make a spread of bids, below cost for their first megawatts of capacity, above for their last. Using this model we demonstrate the impact of price variability on the operation and profitability of storage, highlighting the urgent need for greater awareness of this aspect of market model performance.
We show that the prevailing assumption of generators bidding short-run marginal cost, such as in the merit order stack, substantially underestimates the spread and volatility of hourly wholesale prices. To compound this, the lack of transparent outputs from previous electricity
market modelling studies makes it impossible to scrutinise the prevailing methods or provide a detailed inter-comparison.
We demonstrate a simple modification to the short-run marginal cost approach that delivers improved variability in modelled prices: allowing generators to make a spread of bids, below cost for their first megawatts of capacity, above for their last. Using this model we demonstrate the impact of price variability on the operation and profitability of storage, highlighting the urgent need for greater awareness of this aspect of market model performance.
Date Issued
2019-06
Date Acceptance
2019-01-20
Citation
Energy Policy, 2019, 129, pp.1190-1206
ISSN
0301-4215
Publisher
Elsevier
Start Page
1190
End Page
1206
Journal / Book Title
Energy Policy
Volume
129
Copyright Statement
© 2019 Elsevier Ltd. All rights reserved. This manuscript is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International Licence http://creativecommons.org/licenses/by-nc-nd/4.0/
Sponsor
Engineering & Physical Science Research Council (EPSRC)
Grant Number
EP/M001369/1
Subjects
Social Sciences
Science & Technology
Technology
Life Sciences & Biomedicine
Economics
Energy & Fuels
Environmental Sciences
Environmental Studies
Business & Economics
Environmental Sciences & Ecology
Electricity
Power systems models
Electricity market models
Electricity prices
Energy storage
Transparency
OPERATION STRATEGIES
ENERGY
GENERATION
STORAGE
IMPACTS
MERIT
Energy
Publication Status
Published
Date Publish Online
2019-03-22