Scarcity Pricing simulation
On this page, Elia publishes simulated scarcity price-adders in the context of the 2019 discretionary incentive on scarcity pricing laid upon Elia by CREG. This simulation is based on a scarcity pricing model as conceptualized in the note by CREG and UCL CORE on the general design of a mechanism for the remuneration of reserves in scarcity situations (hereafter referred to as “CREG/UCL study”).
Introduction
Scarcity pricing is the principle of pricing electricity at a value above the marginal cost of the marginal unit during conditions of high system stress, according to the incremental value that flexible capacity offers to the system in terms of keeping the loss of load probability in check. The scarcity pricing simulation shown on this page is based on the principles of scarcity pricing as applied by ERCOT in Texas, with various hypotheses for the Belgian market. This publication of simulated scarcity price-adders results from the 2019 discretionary incentive on scarcity pricing as included in CREG's decision (B)658E/52 and follows the study work of the federal regulator CREG, in collaboration with the UCL CORE (Université Catholique de Louvain Center for Operations Research and Econometrics).
Publications framing further this studied concept of scarcity pricing can be found online:
- Published on 12 May 2016, CREG note (in collaboration with UCL CORE) on scarcity pricing applied to Belgium
- Published on 20 December 2018, Elia study report on scarcity pricing in the context of the 2018 discretionary incentives
- Published on 12 September 2019, CREG note (in collaboration with UCL CORE) on the general design of a mechanism for the remuneration of reserves in scarcity situations (on this page referred to as CREG/UCL study)
D+1 publication of the different scarcity price-adders
The scarcity price-adders shown here are calculated according to the model conceptualized in the CREG/UCL study (cf. chapter 7. Implementation) that - under specific assumptions - assesses the risk of scarcity and assigns a value to these moments that is linked to the loss of load probability and the value of lost load. The relevant concepts from the CREG/UCL study linked to this publication are described below. How such scarcity price-adders might link further to the prevailing market design and remuneration flows goes beyond this price-adder publication and is reflected upon in other parts of the CREG/UCL study.
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Which scarcity price-adders are shown? (cf. section 7.1 The Three Adders in CREG/UCL study)
- Adder 7,5 min.: Assumed remuneration for standby (non-activated) reserve capacity able to react within 7,5 minutes, applicable only to capacity in excess of what a provider has been cleared for in previous markets.
- Adder 15 min.: Assumed remuneration for standby (non-activated) reserve capacity able to react within 15 minutes, applicable only to capacity in excess of what a provider has been cleared for in previous markets.
- Adder Energy: Assumed adder to correct real-time energy price to reflect scarcity.
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How are the scarcity price-adders calculated? (cf. section 7.3 Constructing the Price Adders in CREG/UCL study)Although the exact components to calculate the different adders vary (detail can be consulted in the CREG/UCL study), in general a scarcity price-adder is calculated as follows:
scarcity price-adder = (VOLL - real-time energy price) * LOLP
- VOLL (Value of Lost Load) is a fixed input parameter, set at €8300/MWh.
- The real-time energy price is approximated by the MIP (Marginal Incremental Price) ( cf. Imbalance Prices ).
- The LOLP (Loss of Load Probability) is to be interpreted as the probability of incurring loss of load, estimated based on the distribution of historical system imbalances ( cf. System imbalance, SI ), taking into account the remaining capacity after resources have been activated to clear the imbalance of the present interval ( cf. Available Remaining Margin, ARC ).
