The value of flexibility in power market

The 10 July 2019

Authors

Stéphane Gouttea, Philippe Vassilopoulos

Abstract

The concept of flexibility is not one you find in standard microeconomics textbooks, yet it already plays a major
role in the remuneration of the resources that generate and consume electricity every day and is likely to play an
even larger role with the penetration of large intermittent renewable capacities. In this paper we attempt to
quantify the net revenues that can be captured by a flexible resource able to react to the short term price
variations on the day-ahead and intraday markets in Germany. We find that the difference between day-ahead
and intraday revenues for a flexible resource has been increasing (although the profitability has been decreasing
on both markets). This difference is more pronounced once 15 mn price variations can be captured by a flexible
resource. The net revenues from the local 15 mn auction (which is held 3 h after the hourly “coupled” day-ahead
auction) are more than eight times higher than the day-ahead hourly auction but below the net revenues that can
be captured with the high prices from the continuous market. The results of the backward-looking empirical
estimations allow us to distinguish and quantify two components of flexibility: (1) the “immediacy” value as we
are approaching real-time and the urgency of the delivery increases (this value is revealed during the continuous
intraday process and is highly linked to the stochastic nature of power supply and demand (i.e., wind/solar
forecasts, forced outages of thermal generation,…) forecast error risk), and (2) the “ramping capability” component
based on the technical characteristics as a resource can react to variations of shorter granularity (15 mn
vs. 60 mn). We model and quantify the ramping capability component using a geometric brownian motion with
jumps.

Energy Policy 125, 2019