Scarcity Pricing

The ambitious European renewable energy integration targets are depressing energy prices while creating an increased demand for reserve capacity. The units best suited for providing this reserve capacity, typical gas-fired units with flexible operating characteristics, face shortfalls in the energy market due to their relatively high fuel costs which cannot be covered from energy market payments alone. The solution to this paradox investigated by our group is the introduction of a shortage pricing function for the procurement and remuneration of the reserve. This takes the form of an Operating Reserve Demand Curves (ORDC) that reflects the value of scarce capacity. 

ORDC adders in Texas on July 30, 2015. ORDC adders augment energy prices, and can exceed the marginal cost of the marginal unit significantly during periods of system scarcity.

Read more: 

– A. Papavasiliou, Y. Smeers. “Remuneration of Flexibility under Conditions of Scarcity: A Case Study of Belgium”. The Energy Journal, vol. 38, no. 6, pp. 105-135, 2017. 

– A. Papavasiliou, Y. Smeers, G. Bertrand. “An Extended Analysis on the Remuneration of Capacity under Scarcity Conditions”. Economics of Energy and Environmental Policy, vol. 7, no. 2, 2018.