Energy Policy, 2010, Vol. 38, No. 7, pp. 3146-3154

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This article focuses on the design of balancing markets in Europe taking into account an increasing wind power penetration. In several European countries, wind generation is so far not burdened with full balancing responsibility. However, the more wind power penetration, the less bearable for the system not to allocate balancing costs to the responsible parties. Given the variability and limited predictability of wind generation, full balancing exposure is however only feasible conditionally to well-functioning balancing markets. On that account, recommendations ensuring an optimal balancing market design are formulated and their impact on wind generation is assessed. Taking market-based or cost-reflective imbalance prices as the main objective, it is advised that: (1) the imbalance settlement should not contain penalties or power exchange prices, (2) capacity payments should be allocated to imbalanced BRPs via an additive component in the imbalance price and (3) a cap should be imposed on the amount of reserves. Efficient implementation of the proposed market design may require balancing markets being integrated across borders.