This Report discusses how electricity balancing may best be organised in a future with greater penetration of distributed energy resources (DERs). Increased DER penetration can pose challenges to electricity balancing, while, at the same time, DERs can also help to balance the system more cost-effectively. Currently, participation by DERs in electricity balancing markets, whether individually or aggregated, is still somewhat limited. In the debate among practitioners and academics, most attention has been devoted to reducing market entry barriers for DERs. In this Report, we go one step further: we analyse whether the current organisation of the balancing mechanism is future-proof.
This Report comprises an introduction, four sections and conclusions. After the introduction, Section 2 explains the working of the balancing mechanism and introduces the relevant EU legislation. Section 3 shows that the current organisation of balancing mechanisms in the EU is a legacy rather than a well-thought-through design choice. We explain that alternative setups are possible in theory and that their performance in practice depends on the context. To assess different balancing setups, we introduce a multidimensional framework and illustrate it by comparing the current setups in the EU and the US. In Section 4, we highlight the challenges that the balancing mechanism in the EU is currently facing with increasing shares of DERs. We argue that, in the medium to long term, it will become increasingly challenging to operate the balancing mechanism cost-effectively without adjusting its organisation. In Section 5, we introduce two alternative ways of organising it in the future: the ‘Super SO model’ and the ‘Local SO model’. The key question is whether it would be easier to manage seams within a balancing area or seams between balancing areas. The main challenge with the Super SO model would be that a global optimum, considering all voltage levels and local issues, is difficult to achieve. Even though the Local SO model might be more pragmatic, the main challenge with this model would be implementing it in a way that limits fragmentation of balancing markets, which would have severe implications for efficiency and competition.
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