Harmonization of the European balancing power auction: A game-theoretical and empirical investigation

The shift towards renewable energies is accompanied by great volatility on the supply side, demanding European-wide instead of national balancing services. For the integrated European procurement of balancing reserves, the European Commission proposes a multi-attributive auction mechanism which is very similar to the current German auction. The key difference, however, is a switch from pay-as-bid to uniform pricing. We develop a game-theoretical model of the current German and the future European balancing market design. Both market designs have desirable economic properties in their one-shot version, i.e., an efficient auction outcome and competitive prices. We show that a switch to uniform pricing does not induce bidders to report their true costs in their bids, but leads to underbidding. We contrast the equilibrium outcomes with German market data and find a substantial discrepancy, i.e., non-competitive prices. We provide a game-theoretical grounded explanation that is based on the regular repetition of the auction combined with the invariant supplier side. (C) 2018 Elsevier B.V. All rights reserved.