Discussion Papers

Christian Growitsch, Gernot Müller, Margarethe Rammerstorfer, Christoph Weber

Determinanten der Preisentwicklung auf dem deutschen Minutenreservemarkt

Nr. 300 / Oktober 2007

Summary

Initially, tertiary control in Germany was solely offered by transmission system operators of the respective power control areas and their associated power plants. In 2001 and 2002, the Federal Cartel Office ensured the implementation of separate procurement auctions for the distinct power control areas. The recast of the Energy Act of 2005 and two associated government regulations once again modified the framework for the procurement and utilization of power reserve, stipulating all transmission system operators to phase in a common procurement auction for the supply of tertiary control. Subsequent to a public consultation, in a decision dated August 29, 2006, the Federal Network Agency set uniform provisions, specifying publication obligations, the reservation of shares of tertiary control to be purchased in the own power control area, certain time slots, the timing of auctions, the submitting of bids, and the selection of providers using merit orders. Common procurement auctions for tertiary control started on December 1, 2006. Admittedly, the reform has fallen short of expectations so far, first and foremost concerning the intensification of market entry of tertiary control providers as well as the desired decline of the price level. Taking this into consideration, the study examines the effects of the changeover on observable demand charges. In this context, the analysis gives priority to the following issues: What consequences does the launch of the common IT platform have on power balance charges, particularly with regard to expected values and volatility? Do the variation and integration of the system allow an improvement of the competitive position of market participants? Is there any need for additional action for the regulator in respect of rearranging attributes of the auction, e.g. number and timing of auctions? The first part of the study deals with basic features of power reserve and tertiary control, the structure of the German tertiary control market and the design of the procurement auction. Resting upon the results, the system is analysed from the perspective of auction theory. Daily, single-stage sealed-bid auctions as well as pay-as-bid auctions induce a facilitation of market entry, a restriction of strategic behaviour, and a decrease in prices. The change of the auction design on December 1, 2006, has contradictory implications. The reduction of the minimum quantity bids, the shortening of time slots, and the requirement of providing adequate information favour lower prices, the reservation of certain shares for the own power control area and the timing of the auction point to raising prices. Based on the previously mentioned results, the second part of this study analyses the market itself. Herein, we start with a description of the affected time-series for positive and negative tertiary control prices. These descriptive statistics allow first conclusions about the impact the change of the auction design has had on prices for tertiary control. Furthermore, in a second step the dependence between prices for tertiary control and spot prices is estimated and quantified. The upcoming results provide evidence that the observable increase in prices is not explicitly due to the change of the auction design but rather caused by an increase in spot prices. The quoted models indicate that the time-series will tend back to its original values in the long run. [only a german version available]

Discussion Paper is available for download.

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