IEEE Power & Energy Magazine - January/February 2021 - 56

In this context, maintaining the current market design,
which focuses on the trading arrangements for energy as
a basic commodity, risks creating a scenario in which the
large generation and storage players are unable to recover
their investment costs and thus are motivated to leave the
market. This critical market challenge is usually referred to
as the revenue insufficiency or missing money problem and
entails the dangers of compromising the security of supply
(considering the potential market exit of conventional generators) and/or compromising the carbon reduction targets
(considering the potential exit of low-carbon generators).
In the case of conventional generators, recent European
market design initiatives have contributed to addressing the
missing money problem. First, the design of balancing markets is continuously refined through the introduction of additional balancing products, the harmonization of procurement
and activation processes among different countries, and the
gradual shift toward a joint energy and reserve market clearing process. These policy changes are expected to enhance
the cost reflectivity of balancing markets and increase the
associated revenues of balancing providers. Second, following the U.S. paradigm, some European countries (e.g., the
United Kingdom, Ireland, Italy, and Poland) have started
implementing capacity markets, remunerating participants
that can contribute to the required adequacy levels in a costefficient fashion through competitive auctions; however,
capacity remuneration mechanisms remain controversial
and have been characterized as market distortive measures.
Finally, the concept of scarcity pricing has been recently
highlighted as a means to resolve the missing money problem: during periods of high demand and scarce supply, the
energy price is set at the marginal benefit of the demand side,
which is often estimated as the value of lost load. Considering the very high value of this marginal benefit, the activation of scarcity prices during a limited number of periods
per year can theoretically secure sufficient revenues for generators to recover their investment costs. In this context, the
EC has recently recognized [in Regulation (EU) 2019/943]
scarcity pricing as a key feature of the future low-carbon
electricity market, with Belgium being the first European

Wind Generation
Value Increase (%)

25
20
15
10
5
0

A

B

C

D
E
F
Scenarios

G

H

I

figure 4. An increase of wind generation value in the
Iberian market for different scenarios.
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ieee power & energy magazine	

country that has decided to implement such a mechanism,
which is scheduled to start in late 2021.

Market Participation
of Renewable Generation
Not only conventional generators but also renewables face significant challenges in the emerging market environment. First
of all, most European countries, with the support of the EC policy framework, are gradually abandoning out-of-market incentive mechanisms (such as feed-in tariffs, green certificates, and
long-term contracts for differences) that had been introduced in
the 1990s to provide the initial push for investments in renewable generation, on the grounds of fully integrating renewables
in the deregulated market environment. Second, given the
long gate closure times applied in many European markets,
the renewable generators' bids are typically based on 12-36 h
ahead forecasts in the day-ahead market, entailing significant
forecast errors due to the stochastic nature of renewables' output. As a result, the deviations between forecasted and actual
output need to be compensated in intraday and balancing markets, with the latter involving the payment of substantial penalties, which compromise the renewables' market profitability.
Finally, variable renewable generation is not generally qualified for participation in capacity markets, considering its inherent inability to provide firm power.
Nevertheless, various measures have been recently proposed to address these challenges and enhance the profitability of renewable generators, including both renewables'
operational strategies (e.g., advanced forecasting techniques,
aggregation strategies) and new market designs (e.g., postponing gate closure times, shortening market resolution, and
allowing participation of renewables in balancing markets).
In an effort to quantitatively analyze the effects of such strategies, within the European research program IRPWIND, the
normalized value of wind generation (calculated as the difference between its overall market revenue minus its imbalance penalties, divided by the overall energy production) in
the Iberian market has been quantified through the agentbased simulation tool MATREM for the following set of
scenarios (Figure 4):
✔✔ Scenario A: In this reference scenario (with respect to
which percentage of wind generation value increase is
calculated in the remaining scenarios), the wind generators' market bids are based on deterministic (expected) wind power forecasts.
✔✔ Scenario B: The wind generators employ a more advanced, probabilistic quantile-based forecast approach.
✔✔ Scenario C: Multiple wind generators within a given
control area are aggregated and then participate in
the market as a single entity (with a certain degree of
power controllability) to limit the overall forecast errors.
✔✔ Scenario D: The gate closure time of the day-ahead
market is postponed by 2 h (from 12 p.m. to 2 p.m.
Central European Time) to take advantage of more accurate forecasts.
january/february 2021
IEEE Power & Energy Magazine - January/February 2021

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