We often get questions along the line of:
Why do I need a prognosis for bidding into the mFRR capacity market? Can’t I just bid in my expected profit from the day-ahead market and be done with it?
The idea behind this is that by not bidding into the DAM, I will be missing out on some income equal to the DAM price less my marginal cost; I will then be willing to forgo this profit if I receive the same in another market (e.g. the mFRR CM). Thus I can just bid this value into that market and be done with it.
The broad thrust of this idea is not completely wrong - MMO is essentially calculating what I should bid into the next market to be cleared, given my expected alternative income from the alternative markets that will be cleared later. However, it is a little more complicated in practice than just simply looking at lost income in the DAM market, as we illustrate with the following example.
Capacity market MMO - a simple example
Assume I have a plant with a marginal cost of 20 €/MWh. For the sake of simplicity, let's assume that the plant has a flat efficiency curve, so that my marginal cost doesn’t change with my generation level, and that the market time step is one hour (15 minutes doesn’t change this). I expect the DAM market to clear at 30 €/MWh. An alternative to selling in the DAM is to sell up regulation capacity into the mFRR CM market. How should I price my bid into the mFRR CM market?
The best way to do this is to first calculate the expected income from the DAM market. This is pretty simple in this case - it is simply equal to price (30) less cost (20), and is 10 €/MWh. This is our alternative cost. Our bid into the mFRR CM market should then be structured so that we expect to earn at least this alternative cost if we are cleared - in this case 10 €/MWh.
Let's examine what would happen if I bid up regulation into the mFRR CM market and get accepted. I would get paid the mFRR CM market price for my capacity availability. I would then also bid this same capacity into the mFRR EAM market - indeed I am required to do so. My total income in this case will be equal to:
Where
Lets assume that we know the market will be up regulated at a up regulation mFRR EAM price of 35 €/MWh, and that our mFRR bid will be 50% activated (i.e. aEAM = 0.5), and that the mFRR CM up regulation market clears at 10€/MW. My (expected) profit would then be:
This is 7.5 € more than what I would earn selling solely in the DAM market. I would in fact be willing to sell into the mFRR CM up market at any price above 2.5 €/MW - and indeed, this should be my bid in this market in this case.
In short, when bidding into the capacity markets, the chance of and income from activation must be taken into account in calculating the capacity market bid price. Clearly, a strategy of bidding into, say, the mFRR CM up market at a price equal to the difference between the (expected) DAM price and my marginal generation cost, will result in a lower mFRR CM acceptance than optimal, and a lower expected profit overall.
More realism means more need for forecasts
The example above was highly simplified. We assumed, for starters, that we knew how these markets would clear - which of course is not the case. There are a number of complications that make this more difficult, including:
Non-linear efficiency curves for the generation unit
Uncertainty regarding the mFRR EAM prices and activation probability
Uncertainty regarding the DAM price
Lower volumes in the mFRR CM and EAM markets (so which mix of assets should you offer there, and at what volumes?)
Generation flexibility restrictions, costs of ramping and so forth (in short - how should you structure your bids)?
These complications make it even more important to have an understanding and expectation of market prices for these markets - that is, full and comprehensive CM and EAM forecasts for all markets you are - our could be - active in. Even simple strategies benefit from forecasts of prices, volumes, and uncertainty in these. This is what Optimeering delivers to our customers - comprehensive forecasts and multi-market optimization so you can optimize your bidding strategies, bids, and - ultimately - profit.
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