High clearing prices in the Nordic aFRR Capacity Market
During the last week, the procurement of aFRR balancing capacity in the common Nordic aFRR capacity market has resulted in unusually high prices. The high prices are not due to any mistakes, but a consequence of especially three different circumstances.
First and foremost, transmission capacity has been reduced on SE4-SE3 (and to some extent DK2-SE4), which forces acceptance of expensive bids in SE4/DK2 in order to meet TSO demand. Clearing prices rise expectedly because of that.
Secondly some of the more expensive bids selected have been block bids, where volume is linked for several hours. Block bids are not allowed to set the marginal price, and this introduces pricing rules, such that the final clearing price is just high enough to make block bids profitable during the block period and not for individual hours. The result of that is, that the clearing price is not necessarily equal to the block bid price, but a mathematical measure to make sure that the block bid does not set the marginal price and receive a higher payout than necessary. This unfortunately creates some less transparent results and price signals, and TSOs are investigating how this can be improved – both on a short term within the existing methodology frames, but also in a longer perspective, where it can be foreseen that bid formats will be changed to represent underlying cost better.
Thirdly the capacity auctions are designed with a maximum calculation time limit because results are necessary input for the daily capacity calculation in the Nordic region. When an auction comes across a mathematical complex problem, the price calculation in the clearing algorithm can time out and as a result of that return an approximate result. When an approximate result is returned, bid selection (accepted bids) and cross-zonal capacity reservation are identical to the ‘optimal’ solution. However, the calculation of congestion is simplified in such cases because this is the time-consuming part, and the consequence of that is prices spreading nonintuitively across bidding zones. This is considered a better alternative than not having a solution at all, but TSOs are investigating potential improvements.
While the first and the second points have occurred several days this week, the third until now only affected delivery day 22nd October.
The clearing results are considered correct, and volumes and prices will not be changed, and settlement will be performed accordingly.