Day-ahead and Reserve Prices in a Renewable-based Power System: Adapting Electricity-market Design for Energy Storage

Decarbonizing the power mix will require investments in storage and flexibility options to replace the current carbon-intensive supply of reserves. This paper questions whether reserve-capacity markets can serve as a capacity mechanism for flexible technologies. A fundamental model of the day-ahead and reserve markets is used to investigate the evolution of reserve prices with large shares of renewable energy and storage. The model represents the current market design in Continental Europe with a centralized supply and platforms for the exchange of reserves. By becoming the main suppliers of reserve capacity, batteries have a noticeable impact on reserve prices. Their flexibility implies zero opportunity cost most of the time, meaning that the flexibility is not rewarded by the market. These results suggest that reserve-capacity markets cannot provide additional remuneration for flexible technologies and, thus, do not solve the missing-money problem in the context of the energy transition. JEL Classification: Q41, Q47