Project Structure

WP0 – Project management and dissemination

For a proper coordination of the project work and dissemination strategy, WP0 covers:
A review of the state of the art, to be updated throughout the project life
  •  Meeting organization aspects – general meetings should be held every 6-9 months to share project results, update the project consortium on the activities of all partners, andupdate the dissemination strategy.
  •  Reporting on the various tasks and key findings of the project

  • Dissemination activities for the scientific community and broad audience


 WP1 Market organization and power systems operations (DTU Elektro)

The objective of WP1 is to analyze current market designs and investigate new market-clearing mechanisms to facilitate the competitive exploitation of renewable and distributed energy sources, while guaranteeing a reliable and secure operation of the underlying electrical infrastructure.
Task 1.1
Zonal and locational marginal pricing
Zonal pricing as used in e.g. Nord Pool, provides greater transparency to market participants
 and a lower computational burden if compared to locational marginal pricing, for which electricity prices for each physical bus of the network are determined instead. However, zonal pricing is suboptimal in terms of social welfare. Task 1.1 will investigate the effect of the foreseen increase in renewable and distributed energy resources as well as the participation of flexible demand in electricity markets on zonal and locational marginal pricing. It will also look at potential ways to compromise between the two, for instance based on dynamic zonal pricing approaches.

Task 1.2 The mechanics of market clearing: from decoupled to coordinated

Forward markets are required for inflexible power plants to efficiently and reliably adjust their production levels sufficiently in advance, while balancing markets are needed to cover the energy imbalances that may arise during the real-time operation of the power system, providing economic incentives for flexible producers to adjust their forward positions. While today in markets like Nord Pool these markets are cleared successively in a decoupled manner, a range of alternative approaches will be introduced and evaluated through Task 1.2 in the context a substantial renewable energy penetration, with different degrees of coupling and coordination, aiming at improving the economic performance of the system at a limited computational cost.

Task 1.3 Co-optimized markets for energy and ancillary services

Markets for electrical energy need to be supported by different types of ancillary services in order to ensure the continuous balance between generation and consumption in a secure and reliable manner. The rapid increase in renewable energy penetration is making the requirements for ancillary services more stringent. Task 1.3 will focus on analyzing different alternatives to coordinate the market clearing for electrical energy with the acquisition of ancillary services in order to maximize the social welfare as well as the reliability of the system.

Task 1.4 The role of forecast imperfections on markets

Increasing penetration of renewable energy sources and increased flexibility of the demand give a more prominent role to forecasts as input to market clearing. These forecasts ought to be of probabilistic nature (i.e. predictive densities and scenarios) so as to reflect uncertainties in upcoming events at the time of clearing. These forecasts can never be perfect. Task 1.4 will analyse the impact of various types of forecast imperfections on the various types of markets of Tasks 1.1-1.3. Among other things, this concerns probabilistic biases in the forecasts, as well as errors in the representation of spatial and temporal correlations of uncertainties.

Enabling demand-side management in electricity markets

WP2 focuses on releasing the potential for demand flexibility in electricity markets. The transaction costs of different solutions are investigated to determine the optimal placement of incentives or markets for demand flexibility among the various power markets. Finally, effects of the physical constraints of the grid and the need to ease regulatory constraints are studied.

Task 2.1 Pooling and handling flexible demand

Demand flexibility may greatly support integration of renewable energy generation by allowing demand to follow supply rather than the opposite way. Typically today, it is only the case of very large customers participating in the balancing market. Envisaging consumers may bring additional flexibility and based on an analysis of transactions costs and benefits, Task 2.1 will analyze the extent to which demand flexibility may be incentivized as well as identity of the economic agents who would be best suited to aggregate and trade the resulting flexibility. 

Task 2.2 New market designs for demand-side management in a market environment

Various power markets (capacity, forward, retail, balancing, as well as derivative markets for demand flexibility) are clearly linked as also analyzed in Task 1.2. It is not clear where new markets for flexible demand would “naturally” fit in as this depends on transactions costs (Task 2.1) and on incentives that cut across markets. Task 2.2 analyses various market designs for trading demand flexibility and determines their relative performance in terms of price structures, reliability of supply and incentives to invest in capacity, grids and automation/ICT.

Task 2.3 Regulatory aspects

A new organization of electricity markets would likely require liberalization or re-regulation to remove legal barriers for trade to emerge. Task 2.3 provides a law & economics analysis of existing regulation with a view to determining the binding legal/regulatory constraints and the legal framework that would be optimal for the evolution of electricity markets if the best market designs found in Task 2.2 were to be implemented. In addition to an analysis of Danish  regulation, cross country comparisons will be conducted to gather the limited but increasing evidence on legal regimes that foster or hamper demand responsiveness.

Market dynamics and incentives for investment

The focus of WP3 is on how various market designs, including the current and proposed set-ups, may lead to different market dynamics and how this affects investment incentives and thereby drive the future generation mix.

Task 3.1 Valuing emerging technologies under the current market design

Task 3.1 will investigate whether the current market design provides sufficient investment incentives for renewable energy and system flexibility, building on recent real options approaches. In contrast to standard real options models, however, for flexible technologies such as storage, the control affects the underlying dynamics, which poses a severe modeling challenge. Furthermore, renewables and flexible technologies will not only be valued as stand-alone investments, but also from a portfolio perspective.

Task 3.2 Creating appropriate investment incentives under future market designs

In overcoming the barriers to investment, the previous WPs will propose a number of changes to the current set-up, involving offer construction, market coupling, clearing sequence and clearing frequency. Task 3.2 will investigate how these changes propagate through the system and affect investments. This includes 

  •  characterization and modeling of alternative price
  • dynamics stemming from various market structures and generation mix,
  • the joint

  • consideration of multiple sources of correlated uncertainties (from various markets), and the usage of multiple (interlinked) real options permitting to handling various types of market organizations.


Task 3.3 Investment and policy recommendations

For potential investors the real options assessments can provide simple rules for whether, when and how much to invest in new technologies and under various market designs. Assuming optimal investor behavior, Task 3.3 will in turn provide information for policy makers on incentives to invest, and may serve as a guideline in the design of future markets. One could ultimately address the question of sufficient generation adequacy by simulation from the suggested real options models.

Systems view and overall recommendations for future electricity markets

This last WP scales up to the level of real-world power systems, produces a set of simulation results on these systems to validate/generalize previous results, then gathers a set of overall recommendations.

Task 4.1 Scaling market proposals to the level of real power systems

Most of the proposals in the literature are implemented and evaluated for power systems of limited size in order to provide illustrative examples. A main objective of the ‘5s’ project through Task 4.1 is to evaluate how the various market concepts introduced in WPs 1-3 can be scaled to the level of a real power system. This may require the use of decomposition techniques, parallelization of the computational burden or the use of surrogate models. The real-world test case will be defined based on the expertise and input of (Transmission System Operator in Denmark) and Dansk Energi (representing the Danish Energy Industry).

Task 4.2 Simulations in various market environments

Based on the methodological developments and implementation at a real-world system level performed in Task 4.1, a set of simulations will be performed in Task 4.2 in order to verify and generalize the conclusions drawn in WPs 1-3 for the new market concepts introduced and evaluated, with particular focus on computational burden and optimality of market outcomes. These simulations will be used as input to the gathering of overall recommendations to market operators, system operators and policy-makers in Task 4.3.

Task 4.3 Overall recommendations

Following the various methodological proposals in the various WPs and Tasks, as well as simulations on small test systems and real-world systems, the aim of Task 4.3 is to build on the expertise built in the project for drawing a number of meaningful overall recommendations. They will be directed towards market operators regarding future market design, system operators regarding the potential impact on related operations, and policy- makers so as to support future regulatory decisions eg. with incentivize for appropriate investments and maximization of social welfare through integration of renewable energy and flexible demand in a market environment.