A Model based Market Power Analysis of the German Market for Frequency Containment Reserve

Balancing power markets for electricity are one step ahead of being re-designed. Weekly tender processes will be shortened in order to increase market efficiency and enable new companies to enter the market. The change in market design could lead to a change in strategic bidding behavior and thus increase the potential for exercising market power. Currently, it is not clear to which extent market power may reduce the desired efficiency gains. Therefore, we conduct an analyzes of the strategic bidding behavior in the German market for frequency containment reserve with an equilibrium model. The authors conclude that current market outcomes are beyond competitive levels. The costs for balancing power can be reduced by shortening contract durations, while an increase of strategic behavior can be observed which leads to welfare losses.