Assessing distorted trading incentives of balance responsible parties based on the example of the Swiss power system

Power systems require a continuous balance of supply and demand. In Europe, this task is shared between Balance Responsible Parties (BRPs) and Transmission System Operators (TSOs). For this purpose, the European electricity sector consists of several markets. Objective of this paper is to investigate distorted incentives that stem from loopholes in the market design which BRPs can use to undermine electricity balancing principles in favour of gaming opportunities between the domestic imbalance energy pricing and international wholesale markets. These incentives are evaluated using historical data from the Swiss power system which features a typical European imbalance pricing mechanism. The results imply that little effort would have been needed to make a good profit at the expense of system security. The major loophole arises from the interdependence between cross-border trading and national imbalance energy pricing. Bearing in mind the European Union's Third Energy Package, the importance of national balancing mechanisms will increase strongly. In this context, national remedies to cope with distorted incentives are outlined and the importance of harmonising balancing markets on an international level is elaborated.