Wind power intermittency and the balancing power market: Evidence from Denmark

Generated amounts of wind power fluctuate considerably over time due to weather patterns. Yet majority of wind power is sold in the day-ahead market, where producers are required to commit to a physical delivery 12-36 hours in advance. If wind suddenly dies down, the producers can cover their deficit either by purchasing from the intraday market or, as a last resort, from the balancing power market. This paper studies the pricing in the balancing power market during times of lower-than-expected wind power generation. Using data to construct "wind power surplus", defined as the difference between wind power prognosis and actual wind power production, this paper uses nonlinear regression methods to estimate the effect of wind surplus on the price of balancing power. The main finding is that the balancing power prices are consistently higher during times of lower-than-expected wind power production even after controlling for other factors. If we fix other covariates at their means and compute the predicted balancing power prices at the 5th and 95th percentile of wind power surplus, the difference is 26.8 DKK/MWH. For down-regulation, the corresponding figure is 21.9 DKK/MWH.