Participation of interconnected capacity in balancing markets: Benefits and practical steps

This paper discusses the opportunities and welfare gains of reserving interconnector capacity for trade in balancing power markets. We focus on the cross-border trade between two electricity markets that have distinctively different market designs, namely the Nordic `energy-only' market and the capacity-based Russian market. The results show that a higher price difference in the balancing markets produces incentives to allocate part of the interconnector capacity from the day-ahead markets to the balancing markets. This part is rather small because of high price and volume risks of the balancing markets, and depends on traders' risk aversion and the imbalance volumes traded.