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Value of Lost Load (VoLL)
European Union Electricity Market Glossary

 

 

Value of Lost Load (VoLL) is traditionally defined as the value attributed by consumers to unsupplied energy.

 

It represents the maximum price that consumers are willing to pay to be supplied with energy, and at that price they will be indifferent between, on the one hand, being supplied and paying the price and, on the other hand, not being supplied (and pay nothing). 

 

 

VoLL expresses the value attached by consumers to uninterrupted electricity supply.

 

The so-called 'Winter Package' defines the VOLL as 'an estimation in €/MWh, of the maximum electricity price that customers are willing to pay to avoid an outage' (Article 2(9) of the Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity (recast)) and Article 2(2)(h) of the Proposal for a Regulation of the European Parliament and of the Council on the internal market for electricity (recast), 30.11.2016, COM(2016) 861 final 2016/0379 (COD)).

 

Pursuant to Article 11 of the said Regulation (EU) 2019/943 by 5 July 2010 the EU Member States must establish a single estimate of the VoLL for their territory (it is required for the purpose of setting a reliability standard). Different VoLLs per bidding zone may be established if Member State has several bidding zones in its territory). Where a bidding zone consists of territories of more than one Member State, the concerned regulatory authorities or other designated competent authorities shall determine a single estimate of the value of lost load for that bidding zone.

Member States must update their estimate at least every five years, or earlier where they observe a significant change. 

voll 

In determining the single estimate of the value of lost load regulatory authorities or other designated competent authorities must apply the methodology drafted by the ENTSO-E and approved by the ACER (Article 23(6)(a) of the Regulation (EU) 2019/943).

The deadline for submitting by the ENTSO for Electricity to the ACER of a draft methodology for calculating the value of lost load is 5 January 2020.

 

The crucial provision of the Winter Energy Package, as drafted by the European Commission in 2016, was expressed in Article 9(1) of the Electricity Market Regulation, which defined maximum wholesale electricity price at the VoLL's level.

This rule was intended to apply, inter alia, to bidding and clearing in all timeframes and included balancing energy and imbalance prices.

 

Article 9 of the said European Commission’s Proposal for a Regulation of the European Parliament and of the Council on the internal market for electricity (recast) of 30 November 2016 (COM(2016) 861 final 2016/0379 (COD)), titled “Price Restrictions” in paragraph 1 read as follows:
“There shall be no maximum limit of the wholesale electricity price unless it is set at the value of lost load as determined in accordance with Article 10. There shall be no minimum limit of the wholesale electricity price unless it is set at a value of minus 2000 € or less and, in the event that it is or anticipated to be reached, set at a lower value for the following day. This provision shall apply, inter alia, to bidding and clearing in all timeframes and include balancing energy and imbalance prices.”

 

This provision has, however, been softened during the negotiations process, and the final text of the Regulation (EU) 2019/943, reads the following way in Article 10(1) and (2) under the heading “Technical bidding limits”:

“Article 10

1. There shall be neither a maximum nor a minimum limit to the wholesale electricity price. This provision shall apply, inter alia, to bidding and clearing in all timeframes and shall include balancing energy and imbalance prices, without prejudice to the technical price limits which may be applied in the balancing timeframe and in the day-ahead and intraday timeframes in accordance with paragraph 2.
2. NEMOs may apply harmonised limits on maximum and minimum clearing prices for day-ahead and intraday timeframes. Those limits shall be sufficiently high so as not to unnecessarily restrict trade, shall be harmonised for the internal market and shall take into account the maximum value of lost load. NEMOs shall implement a transparent mechanism to adjust automatically the technical bidding limits in due time in the event that the set limits are expected to be reached. The adjusted higher limits shall remain applicable until further increases under that mechanism are required.”

Instead of imposing strict limits, the formula of “taking into account” the maximum VoLL has been used, the whole process has been, moreover, attached to the NEMOs’ operations.

 

Recital 24 of the Regulation (EU) 2019/943 argues as follows in this regard:

 

“Short-term markets improve liquidity and competition by enabling more resources to participate fully in the market, especially those resources that are more flexible. Effective scarcity pricing will encourage market participants to react to market signals and to be available when the market most needs them and ensures that they can recover their costs in the wholesale market. It is therefore critical to ensure that administrative and implicit price caps are removed in order to allow for scarcity pricing. When fully embedded in the market structure, short-term markets and scarcity pricing contribute to the removal of other market distortive measures, such as capacity mechanisms, in order to ensure security of supply. At the same time, scarcity pricing without price caps on the wholesale market should not jeopardize the possibility of offering reliable and stable prices to final customers, in particular household customers, small and medium-sized enterprises (SMEs) and industrial customers.”

 

The European Energy Regulators: the Agency for the Cooperation of Energy Regulators (ACER) and Council of European Energy Regulators in the document "European Energy Regulators’ White Paper # 4, Efficient Wholesale Price Formation, Relevant to European Commission’s Clean Energy Proposals" of 29 May 2017 (p. 3, 4) expressed support for the Winter Energy Package initiative for removing price caps below the VoLL, and consequently, for allowing prices to rise to the level that consumers are willing to pay.

 

ACER and CEER said:
"We welcome the European Commission’s proposals to incorporate the concept of Value of Lost Load (VoLL) when assessing price limits and to restrict, to the extent possible, political interference in price formation. Allowing prices to reflect scarcity will improve efficiency through electricity priced to reflect market conditions. This has the potential to lower costs, provide a more efficient use of the transmission grid and properly distribute costs and benefits between producers and consumers. We therefore consider that allowing prices to reflect scarcity should be the basis for good market design".

 

VoLL is typically quite high (e.g. several thousands of euros per MWh) and not necessarily the same for each (group of) consumer, thus enabling voluntary demand side management (DSM) activation by consumers before the VoLL is reached (ACER/CEER Annual Report on the Results of Monitoring the Internal Electricity and Natural Gas Markets in 2014, November 2015, p. 217).

 

Pursuant to the Agency for the Cooperation of Energy Regulators, in a well-functioning electricity market, prices should be allowed to vary unhindered in a way which optimises EU generation schedules in the short term and efficiently determines the optimal composition of the energy mix in the long term, including during shortage situations.

 


"The demand for electricity is typically insufficiently responsive to prices because currently prevailing technical features of electricity delivery do not allow most customers to respond to price variations in real time. As a consequence, there may be situations when the wholesale energy market cannot clear, because demand remains above available generation capacity independently of the price level. In such circumstances, some kind of regulatory intervention is needed to bring supply and demand in balance, e.g. by rationing demand and administratively setting a price.

 

Economic theory indicates, under certain assumptions, that during periods of rationing it is optimal to set a price at the level of the value of lost load (hereafter, 'VOLL'). VOLL is equal to the marginal consumer surplus associated with a unit increase in electricity supplied to rationed consumers. In other words, it expresses the value attached by consumers to uninterrupted electricity supply. A regulated price at the level of VOLL when the market does not spontaneously clear would in theory provide incentives to invest in generation capacity that reflect consumers' average willingness to pay for security of supply.

(...)

In most Member States price caps currently exist which are not based on estimates of average VOLL, but often on the technical bidding limits used by power exchanges. The maximum price may also be limited by the rules by which imbalance settlement is calculated, since market participants will never choose to pay more for electricity in the market than they would be charged for a deficit after gate closure. Although VOLL has not been calculated in many Member States, those Member States that have calculated it, report values that are well above their price caps in the day-ahead market.

(...)

There are several reasons why in practice prices are often capped significantly below VOLL level. In practice it is a challenge to accurately estimate the VOLL to ensure that prices are set to incentivise investments in generation capacity up to a level that reflects consumer willingness to pay for additional security of supply.

(...)

Alternative emergency measures (like activating operating reserves, dispatching emergency demand response or implementing voltage reductions, for instance) are used to balance markets that suppress price signals, instead of implementing involuntary curtailments of demand and VOLL pricing."

 

Commission Staff Working Document, Accompanying the document Report from the Commission, Interim Report of the Sector Inquiry on Capacity Mechanisms {C(2016) 2107 final}, 13.4.2016 SWD(2016) 119 final, p. 28, 29


During such shortage situations, the margin between available capacity and (peak) demand may tighten, and electricity prices will rise above marginal operating costs to include a 'scarcity premium', potentially up to the VoLL.

 

During these hours, all generating plants in the merit-order (e.g. base-load, intermediate and peaking plants) receive a price which contributes to the recovery of their fixed costs.

 

Even in the absence of scarcity, most dispatched plants receive an "infra-marginal rent" (i.e. the difference between the market price and the variable cost of the plant) which can be used to cover fixed costs.

 

The above ACER Report of November 2015 further observes, in a well-functioning electricity market, the occurrence and magnitude of scarcity prices should be sufficient to attract the required level of investment.

 

In the absence of such price spikes and without any other revenues (e.g. from the provisions of ancillary services), existing peak plants might exit the market without being replaced.

 

This would simultaneously increase the frequency of scarcity conditions and scarcity prices, while reducing the market's ability to respond.

 

Where demand is sufficiently price responsive, a well-functioning electricity market will deliver full adequacy, albeit at the cost of some demand 'voluntarily' reducing consumption when, during (rare) shortage situations, prices are allowed to reach VoLL levels.

 

This is because, given the definition of VoLL, no consumer is willing to pay a price for energy higher than VoLL.

 

Commission Staff Working Document, Accompanying the document Report from the Commission, Interim Report of the Sector Inquiry on Capacity Mechanisms {C(2016) 2107 final}, 13.4.2016 SWD(2016) 119 final, p. 28, 29 refers to literature (Cramton P., Ockenfels A. and Stoft S. (2013)), according to which the market responds to VOLL by building additional capacity up to the point where a MW of capacity costs just as much as it earns from being paid VOLL during blackouts.

 

So at this point the cost of capacity equals the value of capacity to consumers, and beyond this point, consumer value per MW can only decline as the system becomes more reliable.

 

Hence, the VOLL pricing rule causes the market to build the second-best, 'optimal' amount of capacity.

 

This solves the adequacy problem – with help from a regulator.

 

A first-best solution can only be obtained by enabling a fully responsive demand-side allowing the market to clear at all times on the basis of individual consumers' preferences.

 

The said Commission Staff Working Document of 13.04.2016 estimates that the VOLL for the EU Member States ranges from EUR 11,000/MWh to EUR 26,000/MWh, so significantly higher than existing European price caps.

 

The aforementioned document also reads:

 

"Moreover, a majority of countries does not calculate a VOLL for their market, nor use it in setting a market price cap or a reliability standard.

 

This results in a situation in which the necessity and the size of a capacity mechanism are not always based on a proper economic assessment. As a consequence, there is a risk that interventions in the market become subjective and hence sub-optimal. Objectivising the need for and degree of interventions can be done by adopting a well-defined VOLL as a key indicator in determining an appropriately maximum level of protection."

 

 

 

 

"To determine their reliability standard, a number of Member States make use of a calculation of VOLL. Where a Member State calculates and applies VOLL, it estimates the value an average consumer places on secure electricity supplies at any point in time. In other words, it is the price point at which the consumer is indifferent between paying for electricity and being cut off. The higher the degree of protection desired, the more (back-up) capacity is needed and therefore the higher the price tag attached to it. In order to determine the cost of additional protection against disconnections through additional capacity investment, some countries calculate the cost of new investment by estimating the cost of a 'Best New Entrant (BNE)' or 'Cost of New Entry (CONE)'. The estimate is usually based on the costs of a new peaking plant (since this represents a cheaper way of providing marginal capacity than a baseload plant). A comparison of VOLL and BNE/CONE can identify the point at which the value for consumers of investment in additional capacity is maximised – at the point at which the incremental cost of insuring customers against power cuts is equal to the incremental cost to customers of power cuts. [...] Linking the reliability standard to the level of capacity that reflects the maximum value consumers place on being supplied with electricity, means that an economic efficient level of protection is set and that expensive overprotection is avoided.

 

Less than half of the countries calculate VOLL and use it as their basis for determining their reliability standard. A possible reason that not all Member States make use of a VOLL to ensure an economically sensible level of protection may be that it is difficult to calculate an appropriate average VOLL. Electricity has a different value for different users and differs over time. An additional complexity [...] is that electricity consumers are not able to individually express their valuation of electricity for every time slot. VOLL calculations therefore attempt to replace the true (but unknown) value of disconnection with an administrative average value. The average VOLL in each Member State or bidding zone may also be different, reflecting the different cost of a MWh of unserved energy to different types of consumers and/or consumers in different parts of Europe."

 

Commission Staff Working Document, Accompanying the document Report from the Commission, Interim Report of the Sector Inquiry on Capacity Mechanisms {C(2016) 2107 final}, 13.4.2016 SWD(2016) 119 final, p. 58


 

 

Specific, but determinative example of application of the VoLL in the Winter Energy Package was a new definition of the 'strategic reserve' as a capacity mechanism, which can only be used where, among others, 'imbalances in the market, during periods where the reserves were dispatched, are settled at the VoLL (Article 2(2)(v) of the Proposal for a Regulation of the European Parliament and of the Council on the internal market for electricity (recast), 30.11.2016, COM(2016) 861 final 2016/0379 (COD)).

 

This definition has not eventually been included in the final text of the Regulation (EU) 2019/943, instead, Article 22(2)(b) of the said Regulation imposes a requirement that the design of strategic reserves must ensure that during imbalance settlement periods where resources in the strategic reserve are dispatched, imbalances in the market must be settled at least at the value of lost load or at a higher value than the intraday technical price limit, whichever is higher.

 

This significant restriction put on the use of strategic reserves in the EU electricity markets can have far-reaching consequences.

 

Another important aspect of the 'Winter Energy Package' is that is uses the VoLL as an element of the set of indicators for the European resource adequacy assessments and a reliability standard.

 

The said estimations cover the overall adequacy of the electricity system to supply current and projected demands for electricity and must use the VoLL (along with the cost of new entry, LOLE and EENS), as an element of relevant methodologies.

 

According to Article 23(6) of the Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity (recast), for the purposes of the European resource adequacy assessment (carried out by the ENTSO for Electricity on an annual basis, the ENTSO for Electricity is required to submit to ACER, by 5 January 2020, a draft methodology for calculating, among others, the value of lost load.


 

 

Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity (recast))

 

Article 25 Reliability standard

 

1.When applying capacity mechanisms Member States shall have a reliability standard in place. A reliability standard shall indicate the necessary level of security of supply of the Member State in a transparent manner. In the case of cross-border bidding zones, such reliability standards shall be established jointly by the relevant authorities.

 

2.The reliability standard shall be set by the Member State or by a competent authority designated by the Member State, following a proposal by the regulatory authority. The reliability standard shall be based on the methodology set out in Article 23(6).

 

3.The reliability standard shall be calculated using at least the value of lost load and the cost of new entry over a given timeframe and shall be expressed as ‘expected energy not served’ and ‘loss of load expectation’.

 

4.When applying capacity mechanisms, the parameters determining the amount of capacity procured in the capacity mechanism shall be approved by the Member State or by a competent authority designated by the Member State, on the basis of a proposal of the regulatory authority.

 

 

 

 

Voll prices 

 

 

 

Wholesale Price Caps and estimates of VOLL (EUR/MWh) in the 11 EU Member States

 

Source: European Commission based on replies to sector inquiry, Commission Staff Working Document of 30.11.2016 Accompanying the document Report from the Commission Final Report of the Sector Inquiry on Capacity Mechanisms {COM(2016) 752 final} SWD(2016) 385 final, p. 30

 

 

Allowing prices to rise to VOLL in periods of scarcity is likely to entail very high wholesale prices, albeit during short periods of time. 


 

While the discussion on the need for price caps and their optimal level is important in terms of market design, price caps may not be the only factor effectively limiting market prices.

 

Despite the existence of price caps lower than VOLL in many markets, price caps have rarely been reached in recent years in the Member States covered by the Commission's inquiry.

 

Over the last five years, price caps were reached only in Denmark, Ireland, Italy, and Portugal.

 

In each of Denmark and Ireland caps were only reached on a single occasion.


 

 

VoLL and the clients' non excludability

 

 

The Commission Staff Working Document of 30.11.2016 Accompanying the document Report from the Commission Final Report of the Sector Inquiry on Capacity Mechanisms {COM(2016) 752 final} SWD(2016) 385 final confirms that it is currently not possible for most individual final consumers to be selectively disconnected by the system operator on the basis of their individual VOLL (p. 39).

 

In effect, price caps are often set below VOLL.

 

This means that in events of scarcity each consumer's likelihood of being disconnected is independent of his VOLL, making him unwilling to pay for reliability as much as he would otherwise be willing to.

 

There is the risk that electricity markets in such circumstances ultimately deliver suboptimal levels of system reliability compared to what consumers would have been willing to pay for if they were able to be individually disconnected on the basis of their individual VOLL.

 

 

Reliability standard based on VOLL as the basis for any intervention in the electricity market

 

 

The said Commission Staff Working Document of 30.11.2016 argues "linking the reliability standard to the value consumers place on being supplied with electricity, means that an economic efficient level of protection is set and that expensive and distortive overprotection is avoided. Therefore, a reliability standard based on VOLL should be the basis for guiding any intervention in the market with the aim of ensuring security of supply" (p. 140).

 

As was mentiomed above, the European Commission considers, for example, strategic reserve can only be dispatched when the market fails to clear at the level of a VOLL price cap (p. 147).

 

This is a clear indication that the role of the VOLL's assessments in the European Union uniform electricity market will drastically grow in importance soon. 

 

 

Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity (recast))

 

Article 11
Value of lost load

 

1. By 5 July 2020 where required for the purpose of setting a reliability standard in accordance with Article 25 regulatory authorities or, where a Member State has designated another competent authority for that purpose, such designated competent authorities shall determine a single estimate of the value of lost load for their territory. That estimate shall be made publically available. Regulatory authorities or other designated competent authorities may determine different estimates per bidding zone if they have more than one bidding zone in their territory. Where a bidding zone consists of territories of more than one Member State, the concerned regulatory authorities or other designated competent authorities shall determine a single estimate of the value of lost load for that bidding zone. In determining the single estimate of the value of lost load, regulatory authorities or other designated competent authorities shall apply the methodology referred to in Article 23(6).


2. Regulatory authorities and designated competent authorities shall update their estimate of the value of lost load at least every five years, or earlier where they observe a significant change.

 

 

 

 

 

 

IMG 0744

    Documentation    

 

 

 

 

Regulation (EU) 2019/943 of the European Parliament and of the Council of 5 June 2019 on the internal market for electricity (recast)), Article 2(9), Article 11, Article 23(6)(a), Article 25

 

Proposal for a Regulation of the European Parliament and of the Council on the internal market for electricity (recast), 30.11.2016, COM(2016) 861 final 2016/0379 (COD), Article 2(2)(h), Article 9(1), 10, 20(3), Recital 10

 

Commission Staff Working Document, Accompanying the document Report from the Commission, Interim Report of the Sector Inquiry on Capacity Mechanisms {C(2016) 2107 final}, 13.4.2016 SWD(2016) 119 final, p. 28, 29, 33, 39, 58

 

Commission Staff Working Document of 30.11.2016 Accompanying the document Report from the Commission Final Report of the Sector Inquiry on Capacity Mechanisms {COM(2016) 752 final} SWD(2016) 385 final, p. 30  

 

ACER/CEER Annual Report on the Results of Monitoring the Internal Electricity and Natural Gas Markets in 2014, November 2015, p. 217

 

 

 

 

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    Links    

 

 

 

European Energy Regulators’ White Paper # 4, Efficient Wholesale Price Formation, Relevant to European Commission’s Clean Energy Proposals, 29 May 2017, p. 3, 4

 

The danger of technical price limits in day-ahead, intraday and balancing markets suppressing price signals, EFET memo, 23 March 2017

 

 

 

 

 

Last Updated on Friday, 25 October 2019 10:06
 

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