Value of Lost Load (VoLL) - Page 2
European Union Electricity Market Glossary

 

 


 

 

Specific, but determinative example of application of the VoLL in the Winter Energy Package is 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)).

 

 

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)

 

'strategic reserve' means a capacity mechanism in which resources are only dispatched in case day-ahead and intraday markets have failed to clear, transmission system operators have exhausted their balancing resources to establish an equilibrium between demand and supply, and imbalances in the market during periods where the reserves were dispatched are settled at the value of lost load.

 

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.

 

The said estimations cover the overall adequacy of the electricity system to supply current and projected demands for electricity for a ten-year period from the date of that assessment (in a yearly resolution), and, according to Article 19(5)(a) of the said draft Regulation of 30 November 2016, must use the VoLL (along with LOLE and EENS) as an element of relevant methodologies.

 

Article 20(3) of the said draft Regulation explicitly states that "the reliability standard shall be calculated using the value of lost load" (and the cost of new entry) over a given timeframe.

 

 

 

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. 

 

 



Last Updated on Thursday, 08 June 2017 20:29
 

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