Reserve requirements and price spikes in multinational power markets

During the winter of 2009/10 several incidents with prices between 1000 and 1400 €/MWh occurred in the Nordic power market. These were caused by a combination of demand peaks due to severe cold and an unusually low availability of nuclear power in Sweden. With the activation of out-of-market re-serves, prices were set to 0.1 €/MWh above the highest commercial bid. Only a minor amount of reserves was used. Although the socio-economic effect of the price spikes is limited, the negative effect on consumers is obvious, while also many retailers are negatively affected. The paper presents three alternatives that could have been used to avoid the extreme price peaks: increasing transfer capacities, reducing reserve requirements and increasing the price elasticity of demand. It is difficult to quantify the effect on system security of increasing transfer capacities, but even a marginal increase in the probability of a blackout implies a high cost. However, a reduction of country-specific reserve requirements and a better sharing of reserves between countries does not have an effect on system security if there is available transfer capacity for the reserves. A better functioning demand side would almost certainly have avoided the price peaks.