Optimal transmission capacity allocation for cross-border exchange of Frequency Restoration Reserves (FRR)

This paper describes a model of the Northern European power markets that includes both the day-ahead market and markets for upward and downward Frequency Restoration Reserves. The model is similar to present European markets, procuring reserve capacity before the clearing of the day-ahead market. We compare a market design for the procurement of reserve capacity within each balancing region and an alternative design with cross-border exchange of reserve capacity. For the latter case an algorithm is used for the optimal reservation of transmission capacity based on reserve capacity bids and expected day-ahead prices. It turns out to be optimal to reserve about 30 % or the interconnection capacity between Norway and the Netherlands for reserve capacity procurement most of the year and between 5 % and 26 % of the interconnection capacity between the Nordic system and Germany. Between the Netherlands and Germany reservation is more volatile. Costs are reduced in the market for Frequency Regulation Reserves, as expected, but also in the day-ahead market due to the increased flexibility in the most expensive market. Contrary to what is generally assumed, reserving transmission capacity for reserve procurement can thus be a win-win situation for both the reserve and the day-ahead markets.