Social welfare of balancing markets

This paper investigates the social welfare of balancing markets. The technical background of balancing, the load-frequency control processes, is presented along with an overview of the market design options and cost-bearing mechanisms. A social welfare model is derived based on the assumption of an inelastic demand for balancing services. The results show that the social welfare of balancing markets does not depend on the prices of balancing services. The social welfare increase in cross-border cooperations is driven by the reduction of the underlying costs of balancing service provision. Since prices do not affect social welfare of balancing, it remains constant under marginal and pay-as-bid pricing as long as the same bids are selected to supply a given demand. Nonetheless, a market design where bid prices reflect marginal costs of balancing service provision has advantages for cross-border cooperations and practical aspects of market design.