The Grid of The Rising Sun: A Quantitative Study of Balancing Markets in Germany and DK1

Abstract

This thesis investigates the impact of variable renewable energy (VRE) integration on balancing market outcomes in Germany and Western Denmark (DK1), focusing on imbalance price spreads and net imbalance volume. The study is motivated by the growing electricity market stability challenges posed by the integration of VRE. It addresses whether VRE integration has an impact on imbalance price spreads and volume, and whether the effect differs between Germany and DK1. Departing from testable hypotheses derived from energy economic theories and existing empirical literature, this thesis uses hourly data from 2017 to 2024; the analysis employs GARCH-X and quantile regression models to capture both the average effects and extreme outcomes under varying market stress conditions. The results confirm that VRE integration does have an effect: overall, it is associated with larger imbalance volumes and wider price spreads, particularly under conditions of high solar and wind generation and significant renewable forecast errors. The nature and manifestation of these impacts vary by the VRE type (onshore wind, offshore wind, solar). The effects of actual VRE generation and associated forecast errors are also juxtaposed against load forecast errors, as demand-side deviations can independently generate system imbalances and allow for a clearer attribution of observed imbalance outcomes. It was also found that cross border balancing mechanisms: cross-border reserve activation and market coupling help moderate VRE effects, especially for imbalance price spreads, which underscore the need for robust cross-border balancing mechanisms to maintain system reliability. Overall, the findings of this thesis serve as a starting point for informing more efficient integration of VRE into liberalized electricity markets, highlighting the importance of balancing markets - an area of growing significance that remains underexplored in current research.