A double pricing and penalties "Separated" imbalance settlement mechanism to incentive self balancing of market parties

This article  introduced the "Separated" imbalance settlement (IS) mechanism, designed to promote self-balancing among Balance Responsible Parties (BRPs) while achieving a neutral cash flow between imbalance settlement penalties and balancing market costs. The mechanism was compared with Portugal's double pricing/single penalty system and Spain’s single pricing/penalty mechanism, utilizing the RESTrade tool.The Separated IS mechanism proposed here ensures that BRPs directly pay the costs associated with their imbalances to the balancing parties, with TSOs serving as intermediaries. This approach uses double pricing and assigns different penalties based on the imbalance direction, creating a balanced exchange where the amount paid by BRPs matches what TSOs pay to balancing entities. Results from two case studies indicate that this mechanism reduces penalties, particularly benefiting active market participants. Reviewing 2019 data reveals that penalties for unbalanced BRPs in Portugal and Spain amounted to approximately 13.2% and 20.3% of the wholesale market price, respectively, with higher penalties in Spain due to net deviations. Under the Separated IS, these penalties are reduced to 4.3%, highlighting its potential to lower costs for BRPs and enhance market efficiency.