Arbitrage in Cost-Based Redispatch: Evidence from Germany

Abstract

The European Union's push towards market-based procurement of redispatch services has sparked fears of so called Inc-Dec-Gaming, i.e. the incentive to engage in arbitrage between the national wholesale market and the local redispatch market. The latter would increase both likelihood and severity of grid congestions. Such incentives might already be present in Germany where participation is mandatory and reimbursement based on costs if the marginal cost estimates are not accurate. This paper develops a method to identify such behavior. We test for the presence of Inc-Dec-Gaming at the plant level using a random forest prediction model and time series regressions based on a sample of German power plants. We do find evidence of arbitrage among a small cluster of German power plants.