| Summary: | Balancing services are essential for the transmission system operator (TSO) to ensure system stability in the event of frequency deviations. The Swedish TSO has largely relied on reservoir hydro power plants to provide these services, including frequency containment reserve (FCR), using a complex cost-based methodology and awarding successful bidders on a pay-as-bid basis. Changing the pricing rule from pay-as-bid to marginal and moving from a cost-based to bid-based market may help diversify the pool of balancing service providers and stave off increasing FCR prices. In this paper, we investigate the economic effect of 1) introducing marginal pricing, 2) the entry of new technologies, wind generation and battery storage into the FCR market, and 3) how much new wind and storage capacity is necessary to counteract a potential system cost increase. For this, we develop an agent-based model of the Swedish FCR market for normal operation (FCR-N) and a reinforcement learning algorithm to emulate possible non-competitive behavior of market participants. We show that, in a current concentrated hydro-dominated market, a change to marginal pricing and freely set bids leads to skyrocketing FCR-N prices. The main driver is strategic behavior, as a result of which agents do not only increase their bid prices but also tend to withhold capacity increasing their profits through artificial scarcity. Furthermore, our results show that marginal pricing along with the entry of new technologies can counteract the rise of system cost and stabilize the market by combating strategic behavior.
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