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choose the best generator locations on the grid, to have an overall lowest heat price. This market concept allows to include annual ecologic indicators (primary energy factor or CO2 emissions) in decision-making. The capacity market will operate each year. If the SB has chosen a producer, they will fix a contract including the CP and WP bound to PACs. This price has to be paid through the whole contract duration. Therefore, in the next year, only the WPs from existing contracts will be included in the capacity market. The CP will be set to zero, because of the contract obligations. Besides investments, the seasonal storage scheduling should be included in this market. The result is the daily amount of heat that should be loaded or unloaded in the following year and will be obligatory for the short-term markets. Short-term scheduling based on a smart market auction mechanism The annual long-term planning mechanism is characterized by low resolution (between 1 day and some hours) and low forecast accuracy. Therefore, short-term planning mechanisms based on auctions should be implemented. To include the complex physics of the DHS, the market mechanism cannot be the same as in the electricity market where grid capacities are not considered and only implemented in a second step, in case there are any bottlenecks detected. In contrast to this, it is required to include the physical behavior in a heat market mechanism from the beginning. One solution is the introduction of a smart market. A smart market chooses the necessary production that achieves the cheapest price including grid losses and bottlenecks. There are several possible approaches for developing smart district heating markets. They can include optimization with heat flow bottlenecks, a combined approach with grid simulation and optimization or even local markets that trade with each other through limited connections. In the context of this article, the local market approach will be chosen, because it allows also the consideration of different temperature levels in parts of the DHS. An important design criterion for these kind of markets is the auction mechanism. There are several concepts with different advantages and disadvantages. In the electricity sector, the uniform price mechanism has shown the best economic performance. By this mechanism (shown in figure 2), the highest price that is accepted by the amount in the merit order is payed for all accepted offers. The opposite way would be pay as bid. Pay as bid offers many possibilities of speculation and forces participants to bid the highest possible price. The uniform price forces the producers to stay at the marginal costs and get the benefits out of the difference to the uniform price. Plants that have been participating on the capacity market will not get this difference (green area). Producers that join a TPA but do not have participated on the capacity market, can use this benefit (red area) for the payment of their investments. This could be attractive especially for demand side management measures.
as all services (e. g. accounting). Otherwise, the generators will be in the responsibility of the new role of producers. They are in competition with each other. The market mechanism for such an SB-structured market could be designed as follows, including two methodologies: a market cascade that combines different markets for different time-scales and the concept of a smart market to include the physics of the DHS especially in the short-term markets. The concept of cascade markets is shown in figure 1. It consists of at least three different market systems: A capacity market, a day-ahead market and an intraday market. All these markets serve a different purpose. To regulate the short-term markets, prices from the capacity markets and short- term markets are bound. This regulation will be explained in the long-term planning section. The concept and principle of the smart market will be presented in the short-term planning section.
Figure 1: Overview of the Cascade Market Mechanism
Long-term planning security due to a capacity market with price adjustment clauses For a long-term perspective, the capacity market should allow for investment security as well as binding prices for the main producers valid in the short-term markets. It should also keep big producers from gambling on the day-ahead and intraday markets. But what could such a price binding between the capacity market and the short-term markets look like? In Germany for example, end-user prices are defined by price adjustment clauses (PACs). They define adjustments for the end-user price depending on public indexes, e. g. EEX electricity prices, gas prices or bio-methane index. The existing PAC system could be adapted to the capacity market and shifted from the consumer to the producer side. In a tendering procedure, the producers can offer capacity (heat flow) and daily amount of work for a whole plant lifetime e. g. 20 years. The mechanism may also include start-up costs, minimal running times and stop times. As a result the SB is able to optimize the best mix of generators based on different pricing structures. It will take offers with high capacity prices (CPs) and low work prices (WPs) for the baseload and some with low CPs and high WPs for peak load. It will additionally
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