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Impact of operating reserve rules on electricity prices with high penetrations of renewable energy

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  • Frew, Bethany
  • Brinkman, Greg
  • Denholm, Paul
  • Narwade, Vinayak
  • Stephen, Gord
  • Bloom, Aaron
  • Lau, Jessica

Abstract

In competitive wholesale electricity markets, significant effort is devoted to designing markets that set efficient prices for maintaining supply-demand balance. One factor that can impact prices is administratively-set scarcity pricing, which sets prices to a preset level when the market is not able to meet operating reserve or energy requirements. When energy and operating reserves are co-optimized, assumptions surrounding operating reserve requirements and scarcity pricing can impact system-wide price outcomes for both operating reserves and energy. This study uses production cost modeling of an ERCOT-like system to evaluate the impact of operating reserve eligibility, scarcity pricing, and quantity rules on electricity prices, and therefore also on generator revenues. Results reveal economic and operational benefits with allowing open participation in reserve markets, as this enables greater access to the full set of capable resources at lowest cost. Furthermore, both energy and reserve prices are strongly impacted by reserve scarcity pricing events, which reveals that reserve scarcity pricing assumptions can impact price outcomes even for units not providing reserves. This study highlights the importance of operating reserve scarcity pricing rules because of the strong coupling between energy and reserve prices and because these rules serve as proxies for true price responsive demand.

Suggested Citation

  • Frew, Bethany & Brinkman, Greg & Denholm, Paul & Narwade, Vinayak & Stephen, Gord & Bloom, Aaron & Lau, Jessica, 2021. "Impact of operating reserve rules on electricity prices with high penetrations of renewable energy," Energy Policy, Elsevier, vol. 156(C).
    • Handle: RePEc:eee:enepol:v:156:y:2021:i:c:s030142152100313x
    DOI: 10.1016/j.enpol.2021.112443
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    References listed on IDEAS

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    1. Paul Joskow & Jean Tirole, 2007. "Reliability and competitive electricity markets," RAND Journal of Economics, RAND Corporation, vol. 38(1), pages 60-84, March.
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    5. Bublitz, Andreas & Keles, Dogan & Zimmermann, Florian & Fraunholz, Christoph & Fichtner, Wolf, 2019. "A survey on electricity market design: Insights from theory and real-world implementations of capacity remuneration mechanisms," Energy Economics, Elsevier, vol. 80(C), pages 1059-1078.
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    Cited by:

    1. Prakash, Abhijith & Bruce, Anna & MacGill, Iain, 2022. "Insights on designing effective and efficient frequency control arrangements from the Australian National Electricity Market," Renewable and Sustainable Energy Reviews, Elsevier, vol. 161(C).
    2. Frew, Bethany & Levie, Daniel & Richards, James & Desai, Jal & Ruth, Mark, 2023. "Analysis of multi-output hybrid energy systems interacting with the grid: Application of improved price-taker and price-maker approaches to nuclear-hydrogen systems," Applied Energy, Elsevier, vol. 329(C).
    3. Kristian Balzer & Joaquín Lazo & David Watts, 2023. "Economic Model of Ancillary Services in Real Time for Frequency Control," Energies, MDPI, vol. 16(17), pages 1-24, September.
    4. Frew, Bethany & Bashar Anwar, Muhammad & Dalvi, Sourabh & Brooks, Adria, 2023. "The interaction of wholesale electricity market structures under futures with decarbonization policy goals: A complexity conundrum," Applied Energy, Elsevier, vol. 339(C).
    5. Wooyoung Jeon & Jungyoun Mo, 2023. "Estimating the Operating Reserve Demand Curve for Efficient Adoption of Renewable Sources in Korea," Energies, MDPI, vol. 16(3), pages 1-12, February.
    6. Sai, Wei & Pan, Zehua & Liu, Siyu & Jiao, Zhenjun & Zhong, Zheng & Miao, Bin & Chan, Siew Hwa, 2023. "Event-driven forecasting of wholesale electricity price and frequency regulation price using machine learning algorithms," Applied Energy, Elsevier, vol. 352(C).

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