Facilitating appropriate compensation of electric energy and reserve through standardized contracts with swing

Three key issues have arisen for centrally-managed wholesale electric power markets in Europe and the United States as they attempt to handle an increased penetration of variable energy resources. First, rigid definitions for energy and reserve products make it difficult to ensure appropriate compensation for important needed flexibility in start-up times, ramp-rates, power dispatch levels, and duration. Second, participation restrictions hinder the achievement of an even playing field for potential providers of flexible services. Third, reliance on out-of-market compensation for the provision of some valued services encourages strategic manipulation. This study examines the possibility of addressing these three issues through the introduction of standardized energy and reserve contracts with swing (flexibility) in their contractual terms. Concrete examples are used to demonstrate how the trading of these standardized contracts can be supported by linked forward markets in a manner that permits efficient real-time balancing of net load subject to system and reserve-requirement constraints. Comparisons with existing wholesale electric power markets are given, and key policy implications are highlighted.